UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 20-F

  

 

 

(Mark One)

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
OR
   
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
   
OR
   
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to_________                   
   
OR
   
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report

Commission file number: 001-35109

 

QIHOO 360 TECHNOLOGY CO. LTD.
(Exact name of Registrant as specified in its charter)
 
N/A
(Translation of Registrant’s name into English)
 
Cayman Islands
(Jurisdiction of incorporation or organization)
 
Building No. 2
6 Jiuxianqiao Road, Chaoyang District
Beijing 100015, People’s Republic of China
(Address of principal executive offices)
 
Jue Yao, Chief Financial Officer
Alex Zuoli Xu, Co-Chief Financial Officer
Building No. 2
6 Jiuxianqiao Road, Chaoyang District
Beijing 100015, People’s Republic of China
Tel: (+86-10) 5878-1000
Fax: (+86-10) 5682-2000
E-mail: ir@360.cn
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

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

 

Title of each class   Name of each exchange on which registered
American depositary shares, every two   New York Stock Exchange
representing three Class A ordinary shares, par    
value $0.001 per share    

 

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

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None
(Title of Class)
 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

147,485,168 Class A ordinary shares and 45,931,163 Class B ordinary shares, par value $0.001 per share, as of December 31, 2014.

 

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

x Yes    ¨ No

 

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

¨ Yes   x No

 

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

x Yes    ¨ No

 

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

x Yes    ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

 

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

 

U.S. GAAP x International Financial Reporting Standards as issued
by the International Accounting Standards Board ¨		 Other ¨

 

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

¨ Item 17    ¨ Item 18

 

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

¨ Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

¨ Yes   ¨ No

 

 
 

 

TABLE OF CONTENTS

 

INTRODUCTION 3
     
PART I   4
     
Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 4
     
Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE 4
     
Item 3. KEY INFORMATION 4
     
Item 4. INFORMATION ON THE COMPANY 31
     
Item 4A. UNRESOLVED STAFF COMMENTS 52
     
Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 52
     
Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 74
     
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 85
     
Item 8. FINANCIAL INFORMATION 89
     
Item 9. THE OFFER AND LISTING 91
     
Item 10. ADDITIONAL INFORMATION 92
     
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 99
     
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 100
     
PART II   101
     
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 101
     
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 101
     
Item 15. CONTROLS AND PROCEDURES 101
     
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT 104
     
Item 16B. CODE OF ETHICS 104
     
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 104
     
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 104
     
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED  PURCHASERS 104
     
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 105
     
Item 16G. CORPORATE GOVERNANCE 105
     
PART III 105
     
Item 17. FINANCIAL STATEMENTS 105
     
Item 18. FINANCIAL STATEMENTS 105
     
Item 19. EXHIBITS 105

 

 
 

 

INTRODUCTION

 

Unless the context otherwise requires, in this annual report on Form 20-F:

 

·“We,” “us,” “our,” and “our company” refer to Qihoo 360 Technology Co. Ltd., its subsidiaries and consolidated entities, collectively;

 

·“Qihoo 360” refers to Qihoo 360 Technology Co. Ltd.;

 

·“Qizhi Software” refers to Qizhi Software (Beijing) Co., Ltd.;

 

·“Shares” or “ordinary shares” refers to our ordinary shares, including Class A and Class B ordinary shares, par value $0.001 per share.

 

·“ADSs” refers to our American depositary shares, every two of which represents three Class A ordinary shares;

 

·“ADRs” refers to the American depository receipts, which, if issued, evidence our ADSs;

 

·“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report, Taiwan, Hong Kong and Macau;

 

·“RMB” or “Renminbi” refers to the legal currency of China, and “$” or “U.S. dollars” refers to the legal currency of the United States; and

 

Names of certain companies provided in this annual report are translated or transliterated from their original Chinese legal names.

 

Discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

 

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2012, 2013 and 2014.

 

This annual report contains translations of certain Renminbi amounts into U.S. dollars at the rate of RMB6.2046 to $1.00, the noon buying rate in effect on December 31, 2014 in New York City for cable transfers of Renminbi as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Fluctuation in the value of the RMB may materially adversely affect your investment.” On April 17, 2015, the noon buying rate was RMB6.1976 to $1.00.

 

We completed an initial public offering of 13,927,420 ADSs on April 4, 2011. On March 30, 2011, we listed our ADSs on the New York Stock Exchange under the symbol “QIHU.” On September 5, 2013, we completed an offering of $600 million 2.50% convertible senior notes due 2018 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act, and non-U.S. persons in offshore transactions in compliance with Regulation S of the Securities Act. On August 6, 2014, we completed an offering of $450 million 0.50% convertible senior notes due 2020 and $450 million 1.75% convertible senior notes due 2021 to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and non-U.S. persons in offshore transactions in compliance with Regulation S under the Securities Act.

 

3
 

 

PART I

 

Item 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not Applicable.

 

Item 2.OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not Applicable.

 

Item 3.KEY INFORMATION

 

A.Selected Financial Data

 

The following selected consolidated statements of operations data for the years ended December 31, 2012, 2013 and 2014 and the selected consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited financial statements included elsewhere in this annual report. The selected consolidated financial data should be read in conjunction with those financial statements and the accompanying notes and “Item 5. Operating and Financial Review and Prospects” below. Our consolidated financial statements are prepared and presented in accordance with United States generally accepted accounting principles, or U.S. GAAP. Our historical results do not necessarily indicate our results expected for any future periods.

 

Our selected consolidated statements of operations data for the years ended December 31, 2010 and 2011 and our consolidated balance sheets as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements, which are not included in this annual report.

 

   Year Ended December 31, 
   2010   2011   2012   2013   2014 
   ($ in thousands, except share and per share data)     
Statement of Operations Data:                         
Revenues:                         
Internet services   53,790    166,961    328,882    671,088    1,370,695 
Others   3,875    890    150    —    19,965 
Total revenues   57,665    167,851    329,032    671,088    1,390,660 
Cost of revenues:                         
Internet services   5,566    18,680    32,762    87,838    297,645 
Others   1,185    238    40    —    7,817 
Total cost of revenues   6,751    18,918    32,802    87,838    305,462 
Subsidy income   266    151    2,570    2,349    8,506 
Operating expenses:                         
Selling and marketing   12,603    46,836    58,178    110,104    333,701 
General and administrative   5,051    19,141    35,643    117,148    94,260 
Product development (1)   24,505    64,962    156,269    255,248    406,250 
Total operating expenses   42,159    130,939    250,090    482,500    834,211 
Income from operations   9,021    18,145    48,710    103,099    259,493 
Interest income   415    2,594    6,715    10,398    25,605 
Interest expense   (98)   (53)   —    (5,572)   (25,518)
Other (expense) income   (60)   (3)   1,243    590    1,803 
Exchange (loss) gain   (267)   6,294    49    5,105    (11,899)
(Loss) gain in connection with short-term investments   —    (220)   (52)   327    10,230 
(Loss) gain in connection with long-term investments   —    (902)   2,464    11,216    26,780 
Gain (loss) on disposal of subsidiaries   —    —    3,566    (1,144)   — 
Income before income tax expense and loss from equity method investments   9,011    25,855    62,695    124,019    286,494 
Income tax expense   (463)   (10,874)   (11,379)   (23,423)   (51,425)
Loss from equity method investments   (57)   (437)   (4,845)   (2,747)   (18,906)
Net income   8,491    14,544    46,471    97,849    216,163 
Add: Net loss attributable to noncontrolling interest   17    1,059    275    1,803    6,605 
Net income attributable to Qihoo 360 Technology Co. Ltd.   8,508    15,603    46,746    99,652    222,768 

 

4
 

 

   Year Ended December 31, 
   2010   2011   2012   2013   2014 
                     
Net income attributable to ordinary shareholders of Qihoo 360 Technology Co. Ltd.   5,465    14,832    46,746    99,652    222,768 
Net income per ordinary share—basic   0.05    0.10    0.26    0.55    1.20 
Net income per ordinary share—diluted   0.05    0.09    0.25    0.52    1.13 
Weighted average shares used in calculating net income per ordinary share—basic   71,350,571    149,068,287    176,442,866    180,476,681    185,107,216 
Weighted average shares used in calculating net income per ordinary share—diluted   71,350,571    172,992,515    183,623,235    193,036,850    197,491,372 

  

(1) In 2011, we changed “research and development expenses” to “product development expenses” in our statements of operations. This was mainly because our business had been growing rapidly and along with the development of new products, we have devoted more resources to strengthening our existing products. As such, we believe that “product development expenses” will better reflect the nature of such expenses. 

 

   As of December 31, 
   2010   2011   2012   2013   2014 
   ($ in thousands) 
Balance Sheet Data:                         
Cash and cash equivalents   60,505    343,731    380,664    1,013,465    1,645,234 
Total assets   87,808    423,958    689,529    1,568,896    3,331,570 
Total current liabilities   13,924    46,560    203,714    208,598    540,229 
Total liabilities   14,886    52,466    211,266    814,818    2,189,302 
Capital stock   72    179    184    189    193 
Noncontrolling interest   507    639    167    17,185    113,670 
Total equity   2,722    371,492    478,263    754,078    1,142,268 

 

B.Capitalization and Indebtedness

 

Not Applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not Applicable.

 

D.Risk Factors

 

Risks Related to Our Business

 

If we fail to continue to innovate and provide attractive products and services to attract and retain users, the effectiveness of our cloud-based security technology may be adversely affected and we may lose users and customers for our revenue generating services.

 

Our success depends on our ability to continue to provide attractive products and services that enable users to have a secure and high-quality PC and mobile Internet experience. In order to attract and retain users and compete against our competitors, we must continue to invest significant resources in product development to enhance our PC and mobile Internet security technology, improve our existing products and services, introduce additional high-quality products and services and enhance user experience. We may not be able to expand our user base if our products and services do not meet the needs of our users or are not effectively or timely brought to market. If we are unable to anticipate user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, our user base may not increase at the expected rate, if at all, or even decrease. The effectiveness of our cloud-based security technology increases with the size of our user cloud. If we fail to innovate and provide attractive products and services to attract and retain users, the effectiveness of our cloud-based security technology may be adversely affected. Users may not choose to use our PC and mobile Internet security products and Internet value-added services if our technology is ineffective, and customers may no longer choose our platform to deliver online advertising if our user base does not grow. As PC and mobile Internet security technology continues to develop, our competitors may be able to offer PC and mobile Internet security products and services that are, or are perceived to be, substantially similar to or better than our own. This may force us to expend significant resources in order to remain competitive.

 

5
 

 

If we fail to keep up with rapid changes in technologies and mobile devices, our business may be adversely affected.

 

The PC and mobile Internet industry is characterized by rapid technological changes. Our future success will depend on our ability to respond to rapidly changing technologies, adapt our services to evolving industry standards and improve the performance and reliability of our products and services. Our failure to adapt to such changes could harm our business. In addition, changes in mobile devices resulting from technological development may also adversely affect our business. In 2009, we began to offer mobile security products and services in response to this market trend, and we currently have a full suite of mobile products, such as mobile app stores and mobile browsers supporting both iOS and Android based mobile devices.  In December 2014, the number of Chinese smartphone users of our key mobile security product, 360 Mobile Safe, reached 744 million and our Android-based app store, 360 Mobile Assistant, continued to hold the largest Android app distribution market share despite intense competition. However, if we are slow to develop new products and services for the latest mobile devices, or if the products and services we develop are not widely accepted and used by mobile device users, we may not be able to capture a significant share of this increasingly important market. In addition, the widespread adoption of new Internet, mobile, networking or telecommunications technologies or other technological changes could require substantial expenditures to modify or adapt our products, services or infrastructure. If we fail to keep up with rapid technological changes to remain competitive, our future success may be adversely affected.

 

If we fail to leverage our user base to increase our revenues, our results of operations and growth prospects could be harmed.

 

We generate revenues primarily through online advertising and Internet value-added services, such as offering games on our platform and other Internet value-added services. The attractiveness of our online advertising and Internet value-added services largely depends on our ability to maintain and expand our user base, which in turn requires us to continuously invest significant resources in providing Internet and mobile security products and services that retain and attract users. We plan to continue to make significant investments in developing and offering PC and mobile Internet products and services across our PC and mobile platforms. However, we cannot assure you that our investments will maintain or expand our user base or that our user base will successfully drive our revenue growth. If we fail to leverage our user base to promote games or other Internet value-added services or to attract paying advertising customers, our business, results of operations and growth prospects could be seriously harmed.

  

We generate a substantial and fast-growing portion of our revenues from online advertising. If we fail to retain existing customers or attract new customers for our online advertising services, our business, results of operations and growth prospects could be seriously harmed.

 

In the three years ended December 31, 2012, 2013 and 2014, online advertising services accounted for 67.3%, 62.2% and 54.4% of our total revenues, respectively. We offer marketing opportunities to our customers by providing comprehensive online advertising solutions, such as sponsored links, on both our PC and mobile platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant. Our online advertising customers generally pay for such services on a pay-for-effectiveness basis. They may not continue to do business with us if their investments do not generate effective sales leads and ultimately revenues. If we fail to retain existing customers or attract new customers for our online advertising services, our business, results of operations and growth prospects could be seriously harmed.

 

6
 

 

Legal proceedings or allegations of impropriety against us or our management could have a material adverse impact on our reputation, results of operation, financial condition and liquidity.

 

From time to time, we have been, and may be in the future, subject to lawsuits or allegations brought by our competitors, individuals or other entities against us or our management, including claims of unfair, unethical, fraudulent or otherwise inappropriate business practices. Certain key members of our management team have also been in the past alleged to have committed wrongdoings in their current and/or prior business affiliations.  Any such lawsuit or allegation, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong doing by any key member of our management team could harm our reputation and user base and distract our management from day-to-day operations of our company. We are currently involved in several lawsuits in PRC courts where our competitors instituted proceedings or asserted counterclaims against us or we instituted proceedings or asserted counterclaims against our competitors relating to anti-trust issues, unfair competition and defamation. See “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings.” We cannot assure you that we or key members of our management team will not be subject to lawsuits or allegations of a similar nature in the future. Where we can make a reasonable estimate of the liability relating to pending litigation and determine that an adverse liability resulting from such litigation is probable, we record a related contingent liability. As additional information becomes available, we assess the potential liability and revise estimates as appropriate. In 2012, we did not record any contingent liabilities relating to pending litigation. In 2013 and 2014, we recorded $0.9 million and $0.9 million in contingent liabilities for two and two legal cases, respectively. However, when we record or revise our estimates of contingent liabilities in the future, our estimates may be inaccurate due to the inherent uncertainties relating to litigation. In addition, the outcomes of actions we institute against our competitors may not be successful or favorable to us. These litigations and allegations may also generate negative publicity that significantly harms our reputation, which may materially and adversely affect the size of our user base and the number of our paying customers. In addition to the related costs, managing and defending litigation and related indemnity obligations can significantly divert our management’s and the board of directors’ attention from operating our business. We may also need to pay damages or settle the litigation with a substantial amount of cash. All of these could have a material adverse impact on our business, results of operation and cash flows, as well as the trading price of our ADSs.

 

We face significant competition and may suffer from a loss of users and customers as a result.

 

We face significant competition from Internet security product and service providers and PRC-based Internet companies. The competitive standing of an Internet security market player in China largely depends on the technological reputation of its brand, the size of its user base, its technological expertise, the effectiveness of its security software as well as its business model. We compete in the Internet security market with other companies providing anti-virus software, such as Cheetah Mobile Inc. and Beijing Rising Information Technology Co., Ltd. We also compete with PRC-based Internet companies that, like us, build Internet platforms to offer value-added services and online advertising services. Our primary competitor in this market is Tencent Holdings Limited, or Tencent, one of the largest Internet companies in China. In December 2014, Tencent’s QQ instant messaging software had an active user penetration rate in China of 90.9%, while our security products had an active user penetration rate in China of 90.5%, according to iResearch. Additionally, our primary competitors in the search market are Baidu Inc., or Baidu and Sogou Inc., or Sogou. See “Item 4. Information on the Company — B. Business Overview — Competition” for a description of our principal competitors in each of our product and services categories. Some of our competitors have significantly greater financial resources than we do. They also have longer operating histories and more experience in attracting and retaining users and managing customers than we do. They may use their experience and resources to compete with us in a variety of ways, including by competing more intensely for users and customers, investing more heavily in research and development and making strategic acquisitions. If any of our competitors provides better Internet products and services than we do, our user base and user traffic could decline significantly. Any such decline could weaken our brand, result in losing users and customers and have a material adverse effect on our results of operations.

 

Furthermore, in an increasingly competitive environment, our competitors may adopt business practices or take other actions that could be harmful to us, and we may have difficulties in obtaining remedies against such actions. Any increase in competition could erode our market share, reduce our user base and customer base, and increase our marketing and product development expenditures, which could adversely materially affect our business, financial condition and operating results.

 

7
 

 

Our competitors may cause their products to be incompatible with ours, which may reduce our market share.

 

As two of the largest providers of client software in China, we and Tencent may from time to time compete for users. On November 3, 2010, Tencent issued a letter to users of Tencent QQ, Tencent’s popular instant message software, announcing its decision to disable the widely used Tencent QQ on computers that had installed our security products, effectively requiring users to either stop using Tencent QQ or uninstall our Internet security products. As a result, a significant number of users stopped using Tencent QQ, or our Internet security products, or both. Due to the large number of Internet users that were affected, this incident was extensively reported in the media and attracted government scrutiny. On November 21, 2010, the Ministry of Industry and Information Technology, or the MIIT, ordered that Tencent and we ended the dispute, apologized to affected users and ensure the compatibility of products concerned. We lost some users in the first several days of this dispute before our user base quickly returned to its prior level. Since then, the MIIT has increased its regulation of competition in the Internet industry, including “Certain Provisions on the Regulation of Internet Information Service,” effective March 2012, which prevents software companies that cause product incompatibility from competing in market.  However, our competitors may continue to make their products incompatible with ours or direct and/or induce their users to not use our products, which may reduce our market share, negatively affect our brand and reputation and materially and adversely affect our business, results of operations or financial condition.

 

If our expansion into new PC and mobile Internet businesses, as well as overseas and hardware markets is not successful, our future results of operations and growth prospects may be materially and adversely affected.

 

As part of our growth strategy, we enter into new PC and mobile Internet businesses from time to time by leveraging our expansive user base to generate additional revenue streams. We have expanded and may continue to expand into other markets, such as enterprise information security, smartphones and other smart hardware and overseas, through investment or strategic alliances with other market participants. Expansion into new businesses and new markets may present operational and marketing challenges that are different from those that we currently encounter. For each new business or market we enter into, we face competition from existing leading providers in that business or market. For example. to offer enterprise information security solutions, we need to adopt new technologies suitable to corporate information technology systems and manage corporate clients. Entering into overseas markets subjects us to new regulatory and competitive landscape, among other things. If we cannot successfully address the new challenges and compete effectively against the existing leading players in the new businesses or markets, we may not be able to develop a sufficiently large customer and user base, recover costs incurred for marketing new businesses or developing new markets, or make a profit from these businesses or markets, and our future results of operations and growth prospects may be materially and adversely affected.

 

We may not be able to manage our expanding operations effectively.

 

We have significantly expanded our operations in recent years. Since our inception in 2005, we have expanded our product offering into a comprehensive suite of PC and mobile Internet products and services and have rapidly established a leading position in the PRC Internet market. We expect this expansion to continue as we grow our user and customer base and explore new opportunities. To manage the further expansion of our business and growth of our operations and personnel, we need to continuously improve our operational and financial systems, procedures and controls, and expand, train, manage and maintain good relations with our growing employee base. In addition, we must maintain and expand our relationships with other Internet companies and other third parties. Our current and future personnel, systems, procedures and controls may not be adequate to support our expanding operations. If we fail to manage our expansion effectively, our business, results of operations and prospects may be materially and adversely affected.

 

Our strategy of acquiring and investing in complementary businesses, assets and technologies may fail.

 

As part of our business strategy, we have acquired, and intend to continue to selectively acquire and invest in, businesses, assets and technologies that complement our existing business. Acquisitions and investments involve uncertainties and risks, including:

 

·potential ongoing financial obligations and unforeseen or hidden liabilities;

 

·failure to achieve the intended objectives, benefits or revenue-enhancing opportunities;

 

·costs and difficulties of integrating acquired businesses and managing a larger business;

 

·costs and difficulties of integrating acquired technologies into our existing products and services; and

 

·diversion of resources and management attention. 

 

8
 

 

Our failure to address these risks successfully may have a material adverse effect on our financial condition and results of operations. Any such acquisition or investment may require a significant amount of capital investment, which would decrease the amount of cash available for working capital or capital expenditures. In addition, if we use our equity securities to pay for acquisitions, we may dilute the value of our ADSs and the underlying Class A ordinary shares. If we borrow funds to finance acquisitions, such debt instruments may contain restrictive covenants that could, among other things, restrict us from distributing dividends. Such acquisitions may also generate significant amortization expenses related to intangible assets.

 

Our business depends on a strong brand and reputation, and if we are not able to maintain and enhance our brand or reputation or if there is negative publicity against us, our business and operating results may be harmed.

 

We believe that our “360” brand and our reputation have contributed significantly to the success of our business. We also believe that maintaining and enhancing the “360” brand and our reputation are critical to increasing our number of users and customers. As our market becomes increasingly competitive, our success in maintaining and enhancing our brand and reputation will depend largely on our ability to remain as a leading provider of Internet and mobile security products and services in China, which may become more expensive and challenging.

 

We began enhancing marketing and brand promotion efforts in early 2010 and over the years have increased related spending. However, we cannot assure you that our marketing and brand promotion activities in the future will achieve the expected brand promotion effect. If we fail to maintain and further promote the “360” brand or our reputation, or if we incur excessive expenses in this effort, our business and results of operations may be materially and adversely affected. In addition, historically there has been negative publicity about our company, our products and services and certain key members of our management team. From 2011 to 2012, Citron Research, Anonymous Analytics and certain other short-selling organizations and individuals have issued a series of reports which portrayed our business and financial position in a negative light.  Additionally, in recent years, certain of our competitors have also made accusations and negative remarks against us in the news media. Although we have vigorously rebutted the key points of these reports and remarks, they still generated significant negative publicity for our company. We cannot assure you that there will not be additional negative publicity of the similar nature in the future. Any such negative publicity, regardless of its veracity, could harm our brand image and reputation and in turn adversely affect our business, operating results and the trading price of our ADSs.

 

The success of our Internet value-added services depends on our ability to accommodate user demand and source suitable third-party products and services.

 

We have derived, and expect to continue to derive, a substantial portion of our revenues from our Internet value-added services, such as offering games developed by third parties. The success of our Internet value-added services depends on our ability to respond adequately and timely to accommodate our users’ demand for such value-added services and source suitable third-party products and services on reasonable terms. For example, 2014 saw a strong ramp-up in our mobile games and relative slow growth in our web games. However, given the rapid changes in the trends in the online game industry, we may not be able to continue to source, offer and monetize popular games. If we are unable to continue to offer a variety of suitable value-added services that attract users and generate revenues, our financial condition and operating results may be materially adversely affected.

 

Our dependence on a limited number of customers for a significant portion of our online advertising revenues may cause fluctuations or declines in our revenues.

 

We generate a significant portion of our online advertising revenues from a limited number of customers.  Revenues from our top five online advertising customers comprised 21.3%, 15.6% and 8.4% of our total revenues in 2012, 2013 and 2014, respectively. We enter into non-exclusive, short-term agreements with our online advertising customers, which are typically renewed on a quarterly or annual basis.  Although we continue to diversify our customer base, we anticipate that a limited number of customers will continue to generate a meaningful portion of our online advertising revenues for the foreseeable future. Consequently, any of the following events may materially and adversely impact our business, results of operations and growth prospects:

 

·reduced, delayed or cancelled services required by our large online advertising customers;

 

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·one or more of our large online advertising customers’ failure to pay for our services; or

 

·loss of one or more of our significant online advertising customers and any failure to identify and acquire additional or replacement customers. 

 

If our PC and mobile Internet security products and services fail to detect malware or malicious websites or otherwise do not work properly, we may experience negative publicity, damage to our reputation, legal liability, declined revenues and increased expenses.

 

Our users rely on our PC and mobile Internet security products and services for safe access to the Internet via PCs or mobile devices. New malware and malicious websites are continuously being created and modified, and the detection technologies underlying our products and services may not detect all forms of malware or malicious websites that our users are exposed to. Additionally, our users may experience errors, failures, or bugs in our products that are undetected by our pre-launch testing, especially when our products and services are first introduced or when new updates are first released. Failure to detect malware or malicious websites or defects in our products may result in security breaches, disruption or damage to our users’ computers, mobile devices or networks and theft of confidential information or other negative consequences. Any such event may damage our brand reputation, decrease our user and customer base, require large research and development and marketing expenditures to remedy and may otherwise significantly affect our business and results of operations.

 

Furthermore, our PC and mobile Internet security products and services may falsely identify programs or websites as malicious or otherwise undesirable. Parties whose programs are incorrectly blocked by our products or services, or whose websites are incorrectly identified as unsafe or malicious, may seek redress against us for labeling them as malicious and interfering with their businesses. In addition, falsely identifying programs or websites as malicious may adversely affect our users’ confidence and trust in our products and decrease our user base. 

 

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

 

We have a limited operating history under our current business model upon which you can evaluate the viability and sustainability of our business. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries such as the Internet security industry in China. Some of these risks and uncertainties relate to our ability to:

 

·maintain our leading position in the PC and mobile Internet security market in China;

 

·continue to offer new and innovative products and services to attract and retain a larger user base;

 

·attract additional customers and increase spending per customer;

 

·increase awareness of our brand and continue to enhance user and customer loyalty;

 

·respond to competitive market conditions;

 

·respond to changes in our regulatory environment;

 

·manage risks and uncertainties associated with intellectual property rights;

 

·maintain effective control of our costs and expenses;

 

·raise sufficient capital to sustain and expand our business;

 

·attract, retain and motivate qualified personnel; and

 

·upgrade our technology and infrastructure to support increased traffic and expanded offerings of products and services. 

 

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If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

 

Interruption or failure of our own information technology and communications systems or those of third-party service providers we rely upon could impair our ability to effectively provide our products and services and protect the privacy of our users, which could damage our reputation and harm our operating results.

 

Our ability to provide our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could affect the performance and reliability of our Internet security products and services and directly impact our users. Service interruptions may damage our brand and reduce our user base if our products and services are perceived to be unreliable. Our systems are vulnerable to damage or interruption as a result of terrorist attacks, wars, earthquakes, floods, fires, power loss, telecommunications failures, undetected errors or “bugs” in our software, computer viruses, interruptions in access to our websites and servers through the use of “denial of service” or similar attacks, hacking or other attempts to harm our systems and similar events. Our servers, which are hosted at third-party Internet data centers, are vulnerable to break-ins, sabotage and vandalism. Additionally, the occurrence of a closure of an Internet data center by any of our third-party providers without adequate notice could result in lengthy service interruptions. The steps we take to improve the reliability of our systems will increase our cost and reduce our operating margin and may not be successful in reducing the frequency or duration of service interruptions. Furthermore, our systems may not function properly as a result of third-party action, employee error, malfeasance or otherwise, resulting in unauthorized access to our users’ data and information.  If we experience frequent or persistent system failures affecting our products and services or are unable to prevent unauthorized access to our users’ data, our reputation and brand could be severely harmed.

  

Our success depends on the continuing and collaborative efforts of our management team and other key personnel, and our business may be harmed if we lose their services.

 

Our future success depends heavily upon the continuing services of our management team, in particular Mr. Hongyi Zhou, our chairman and chief executive officer, and Mr. Xiangdong Qi, our director and president. If one or more of our executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for management and key personnel is intense, the pool of qualified candidates is limited, and we may not be able to retain the services of our executives or key personnel, or attract and retain experienced executives or key personnel in the future.

 

If any of our executives or other key personnel joins a competitor or forms a competing company, we may lose customers, distributors, know-how and key personnel. Each of our executive officers and key employees has entered into an employment agreement with us that contains confidentiality provisions. If any disputes arise between any of our executives or key personnel and us, we cannot assure you the extent to which any of these agreements may be enforced.

 

We rely on highly skilled personnel. If we are unable to retain or motivate them or hire additional qualified personnel, we may not be able to grow effectively.

 

Our performance and future success depend on the talents and efforts of highly skilled individuals. We will need to continue to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. Competition in the Internet industry for qualified employees is intense. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.

 

As competition in the Internet industry intensifies, it may be more difficult for us to hire, motivate and retain highly skilled personnel. If we do not succeed in attracting additional highly skilled personnel or retaining or motivating our existing personnel, we may be unable to grow effectively.

 

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We may not be able to prevent others from unauthorized use of our intellectual property or brands, which could harm our business and competitive position.

 

We rely on a combination of copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights and brands. We have registered our “Qihoo” and “Qihu” brands and our “360” logo with relevant government authorities in China, the United States, Japan, European Union, Singapore, Hong Kong and Macau and have pending applications for the “360” logo with relevant government authorities in India, Indonesia, Vietnam, Brazil, Turkey, Malaysia, Thailand and other sixty countries which are designated through the Madrid System, the international trademark system for registering and managing trademarks worldwide. Notwithstanding the above, most of our intellectual property rights and brands are subject to protection under PRC laws. The protection of intellectual property rights and brands in China may not be as effective as those in the United States or other countries. The steps we have taken may be inadequate to prevent the misappropriation of our technology or unauthorized use of our brands. Reverse engineering, unauthorized copying or other misappropriation of our technologies could enable third parties to benefit from our technologies without compensating us. Moreover, unauthorized use of our technology could enable our competitors to offer products and services that are comparable to or better than ours, which could harm our business and competitive position. From time to time, we may have to enforce our intellectual property rights and brands through litigation. Such litigation may result in substantial costs and diversion of resources and management attention.

 

Third parties may claim that we infringe their proprietary rights, which could cause us to incur significant legal expenses and prevent us from promoting our products and services.

 

From time to time, we may receive claims that we have infringed the intellectual property rights of others. Such claims may be based on our use of trademarks, logos, technologies or other intellectual properties. Any such claim, with or without merit, could result in costly litigation and distract our management from day-to-day operations. If we fail to successfully defend such claims, we could be required to make unavailable or redesign our products and services, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our users. Any royalty or licensing arrangements that we may seek in such circumstances may not be available to us on commercially reasonable terms or at all. Also, if we acquire technology to include in our products from third parties, our exposure to infringement actions may increase because we must rely upon these third parties to verify the origin and ownership of such technology.

 

Further, we license and use technologies from third parties in our products and services. These third-party technology licenses may not continue to be available to us on acceptable terms or at all, and may expose us to additional liability. This liability, or our inability to use any of this third-party software, could result in disruptions in our business that could materially and adversely affect our operating results.

 

The successful operation of our business depends upon the performance and reliability of the Internet infrastructure in China and the safety of our network and infrastructure.

 

Our business depends on the performance and reliability of the Internet infrastructure in China. Almost all access to the Internet is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the MIIT. A more sophisticated Internet infrastructure may not be developed in China. We may not have access to alternative networks in the event of disruptions, failures or other problems with China’s Internet infrastructure. In addition, the Internet infrastructure in China may not support the demands associated with continued growth in Internet usage, especially in light of the growth in mobile Internet.

 

Although we believe we have sufficient controls in place to prevent intentional disruptions, we expect our network and infrastructure to be targets of attacks specifically designed to impede the performance of our products and services, misappropriate proprietary information or harm our reputation. Because the techniques used by hackers to access or sabotage networks change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. The theft, unauthorized use or publication of our trade secrets and other confidential business information as a result of such an event could adversely affect our competitive position, brand reputation and user base, and our users and customers may assert claims against us related to resulting losses arising from security breaches. Our business could be subject to significant disruption and our results of operations may be affected.

 

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If we fail to establish an effective system of internal control, we may be unable to accurately and timely report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely impacted.

 

We are subject to reporting obligations under U.S. securities laws. Section 404 of the Sarbanes-Oxley Act of 2002 and related rules require a public company to include a management report on the company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must audit and report on the effectiveness of a public company’s internal control over financial reporting.

 

Our management, including our chief executive officer and chief financial officers, assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. Based on its assessment, our management concluded that, as of the end of our most recent fiscal year, December 31, 2014, our internal control over financial reporting was effective. However, our failure to discover and address any material weaknesses or control deficiencies in the future could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

 

The audit report included in this annual report is prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

 

Our independent registered public accounting firm that issues the audit reports included in our annual reports, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.  Because our auditors are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

 

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.  This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures.  As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by Securities and Exchange Commission, or the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

 

Starting in 2011, the Chinese affiliates of the ‘‘big four’’ accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under China law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission (“CSRC”).

 

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In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC's internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.  Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ordinary shares from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

We may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all. Furthermore, our future capital needs may require us to sell additional equity or debt securities that may dilute our shareholders or introduce covenants that may restrict our operations or our ability to pay dividends.

 

To grow our business and remain competitive, we may require additional capital. Our ability to obtain additional capital is subject to a variety of uncertainties, including:

 

·our future financial condition, results of operations and cash flows;

 

·general market conditions for capital raising activities by Chinese Internet companies; and

 

·economic, political and other conditions in China and internationally.

 

 We may be unable to obtain additional capital in a timely manner or on acceptable terms or at all. In addition, our future capital needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders.

 

Our business, financial condition and results of operations may be adversely affected by a downturn in the global or Chinese economy.

 

The global financial markets have experienced significant volatilities since 2008 and 2009. A variety of factors, including the European sovereign debt crisis and concerns about the viability of the European Union and the Euro, could cause further disruptions to the global economy. To the extent that there have been improvements in some areas, it is uncertain whether such recovery is sustainable. Geopolitical tension in Eastern Europe and elsewhere may also add further uncertainty to global economy. In addition, China’s economy has experienced a slowdown since 2012 and is expected to have a lower growth rate in the coming years. Since we derive substantially all of our revenues from China, our business and prospects may be affected by a slowdown in the development of China’s Internet industry as a result of economic downturns.

 

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Moreover, a slowdown in the global or Chinese economy or the recurrence of any financial disruptions may have a material and adverse impact on financings available to us. The weakness in the economy could erode investors’ confidence, which constitutes the basis of the equity markets. Any future financial turmoil affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all. There is a risk that our business, results of operations and prospects would be materially and adversely affected by future global economic downturn and the slowdown of the Chinese economy.

 

Risks Related to Our Corporate Structure

 

In order to comply with PRC laws and regulations limiting foreign ownership of Internet businesses, we conduct our Internet businesses through our consolidated affiliated entities in China by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with applicable regulations, our business could be materially and adversely affected.

 

The PRC government restricts foreign investment in Internet businesses. See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulations Relating to Our Business —Telecommunications Regulations.” Accordingly, we conduct our business activities in China through a series of contractual arrangements with two of our consolidated variable interest entities, or VIEs, namely Beijing Qihu Technology Company Limited, or Beijing Qihu, and Beijing Star World Technology Co., Ltd., or Beijing Star World. We also entered into similar contractual arrangements with twenty-three other VIEs that do not have significant business operations as of the date of this annual report. See “Item 4. Information on the Company ¾ C. Organizational Structure.” These contractual arrangements enable us to (i) have power to direct the activities that most significantly affect the economic performance of Beijing Qihu and Beijing Star World and their subsidiaries, (ii) receive substantially all of the economic benefits from these VIEs and subsidiaries in consideration for the services provided by our wholly owned subsidiary in China and (iii) have an exclusive option to purchase all or part of the equity interests in these VIEs, when and to the extent permitted by PRC law or request any existing shareholder of the VIEs to transfer all or part of the equity interests in these VIEs to another PRC person or entity designated by us at any time in our discretion. For a description of these contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions ¾ B. Related Party Transactions ¾ Contractual Arrangements Among Our Subsidiaries, Our VIEs and the Respective Shareholders of the VIEs.”

 

In the opinion of our PRC counsel, Commerce & Finance Law Offices, our current ownership structure, the ownership structure of our subsidiaries and our VIEs, the contractual arrangements among us, our wholly owned subsidiaries, VIEs and their shareholders, as described in this annual report, are in compliance with existing PRC laws, rules and regulations. However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations. For example, the Ministry of Commerce, or MOFCOM, published the draft of Foreign Investment Law, or Draft FIL, for public comments on January 19, 2015, which introduces the principle of “actual control” for determining whether a domestic company is considered a foreign invested enterprise and, therefore, be subject to the foreign investment restrictions or prohibitions set forth in the “catalogue of special administrative measures” to be issued later. Not only direct or indirect actual equity holding control but also actual control by agreements or other arrangements falls within the definition of “actual control” in such draft law. Under the Draft FIL, the VIEs that are controlled ultimately by foreign investors through contractual arrangement may not be allowed or may subject to the governmental approval in the industries set forth in the “catalogue of special administrative measures.” The Draft FIL has no immediate legal effect and it is unclear whether and how the legislative progress with proceed, however, if enacted as proposed, may also materially impact our corporate structure and increase our compliance costs.

 

If the PRC government determines that our ownership structure, our contractual arrangements with our consolidated affiliated entities and their shareholders or our businesses are in violation of any existing or future PRC laws or regulations, it may revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, block our websites, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers or take other regulatory or enforcement actions against us that could be harmful to our business.

 

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The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business and our results of operations. If any of these penalties results in our inability to direct the activities of our VIEs and their subsidiaries that most significantly impact their economic performance or our failure to receive the economic benefits from VIEs and their subsidiaries, we may not be able to consolidate our VIEs and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

 

If we exercise the option to acquire equity ownership of our VIEs, the ownership transfer must be approved or filed with PRC governmental authorities, which may subject us to substantial costs.

 

Pursuant to the Contractual Arrangements, Qizhi Software or its designee has the exclusive right to purchase all or any part of the equity interests in VIEs from the respective shareholders. However, if such a transfer takes place, the equity transfer shall also be subject to the approvals from or filings with the MOFCOM, the MIIT, the Ministry of Culture, or the MOC, and/or their local competent branches and the equity transfer may be subject to PRC tax, which may result in substantial costs to us.

 

Our contractual arrangements with our VIEs and their respective shareholders may not be as effective in providing control over the entity as direct ownership.

 

We rely on contractual arrangements with our VIEs and their shareholders for the operation of our Internet business in China. Although we have been advised by our PRC counsel, Commerce & Finance Law Offices, that the contractual arrangements as described in this annual report are valid, binding and enforceable under current PRC laws, except that certain pledge agreements have not been registered, these contractual arrangements may not be as effective in providing us with control over our VIEs as direct ownership in these entities. If our VIEs or their respective shareholders fail to perform their respective obligations under these contractual arrangements, we may incur substantial costs and resources to enforce these arrangements, and rely on legal remedies available under applicable PRC laws, including seeking specific performance or injunctive relief and claiming damages. In particular, if shareholders of a VIE refuse to transfer their equity interests in such VIEs to us or our designated persons when we exercise the purchase option pursuant to these contractual arrangements, we may need to initiate legal actions to compel them to fulfill their contractual obligations.

 

If the applicable PRC authorities invalidate our contractual arrangements for violation of PRC laws, rules and regulations, or any of our VIEs or their shareholders terminate the contractual arrangements or fail to perform their obligations under these contractual arrangements, our Internet and online advertising businesses in China would be materially disrupted, and the value of our ordinary shares would decrease substantially. Furthermore, if we fail to renew these contractual arrangements upon their expiration and the relevant foreign investment restrictions remain effective, we would not be able to continue our Internet business.

 

In addition, if any of our VIEs or all or part of its assets become subject to court injunctions or asset freezes or liens or rights of third-party creditors, we may be unable to continue some or all of our businesses, which could materially and adversely affect our business, financial condition and results of operations. If any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets and our ability to operate its business may be negatively affected. As a result of aforementioned risks and uncertainties, we may not be able to consolidate the VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their shareholders, and it may lose the ability to receive economic benefits from the VIEs. The occurrence of any of these events may hinder our ability to operate our Internet business, which could in turn materially harm our business and our ability to generate revenues and cause the market price of our ordinary shares to decline significantly.

  

Perfection of the pledges in our equity pledge agreements with our VIEs and their registered shareholders may be adversely affected due to failure to register these equity pledge agreements.

 

Under our equity pledge agreements with our VIEs and their registered shareholders, these registered shareholders have pledged all of their respective equity interests in the VIEs to us. The purpose of such pledges is to secure the performance of the VIEs’ obligations under the various VIE agreements, including the business operation agreements and technology development agreements. According to the PRC Property Rights Law, which became effective on October 1, 2007, a pledge is not deemed to be validly created without registration with the relevant local administration for industry and commerce. Fourteen of our VIEs have completed the pledge registration. We are applying to register and update the equity pledges by the shareholders of our eleven other VIEs with the relevant offices of the administration for industry and commerce. Although under PRC laws and regulations, the administration for industry and commerce should register a pledge immediately upon receiving a complete application, the registration process could take longer in practice. If the equity pledges are not successfully registered, they would not be deemed as validly created security interests under the PRC Property Rights Law. If our VIEs breached their obligations under the agreements with us, there is a risk that we may not be able to successfully enforce the pledges if the equity pledge agreements have not been registered with the relevant administration for industry and commerce.

 

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The shareholders of our VIEs may have potential conflicts of interest with us, which may adversely affect our business.

  

The registered shareholders of our VIEs are also our shareholders, directors, officers or employees. For example, Mr. Hongyi Zhou, our chairman and chief executive officer, owned 16.2% of our outstanding ordinary shares and 39.4% of our voting interest as of December 31, 2014 and is one of the registered shareholders of Beijing 3G3W Science & Technology Co., Ltd., a consolidated variable interest entity. In addition, Mr. Xiangdong Qi, our director and president, owned 7.8% of our outstanding ordinary shares and 18.5% of voting interest as of December 31, 2014 and is one of the registered shareholders of Beijing Qihu, a consolidated variable interest entity. Conflicts of interest may arise between these shareholders’ duties to us and our VIEs. If such conflicts arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved in our favor. In addition, these shareholders may breach or cause our VIEs to breach or refuse to renew their existing contractual arrangements that allow us to exercise effective control over them and to receive economic benefits from them. Currently, we do not have arrangements to address potential conflicts of interest the shareholders of our VIEs may encounter in their capacity as beneficial owners of the VIEs, on one hand, and as our shareholders, directors, officers or employees on the other hand. Under the laws of the Cayman Islands, the directors of a company owe certain fiduciary duties to the company, including a duty to act in what they believe in good faith to be in the best interests of the company and not to use their positions for personal gain. If certain shareholders of our VIEs do not comply with their fiduciary duties to us as our designated directors, or if we cannot resolve any conflicts of interest or disputes between us and such shareholders or any future beneficial owners of our VIEs, we would have to rely on legal proceedings to remedy the situation, which could result in disruption of our business and substantial uncertainty as to the outcome of any such legal proceedings.

 

Our contractual arrangements with our VIEs and their respective shareholders may be subject to scrutiny by the PRC tax authorities and we could be required to pay additional taxes, which could substantially reduce our consolidated net income and the value of your investment.

 

Arrangements and transactions among related parties may be subject to audits or challenges by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with VIEs are not arm’s length transactions. If this were to occur, the tax authorities could adjust our VIEs’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our VIEs, which could in turn increase their tax liabilities. The PRC tax authorities could also impose late payment fees and other penalties on our VIEs for under-paid taxes. In addition, any challenge by the PRC tax authorities may limit the ability of our VIEs to receive any preferential tax treatments and other financial incentives. Similar contractual arrangements have been used by many other overseas-listed China-based companies and, to our knowledge, none of these companies has been subject to any material penalties imposed by relevant PRC tax authorities. We have not received any penalties from relevant PRC tax authorities as a result of our contractual arrangements. However, we cannot assure you that penalties will not be imposed on us in the future and we are not able to assess with any degree of certainty the likelihood or remoteness of regulatory authorities implementing the relevant laws and regulations in a way that would materially and adversely affect our business and results of operations. Our consolidated net income may be materially and adversely affected if our VIEs’ tax liabilities increase or if our VIEs are found to be subject to late payment fees or other penalties.

 

Risks Related to Regulation of Our Services and Products

 

We may be adversely affected by complexity, uncertainties and changes in regulation of Internet and value-added telecommunications service companies.

 

The PRC government extensively regulates the Internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the Internet industry. These Internet-related laws and regulations are relatively new and still evolving, and their interpretation and enforcement involve significant uncertainty. As a result, it may be difficult in certain circumstances to determine what actions or omissions may be deemed to be violations of applicable laws and regulations. The following illustrates some of the risks and uncertainties relating to PRC government regulation of the Internet industry:

 

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·We only have contractual control over our websites. We do not own the websites due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including online information services.

 

·There are uncertainties relating to the regulation of the Internet business in China, including licensing practices that continue to evolve. This means that permits, licenses or operations at some of our companies may be subject to challenge, or we may not be able to obtain or renew certain permits or licenses. This may significantly disrupt our business, require us to compromise enforceability of related contractual arrangements, or subject us to sanctions, requirements to increase capital or other conditions or enforcement.

 

·New laws and regulations may be promulgated that will regulate Internet activities, including online advertising and online payment. Other aspects of our online operations may be regulated in the future. If these new laws and regulations are promulgated, additional licenses may be required for our online operations. If our operations do not comply with these new regulations at the time they become effective, or if we fail to obtain any licenses required under these new laws and regulations, we could be subject to penalties.

 

As a result of the complexity, uncertainties and constant changes in regulation in the Internet and value-added telecommunications companies, our business activities and growth may be adversely affected if we do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from ours taken by the competent authority in the interpretation of such applicable laws, regulations and policies.

 

If we fail to obtain or maintain all required licenses, permits and approvals or if we are required to take actions that are time-consuming or costly, our business operations may be materially and adversely affected.

 

We are required to obtain applicable licenses, permits and approvals from different regulatory authorities in order to conduct our business. Over the last several years, various governmental authorities in the PRC have issued regulations regulating specific aspects of Internet content and services. Some of this legislation requires operators to obtain licenses, permits or approvals that were previously not required. The government authorities may continue to pass new rules regulating the Internet sector. They may require us to obtain additional licenses, permits or approvals so that we can continue to operate our existing businesses or otherwise prohibit our operation of the types of businesses to which the new requirements apply. In addition, new regulations or new interpretations of existing regulations may increase our costs of doing business and prevent us from efficiently delivering services and products over the Internet and through mobile operators and expose us to potential penalties and fines. These regulations may also restrict our ability to expand our customer and user base or to provide services in additional geographic areas.

 

Our security software must be examined and approved by the PRC Ministry of Public Security, or the MPS, before it may be made available to users. We believe that we have obtained the applicable permits for offering 360 Safe Guard and 360 Anti-Virus for download. However, as the upgrades of our software become more frequent and such examination and approval by the MPS may be time consuming, we may not be able to obtain such permits for all upgrades in a timely manner, which may subject us to various penalties and adversely affect our business and results of operations.

 

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In addition, we operate an online lottery business. Under the Tentative Administrative Measures on Internet Lottery Sale promulgated by the PRC Ministry of Finance, or the MOF, on September 26, 2010, a license is required for conducting online lottery business. Moreover, on January 18, 2012, the Implementation Rules of the Lottery Administration Regulations, or the Lottery Implementation Rules, were jointly issued by the MOF, the Civil Affairs Bureau and the State General Administration of Sport, became effective as of March 1, 2012 and explicitly stipulate that the welfare lotteries and sports lotteries sold without the MOF’s approval and the Lottery Issuing Authority’s and Lottery Sales Office’s commission may be categorized as illegal lotteries. Therefore, in addition to MOF’s approval, the Lottery Implementation Rules further request the lottery sales agency to obtain proper authorization from the Lottery Issuing Authority and the Lottery Sales Office to conduct lottery business. In December 2012, the Ministry of Finance issued the Lottery Distribution and Sale Administration Measures, which became effective on January 1, 2013. These new measures expressly allowed Internet lottery sales, subject to obtaining relevant approvals or licenses.  As these measures and rules are newly released and there lack associated implementation rules, we have not applied and obtained such approval or license, which may subject us to administrative penalties, confiscation of illegal income and/or criminal sanctions. Our reputation may be harmed and our business may be adversely affected. In addition, on March 1, 2015, the MOF, the Civil Affairs Bureau and the State General Administration of Sport and other five authorities issued a joint administrative order to suspend all forms of online distribution of lottery tickets. We have therefore temporarily suspended our online lottery business since March 2015, pending further regulatory decision by relevant government authorities. Such regulatory policy changes, even temporary, may materially and adversely impact to our online lottery business.

 

If any of our games business activities is deemed to be in violation of law, we may have to cease or modify our game operations, which could have a material and adverse effect on our business and results of operations.

 

All games currently offered by our platform are licensed by, and operated with, third-party game developers. Although we have obtained licenses which we believe are sufficient for our game offerings, the MIIT or other competent government authorities may interpret existing or promulgate and implement new laws, regulations or policies that may require us to cease or modify our games business in order to avoid violation of any PRC laws or regulations. Any such modification to our games business may result in disruption of our business, diversion of management attention and the incurrence of substantial costs. See also “Item 4. Information on the Company— B. Business Overview — Regulations — Regulations Relating to Our Business — Games and Virtual Currency.” In addition, we have applied for and requested our game business partners to obtain and maintain all necessary licenses. However, we cannot assure you that we or all of our business partners have obtained or updated all necessary licenses, permits or registrations with relevant governmental authorities. If we or any of such business partners fails to do so, we may not continue to operate the affected games, which may adversely affect our business and results of operations.

  

Regulation and control of information disseminated over the Internet in China may adversely affect our business and subject us to liability for information displayed on or linked to our websites.

 

The MIIT has published regulations that subject website operators to potential liability for content displayed on their websites and the actions of users and others using their systems, including liability for violations of PRC laws and regulations prohibiting the dissemination of content deemed to be socially destabilizing. The MPS has the authority to order any local Internet service provider to block any Internet website at its sole discretion. From time to time, the MPS has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau is also authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of State secrets in the dissemination of online information. Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches, our websites may be shut down and our business and business licenses may be revoked.

 

Although we attempt to monitor the content posted on our websites or transmitted through our services, we are not able to control or restrict the content generated or linked by the users to other Internet content providers, or ICPs. If the PRC regulatory authorities find any content displayed on our websites objectionable, they may require us to limit or eliminate the dissemination of such information on our websites. If third-party websites linked to or accessible through our websites operate unlawful activities, PRC regulatory authorities may require us to report such unlawful activities to competent authorities and to remove the links to such websites, or they may suspend or shut down the operation of such websites. PRC regulatory authorities may also temporarily block access to certain websites for a period of time for reasons beyond our control. Any of these actions may reduce our user traffic and adversely affect our business. In addition, we may be subject to penalties for violations of those regulations arising from information displayed on or linked to our websites, including a suspension or shutdown of our online operations.

 

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Implementation of laws and regulations relating to data privacy in China could adversely affect our business.

 

Certain data and services collected, provided or used by us or provided to and used by us or our users are currently subject to regulation in certain jurisdictions, including China. The PRC Constitution states that PRC laws protect the freedom and privacy of communications of citizens and prohibit infringement of such basic rights, and the PRC Contract Law prohibits contracting parties from disclosing or misusing the trade secrets of the other party. Further, companies or their employees who illegally trade or disclose customer data may face criminal charges. Although the definition and scope of “privacy” and “trade secret” remain relatively ambiguous under PRC law, growing concerns about individual privacy and the collection, distribution and use of information about individuals have led to national and local regulations that could increase our expenses.

 

On December 28, 2012, the Standing Committee of the National People’s Congress enacted the Decision to Enhance the Protection of Network Information, or the Information Protection Decision, to further enhance the protection of users’ personal information in electronic form. The Information Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the collection and use of users’ personal information by Internet information services providers, or ICPs, publish the ICPs’ standards for their collection and use of users’ personal information, and collect and use users’ personal information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential users’ personal information that ICPs collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against disclosure, damages and loss. Furthermore, the MIIT promulgated the Provision on Personal Information Protection of Telecommunication and Internet Users in July 2013, which provides the definition of personal information and further specifies the principles and requirements of the collection and use of personal information by telecommunication and Internet service providers. Compliance with current regulations and regulations that may come into effect in these areas may increase our expenses related to regulatory compliance, which could have a material adverse effect on our financial condition and operating results.

 

Risks Related to Doing Business in China

 

Adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.

 

We conduct substantially all of our operations in China. Accordingly, our business, financial condition, results of operations and prospects depend significantly on economic developments in China. China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.

 

The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy, which could materially adversely affect our business.

 

We may rely on dividends and other distributions from our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could materially adversely affect our ability to conduct our business.

 

As an offshore holding company, we may rely principally on dividends from our subsidiaries in China for our cash requirements, including to pay dividends or make other distributions to our shareholders or to service our debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, the PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. There is no material difference between accumulated profits calculated in accordance with PRC accounting standards and regulations and the accumulated profits presented in our financial statements. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends.

 

If our subsidiaries in China incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially adversely limit our ability to grow, make investments or acquisitions, pay dividends and otherwise fund and conduct our business.

 

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PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

 

Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM, or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.

 

The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

 

Further, if the business of any target company that we plan to acquire falls into the scope of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using the proceeds of our initial public offering or other financing activities to make loans or capital contributions to our PRC operating subsidiaries, which could materially adversely affect our liquidity and ability to fund and expand our business.

 

In utilizing the proceeds we received from the 2011 initial public offering we completed in April 2011, offerings of convertible senior notes in 2013 and 2014 or in other future financing activities, as an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our PRC subsidiaries by means of shareholder’s loans or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of total investments and registered capital in such subsidiaries, and shall be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Furthermore, any capital contributions we make to our PRC subsidiaries shall be approved by the MOFCOM or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

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In addition, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Under Circular 142, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans. Furthermore, to strengthen Circular 142, on November 9, 2011 SAFE promulgated the Circular on Further Clarifying and Regulating Relevant Issues Concerning the Administration of Foreign Exchange under Capital Account, or Circular 45, which prohibits a foreign invested company from converting its registered capital in foreign exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying inter-company loans, and repaying bank loans that have been transferred to a third party. Circular 142 and Circular 45 may significantly limit our ability to transfer the net proceeds from our initial public offering to our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC. On March 3, 2015, the SAFE promulgated a Circular on Reforming of Administrative Methods Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Companies, or Circular 19, which shall become effective on June 1, 2015, superseding Circular 142. According to Circular 19, although it restates certain restrictions on use of investment capital in foreign currency by foreign invested company, it specifies that the registered capital of a foreign-invested company in foreign currency can be converted into RMB voluntarily and be allowed to use for equity investment in the PRC subject to certain reinvestment registration with local SAFE made by the invested company. However, since Circular 19 is newly issued, its interpretation and enforcement involve significant uncertainties.

 

Fluctuations in the value of the RMB may materially adversely affect your investment.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar.

 

There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant fluctuation of the RMB against foreign currencies. On June 20, 2010, the People’s Bank of China announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Since June 2010, the Renminbi has slowly appreciated against the U.S. dollar, although there have been periods recently when the U.S. dollar appreciated against the Renminbi. It is difficult to predict how long the current situation may last and when and how the relationship between the Renminbi and the U.S. dollar may change again.

 

Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our ADSs in U.S. dollars. In addition, any fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

 

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our wholly-owned PRC subsidiaries to fund any cash and financing requirements we may have. See “Item 7. Major Shareholders and Related Party Transactions ¾ B. Related Party Transactions.”

 

Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, Qizhi Software, Beijing Qihu, Tianjin Qisi Technology Co., Ltd., or Tianjin Qisi, and Qifei Xiangyi (Beijing) Software Co., Ltd., or Qifei Xiangyi, may pay dividends in foreign currency to us without pre-approval from SAFE. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. With the prior approval from SAFE, cash generated from the operations of our PRC subsidiary may be used to pay off debt they owe to entities outside China in a currency other than the Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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Uncertainties in the Chinese legal system could materially adversely affect our business.

 

We conduct our business primarily through our subsidiaries and affiliated entities in China. Our operations in China are governed by PRC laws and regulations. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general, and forms of foreign investment (including wholly foreign-owned enterprises and joint ventures) in particular. These laws, regulations and legal requirements are relatively new and amended frequently, and their interpretation and enforcement often raise uncertainties that could limit the reliability of the legal protections available to us. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violations of these policies and rules until the violations have occurred. Furthermore, any litigation in China may be protracted and result in substantial costs and diversion of resources and management’s attention. We cannot predict future developments in the PRC legal system. We may be required to procure additional permits, authorizations and approvals for our operations, which we may not be able to obtain. Our inability to obtain such permits or authorizations may materially adversely affect our business, financial condition and results of operations.

 

PRC regulations relating to the establishment of offshore special purpose vehicles, or SPVs, by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

 

SAFE has promulgated several regulations, including the Circular on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or Circular No. 37, effective on July 4, 2014, and its appendixes. Circular No. 37 requires that require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in Circular No. 37 as a “SPV.” SAFE Circular No. 37 further requires amendment to the registration in the event of any significant changes with respect to the SPV, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event.  In the event that a PRC shareholder holding interests in a SPV fails to fulfill the required SAFE registration, the PRC subsidiaries of that SPV may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the SPV may be restricted in their ability to contribute additional capital into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion. 

 

These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future. We have notified holders of ordinary shares of our company whom we know are PRC residents to register with the local SAFE branch and update their registrations as required under the SAFE regulations described above. We are aware that Mr. Hongyi Zhou, our chairman and chief executive officer and principal shareholder and Mr. Xiangdong Qi, our director, president and principal shareholder, both of whom are PRC residents, have registered with the relevant local SAFE branch. We, however, cannot provide any assurances that all of our shareholders who are PRC residents will file all applicable registrations or update previously filed registrations as required by these SAFE regulations. If SAFE determines that any of our beneficial owners who are PRC residents fails to comply with the above SAFE rules, our PRC subsidiaries could be subject to fines and legal penalties, and SAFE could restrict our cross-border investment activities and our foreign exchange activities, including restricting our PRC subsidiaries’ ability to distribute dividends to, or obtain loans denominated in foreign currencies from, our company, or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

 

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Failure to comply with the registration requirements for employee share option plans may subject our PRC equity incentive plan participants or us to fines and other legal or administrative sanctions.

 

In January 2007, SAFE issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly-listed company. In March 2007, SAFE promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or Circular 78, which has been replaced by a circular 7 issued by SAFE on February 15, 2012, or Circular 7.

 

Under Circular 7, PRC residents who participate in an employee stock option plan in an overseas publicly-listed company are required to register with SAFE or its local office and complete certain other procedures. A PRC agent, which could be the PRC subsidiary of such overseas publicly-listed company, is required to retain a financial institution with stock brokerage qualification at the listing place or a qualified institution relating to the exercise or sale of share options.  We and our PRC employees, directors and senior management who receive share options became subject to these regulations upon our initial public offering in the United States. Our 2006 Employee Share Option Scheme, 2006 Employee Share Vesting Scheme and 2011 Share Incentive Plan, or the 2011 Plan, have been filed with and approved by SAFE. However, if we or our PRC optionees fail to comply with these regulations or any of our future share incentive plans are not filed with or approved by SAFE, we or our PRC optionees may be subject to fines and other legal or administrative sanctions.

 

We may be subject to PRC taxation on our worldwide income.

 

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, both effective from January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and is subject to a 25% enterprise income tax on its global income. The implementation rules define the term “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties of an enterprise. The State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which sets out certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China.

 

In addition, the SAT issued a bulletin on August 3, 2011 to provide more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The bulletin clarified resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of PRC tax resident determination certificate from an offshore incorporated enterprise controlled by PRC residents, the payer should not withhold 10% income tax when paying the PRC-sourced dividends, interest, royalties, etc. to the offshore incorporated enterprise controlled by PRC residents. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals,  the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general position on how the “de facto management body” test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals.

 

While we do not believe we are considered a resident enterprise or meet the criteria under Circular 82, we cannot ensure you that the SAT will not implement Circular 82 or amend the rules in the future to the effect that such rules will apply to us or our wholly-owned subsidiaries in Hong Kong, Singapore and the United States. If the PRC authorities were to subsequently determine that we should be treated as a resident enterprise, a 25% enterprise income tax will be imposed on our global income, which could significantly increase our tax burden and materially adversely affect our financial condition and results of operations.

 

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We face uncertainties with respect to application of the Circular on Strengthening the Administration of Enterprise Income Tax for Share Transfer by Non-PRC Resident Enterprises.

 

On December 10, 2009, the SAT issued Notice on Strengthening the Management of Enterprise Income Tax Collection of Proceeds from Equity Transfers by Non-resident Enterprises (Guo Shui Han [2009] No. 698), or Circular 698, with retroactive effect from January 1, 2008, which was further explained by a notice issued by the SAT implemented as of March 28, 2011, pursuant to which a non-resident enterprise transfer of its equity interests in a PRC resident enterprise indirectly through a disposition of equity interests in an overseas holding company (other than a purchase and sale of shares issued by a PRC resident enterprise in public securities market), or an Indirect Transfer, may subject the non-resident enterprise, as the seller, to PRC enterprise income tax, if the tax authority considers that the foreign investor has adopted an abusive arrangement without reasonable commercial purposes and for the purpose of avoiding or reducing PRC tax. The tax authority will also disregard the existence of the overseas holding company that is used for tax planning purposes and re-characterize the Indirect Transfer. As a result, gains derived from such Indirect Transfer may be subject to PRC withholding tax at a rate of up to 10%.

 

On February 3, 2015, the SAT issued Notice 7 to supersede the existing tax rules in relation to the Indirect Transfer, while the other provisions of Circular 698 remain in force. Notice 7 introduces a new tax regime that is significantly different from that under Circular 698. Notice 7 extends its tax jurisdiction to capture not only Indirect Transfer as set forth under Circular 698 but also transactions involving transfer of real properties in China and the assets of an “establishment or place” situated in China, of a non-PRC resident enterprise through the offshore transfer of a foreign intermediate holding company. Notice 7 also interprets the term “transfer of the equity interest in a foreign intermediate holding company” widely. In addition, Notice 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and introduces safe harbor scenarios applicable to internal group restructurings. However, it also brings challenges to both the foreign transferor and transferee of the Indirect Transfer as they are required to make self-assessment on whether the transaction should be subject to PRC tax and to file or withhold the PRC tax accordingly.

 

There is uncertainty as to the application of Circular 698 and Notice 7. Where non-resident investors were involved in our private equity financing, if such transactions were determined by the tax authorities to lack reasonable commercial purpose, we and our non-resident investors may become at risk of being taxed under Circular 698 and Notice 7 and may be required to expend valuable resources to comply with Circular 698 and Notice 7 or to establish that we should not be taxed under Circular 698 and Notice 7, which may cause us to incur additional costs and may have a negative impact on the value of your investment in us.

 

The PRC tax authorities have discretion under Circular 698 or Notice 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investment. We may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the New EIT Law and if the PRC tax authorities make adjustments to the taxable income of these transactions under Circular 698 or Notice 7, our income tax expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations. 

 

Dividends we receive from our PRC subsidiaries, dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.

 

Under the New EIT Law and its implementation rules, dividends payable by a foreign-invested enterprise in China to its shareholders that are “non-resident enterprises” are subject to a 10% withholding tax starting from January 1, 2008, unless such shareholders’ jurisdiction of incorporation has a tax treaty with China that provides for a different arrangement. According to the Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between mainland China and Hong Kong Special Administrative Region in August 2006, dividends payable by a foreign invested enterprise, or FIE, in China to a company in Hong Kong which directly holds at least 25% of the equity interests in the FIE will be subject to a reduced withholding tax rate of 5% upon receiving approval from in-charge tax authority. In accordance with several notices issued by the SAT, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review and has the right to make adjustments to the applicable tax rates. Since it has remained unclear how the PRC tax authorities will implement them in practice and to what extent they will affect the dividend withholding tax rates for dividends distributed by our subsidiaries in China to our Hong Kong subsidiary. If the relevant tax authority determines that our Hong Kong subsidiary does not qualify as the “beneficial owner” of the dividend income it receives from our PRC subsidiaries, 10% withholding tax rate will apply to such dividends.

 

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Similarly, any gain realized on the transfer of ADSs or shares by shareholders that are “non-resident enterprises” is also subject to a 10% PRC withholding tax, if such gain is regarded as income derived from sources within the PRC. If we are considered to be an “offshore-registered resident enterprise,” a 10% withholding tax is imposed on dividends we pay to our non-PRC resident enterprise shareholders and on gains derived by our non-PRC resident enterprise shareholders from transferring our shares or ADSs (unless the holder is eligible for a treaty that provides a reduced rate), a 20% withholding tax is imposed on dividends we pay to our non-PRC resident individual shareholders and on gains derived by our non-PRC resident individual shareholders from transferring our ordinary shares or our ADSs (unless the holder is eligible for a treaty that provides a reduced rate), in each case, provided that such income is considered PRC-sourced income by the relevant PRC authorities.

  

If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC enterprise ADS holders, or if gain from disposition of our ordinary shares or ADSs will be subject to PRC taxes, your investment in our ADSs may be materially adversely affected.

 

Any change in the preferential tax treatment we currently enjoy in the PRC may materially adversely impact our net income.

 

Pursuant to the New EIT Law, enterprises that previously enjoyed preferential treatments of low tax rates will be subject to the new enterprise income tax rate of 25% after a five-year transitional period. Moreover, tax exemption or reduction with fixed terms enjoyed by enterprises including us will continue until the expiry of the prescribed period. One of our operating subsidiaries, Qizhi Software, and two of our VIEs, Beijing Qihu and Beijing Star World, receive preferential tax treatment in the PRC as “high and new technology enterprises.” Another two of our operating subsidiary, Tianjin Qisi and Qifei Xiangyi, receives preferential tax treatment in the PRC as “software enterprise.” Specifically, each of Qizhi Software, Beijing Qihu and Beijing Star World, was entitled to a reduced EIT rate of 15% for 2012, 2013 and 2014. Tianjin Qisi received its “software enterprise” status in March 2011 and was entitled to the preferential tax treatment of “two-year exemption plus three-year half rate” starting from 2012, being its first profit-making year for EIT purposes. Tianjin Qisi was entitled to a preferential tax rate of 12.5% for the year ended December 31, 2014. Qifei Xiangyi was recognized as Software Enterprise by relevant PRC government authorities on November 11, 2013 and entitled to the preferential tax treatment of “two-year exemption plus three-year half rate” commencing from its first profit-making year for EIT purposes. For the year ended December 31, 2013 and 2014, Qifei Xiangyi enjoyed the 2-year tax exemption.

 

New labor laws in the PRC may adversely affect our results of operations.

 

On June 29, 2007, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law, which became effective on January 1, 2008 and was amended in 2012. The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Furthermore, the New  Labor Contract Law requires certain terminations to be based upon seniority and not the merits of employees. As a result, the New Labor Contract Law could increase our operating expenses and limit our ability to significantly change or decrease our workforce.

 

Risks Related to Our ADSs

 

The market price for our ADSs has fluctuated and may be volatile; the trading price of our convertible senior notes could be significantly affected by the market price of the ADSs and other factors.

 

The market price of our ADSs has fluctuated since we first listed our ADSs. Since our ADSs became listed on the NYSE on March 30, 2011, the trading price of our ADSs have ranged from $13.71 to $124.42 per ADS, and the last reported trading price on April 24, 2015 was $62.62 per ADS.

 

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

·regulatory developments in our industry;

 

·actual or anticipated fluctuations in our quarterly results of operations;

 

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·changes in financial estimates by securities research analysts;

 

·negative publicity, studies or reports, including those issued by short-selling organizations;

 

·changes in conditions of Internet and mobile security industry;

 

·changes in performance and valuation of our peer or comparable companies;

 

·announcements by us or our competitors of new services, acquisitions, strategic relationships, joint ventures or capital commitments;

 

·changes in our senior management;

 

·fluctuations in the exchange rate between the Renminbi and the U.S. dollar; and

 

·sales or anticipated sales of additional ordinary shares or ADSs.

 

In addition, securities markets have experienced significant price and volume fluctuations unrelated to the operating results of any particular companies. These market fluctuations may also materially adversely affect the market price of our ADSs. We also expect that the trading price of our convertible senior notes will be significantly affected by the market price of our ADSs. This may result in greater volatility in the trading price of the notes than would be expected for nonconvertible debt securities.

 

The price of the ADSs could also be affected by possible sales of the ADSs by investors who view our convertible senior notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving the ADSs. This trading activity could, in turn, affect the trading prices of our convertible senior notes.

 

Conversion of the convertible senior notes will dilute the ownership interest of existing shareholders and holders of our ADSs, including holders who have previously converted their notes.

 

On September 5, 2013, we completed an offering of $600 million of convertible senior notes due 2018, to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and non-U.S. persons in offshore transactions in compliance with Regulation S under the Securities Act. The convertible senior notes will mature on September 15, 2018. On August 6, 2014, we completed an offering of $450 million 0.50% convertible senior notes due 2020 and $450 million 1.75% convertible senior notes due 2021 to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and non-U.S. persons in offshore transactions in compliance with Regulation S under the Securities Act. The conversion of some or all of the convertible senior notes will dilute the ownership interests of existing shareholders and holders of the ADSs and may depress the price of the Class A ordinary shares or ADSs. In addition, any sales in the public market of the ADSs issuable upon such conversion could adversely affect prevailing market prices of the Class A ordinary shares or ADSs.

 

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

 

Based on the current and anticipated value of our assets, including goodwill, and composition of our income and assets, we do not believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2014. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that we will not be a PFIC for any taxable year. A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.

 

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We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs and ordinary shares, fluctuations in the market price of the ADSs and ordinary shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC. If we are a PFIC for any taxable year during which a U.S. holder holds an ADS or ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. See “ Item 10. Additional Information — E. Taxation — U.S. Federal Income Taxation — Passive Foreign Investment Company.”

 

We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders.

 

We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from our initial public offering in April 2011 and convertible senior notes offering in September 2013 and in August 2014 will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

 

Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

 

Sales of our Class A ordinary shares in the public market and after the convertible senior note offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31, 2014, we had 193,416,331 ordinary shares outstanding, including 147,485,168 Class A ordinary shares and 45,931,163 Class B ordinary shares. The majority of our ADSs are freely transferable without restriction or additional registration under the the Securities Act.

 

A number of the ADSs are reserved for issuance upon conversion of our convertible senior notes. The conversion of some or all of the convertible senior notes will dilute the ownership interests of existing shareholders and holders of the ADSs. The issuance and sale of a substantial number of Class A ordinary shares or ADSs, or the perception that such issuances and sales may occur, could adversely affect the trading price of our convertible senior notes and the market price of the shares or ADSs and impair our ability to raise capital through the sale of additional equity securities.

 

In addition, certain holders of our ordinary shares have the right to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

 

Our memorandum and articles of association contain anti-takeover provisions that could materially adversely affect the rights of holders of our ordinary shares and ADSs.

 

Our memorandum and articles of association contain provisions that could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could deprive our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and other rights, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may provide rights and preferences that holders of our ordinary shares or ADSs do not have.

 

We could issue preferred shares quickly on terms that could delay or prevent a change in control of our company or make removal of management more difficult. If we issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially adversely affected.

 

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Our dual-class ordinary share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

 

We have a dual-class voting structure such that our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to five votes per share. We issued Class A ordinary shares represented by our ADSs in our initial public offering in April 2011. As of December 31, 2014, Global Village Associates Limited, or Global Village, a holder of our ordinary shares controlled by Mr. Hongyi Zhou, our chairman and chief executive officer, held 29,340,466 Class B ordinary shares. Young Vision Group Limited, or Young Vision, a holder of our ordinary shares controlled by Mr. Xiangdong Qi, our director and president, held 13,673,345 Class B ordinary shares. Sino Honor Limited, or Sino Honor, a holder of our ordinary shares controlled by Mr. Shu Cao, our chief engineer, held 337,230 Class B ordinary shares, and Sequoia Capital China I, L.P. and its affiliates, collectively Sequoia, held 2,269,461 Class B ordinary shares. As of December 31, 2014, we had a total of 147,485,168 Class A ordinary shares and 45,931,163 Class B ordinary shares issued and outstanding. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible to Class B ordinary shares under any circumstances. Upon any sale, pledge, transfer, assignment or disposition of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.

 

Due to the disparate voting powers attached to these two classes of shares, as of December 31, 2014, Mr. Hongyi Zhou, Mr. Xiangdong Qi, Mr. Shu Cao, Sequoia and certain of our executive officers and investors holding Class B ordinary shares collectively owned approximately 60.9% of the voting power of our issued and outstanding ordinary shares and have considerable influence over certain matters requiring shareholder approval, including election of directors and significant corporate transactions, such as a sale of our company or our assets. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

 

You may not have the same voting rights as the holders of our Class A ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

 

Except as described in this annual report and in the deposit agreement for our ADSs, holders of our ADSs are not able to exercise voting rights attaching to the Class A ordinary shares represented by our ADSs on an individual basis. Holders of our ADSs may instruct the depositary how to vote the Class A ordinary shares underlying their ADSs, and the depositary will endeavor to carry out those instructions. However, you may not receive voting materials in time to instruct the depositary to vote, and you may not have the opportunity to exercise a right to vote.

 

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

 

We may distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders of ADSs.

 

We are not obligated to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

 

You may be subject to limitations on transfer of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems doing so expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs when our books or the books of the depositary are closed, when we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, under any provision of the deposit agreement or for any other reason.

 

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We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, the Companies Law (2013 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions and the fiduciary duties of our directors to us are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States. In particular, the Cayman Islands has a less developed body of securities law than the United States. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, our public shareholders may encounter more difficulty in protecting their interests against actions taken by the management, the board of directors or the controlling shareholders of our company than they would as shareholders of a public company incorporated in the United States.

 

You may have difficulty enforcing judgments obtained against us.

 

We are a Cayman Islands company, and we conduct substantially all of our operations in the PRC. Substantially all of our assets are located outside of the United States. In addition, most of our directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult for you to effect service of process upon us and our directors and officers in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents of the United States and the substantial majority of whose assets are located outside of the United States.

 

Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

 

We are a “foreign private issuer,” and our disclosure obligations differ from those of U.S. domestic reporting companies. As a result, we may not provide you the same information as U.S. domestic reporting companies or we may provide information at different times, which may make it more difficult for you to evaluate our performance and prospects.

 

We are a foreign private issuer and, as a result, we are not subject to the same requirements as U.S. domestic issuers. Under the Exchange Act, we are subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue quarterly reports or proxy statements. We are not required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers are not required to report equity holdings under Section 16 of the Exchange Act and are not subject to the insider short-swing profit disclosure and recovery regime.

 

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As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. However, we are still subject to the anti-fraud and anti-manipulation rules of the SEC, such as Rule 10b-5 under the Exchange Act. Since many of the disclosure obligations imposed on us as a foreign private issuer differ from those imposed on U.S. domestic reporting companies, you should not expect to receive the same information about us and at the same time as the information provided by U.S. domestic reporting companies.

 

Item 4.INFORMATION ON THE COMPANY

 

A.History and Development of the Company

 

We were incorporated in the Cayman Islands as an exempted company with limited liability on June 9, 2005. On December 31, 2010, we changed our name from Qihoo Technology Company Limited to Qihoo 360 Technology Co. Ltd. We conduct our business operations in China through our wholly-owned subsidiaries and affiliated entities. We formed a wholly-owned subsidiary, Qizhi Software, one of our primary operating entities, in China in December 2005, and another wholly-owned subsidiary, Tianjin Qisi, another operating entity, in China in September 2011. In August 2012, we formed our third wholly-owned subsidiary in China, Qifei Xiangyi.

 

On March 30, 2011, we listed our ADSs on the New York Stock Exchange under the symbol “QIHU.” In April 2011, we completed our initial public offering of our ADSs. On September 5, 2013, we completed an offering of $600 million of 2.50% convertible senior notes due 2018. On August 6, 2014, we completed an offering of $450 million 0.50% convertible senior notes due 2020 and $450 million 1.75% convertible senior notes due 2021.

 

Our principal executive offices are located at 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China. Our telephone number is (+86-10) 5878-1000 and our fax number is (+86-10) 5682-2000. Our registered address in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

 

For information regarding our principal capital expenditures, see “Item 4. Information on the Company — D. Property, Plant and Equipment.”

 

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our corporate website address is www.360.cn. Our agent for service of process in the United States is Corporation Service Company, 1180 Avenue of the Americas, Suite 210, New York, New York 10036-8401.

 

B.Business Overview

 

Overview

 

We are a leading Internet company in China. In December 2014, we held leadership positions in a number of key PC and mobile Internet product categories:

 

·We were the No. 1 PC Internet security product provider in China with 479 million monthly active users, representing a user penetration rate of 90.5%, according to iResearch.

 

·We were the No. 1 mobile security product provider in China with over 744 million smartphone users.

 

·We were the No. 1 PC browser provider in China in terms of time spent usage with 361 million monthly active users, representing a user penetration rate of 68.1%, according to iResearch.

 

·We were the No. 1 Android mobile app store operator in China with over 600 million smartphone users.

 

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Monthly active users refer to total number of unique users of or visitors to a given product/web service during a calendar month. User penetration refers to the number of monthly active users divided by the total monthly active Internet users in China for a given period of time. Other user metrics refer to accumulative user base. Unless otherwise specified, market rankings are based on iResearch data and user metrics are based on our internal operating data.

 

Recognizing security as a fundamental need of PC and mobile Internet users, we offer comprehensive high-quality Internet and mobile security products free of charge. As a result, we have amassed a large and loyal user base, which we monetize primarily through offering different forms of online marketing and Internet value-added services.

 

Our core Internet and mobile security products include:

 

·360 Safe Guard and 360 Anti-virus, the No. 1 and No. 2 PC Internet security products in China, with 470 million and 390 million monthly active users in December 2014, respectively, according to iResearch; and

 

·360 Mobile Safe, the No. 1 mobile security product in China, with over 744 million smartphone users in China as of December 2014.

 

On top of our core layer of Internet and mobile security product offerings, we have further developed various platform products to meet a full spectrum of security-related needs of Internet users and create trusted access points to the Internet. Our platform products include:

 

·360 browsers, which together had 361 million monthly active PC users and a user penetration rate of 68.1% in China in December 2014, according to iResearch. We also offer 360 mobile browsers for smartphone users in China.

 

·360 Personal Start-up Page and its subpages, the default homepage of 360 browsers and a key access point to popular Internet services and applications, which had 132 million average daily unique visitors and generated 685 million average daily clicks in the fourth quarter of 2014. We count a “click” when a user of our Personal Startup Page and its subpages clicks one of the links on those pages, which will normally lead the user to either an internal page, such as a subpage of Personal Startup Page, or to an external page on a third-party website. Not all clicks generate revenue for us, as (i) many clicks are on links that are not monetized and (ii) many clicks lead users to internal pages.

 

·360 Search, a search engine using our proprietary search technology and the default search engine of our 360 browsers. It is also accessible at www.so.com, haosou.com and 360.com. We estimate that, 360 Search had a market share of approximately 30% in PRC search traffic in terms of search page views in December 2014. We also started to offer mobile search products in 2014.

 

·360 Mobile Assistant, an Android app store for smartphone users to browse, search, download and install Android mobile apps and access other mobile contents. It is the most popular Android mobile app distribution platform in China in December 2014, according to iResearch.

 

Our products and services are supported by our cloud-based security technology, which we believe is one of the most advanced and robust technologies in the PC and mobile Internet security industry. Our cloud-based security technology enables us to continuously update and enhance our capabilities to detect PC and mobile Internet security threats on a real-time basis. By utilizing this cloud architecture, we believe we are able to offer superior performance through reduced usage of user computing resources, particularly in comparison to traditional PC and mobile Internet security products. As the effectiveness of our cloud-based security technology increases with the size of our user cloud, growth of our user base enhances our capabilities of detecting new PC and mobile Internet security threats, which in turn helps us to attract even more users.

 

Leveraging our large user base, we are developing open platforms on which third-party Internet product and service providers, such as game developers, e-commerce websites and software and application developers, offer their products and services. These open platforms allow us to effectively monetize our large user base through online advertising and revenue sharing arrangements with third parties. For example, our open platform for games enables our users to use their 360 accounts to access more than 1,600 games provided by over 1,300 developers. Our open platforms enable our users to securely access a wide variety of products and services, which in turn enhances their experience and loyalty and further grows our user base.

 

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We have been able to leverage our large user base and our strong brand recognition to grow our paying customer base. We generate revenues primarily through offering the following services:

 

·Online advertising.  We offer marketing opportunities to our customers by providing comprehensive online advertising service solutions, such as sponsored links (advertising links), on our platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant.

 

·Internet value-added services.  We offer games developed by third parties to users and generate revenues through sharing of in-game item sales with game developers. We also serve as an agent for providing online distribution services and payment collections services.

 

·Other services. We also offer enterprise information security products and related services, such as firewalls, gateways and Internet security monitoring systems, to enterprise customers. In addition, on an ad-hoc project basis, we offer IT outsourcing and systems integration services to enterprise customers. The contribution of other services to our revenues was insignificant in 2014.

 

We have grown significantly since we commenced operations in 2005. Our revenues increased from $329.0 million in 2012 to $671.1 million in 2013 and $1,390.7 million in 2014. Our net income increased from $46.7 million in 2012 to $99.7 million in 2013 and $222.8 million in 2014.

 

Products and Services

 

Core Security Products

 

Our core Internet security products are 360 Safe Guard, 360 Anti-Virus and 360 Mobile Safe.

 

360 Safe Guard is our flagship Internet security product and a one-stop solution for PC Internet security and system optimization. 360 Anti-Virus is an anti-virus application that uses multiple scan engines to protect our users’ computers against all kinds of malware, including traditional viruses, and may operate without Internet connection. These applications protect our users’ computers against Trojans, viruses, worms, adware and other forms of malware.

 

These two PC Internet security products collectively provide users with robust and efficient protection against virus, malware and malicious websites, protect users’ privacy by preventing unauthorized access to and control of their computer system and optimize overall computer performance by removing unnecessary processes and unused junk files, automatically detecting and fixing vulnerabilities in operating system and third-party applications, and providing other security and performance optimizing services.

 

In December 2014, according to iResearch, 360 Safe Guard ranked first among all PC Internet security products in China, with 470 million monthly active users and a user penetration rate of 88.8% in China, and 360 Anti-Virus ranked second only to 360 Safe Guard among all PC Internet security products in China and first among all anti-virus products in China, with 390 million monthly active users and a user penetration rate of 73.5% in China.

 

360 Safe Guard and 360 Anti-Virus both comprise multiple integrated security products. The main components of 360 Safe Guard and 360 Anti-Virus include:

 

Cloud-based anti-malware. We believe that our cloud-based anti-malware is one of the most advanced and robust technologies in the Internet security industry. It relies on a large user base to provide information used to detect malware. Our centralized server cloud collects data, such as samples of malware, from our user base. These samples are sent to our cloud-based analytic systems for automatic real-time detection of new malware and updating of the blacklist and whitelist on a real-time basis.

 

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During on-demand scans on and real-time protection of our users’ computers, our cloud-based anti-malware submits the unique digital fingerprints of files and web pages from a user’s computer to our cloud query engines for malware detection. Our cloud query engines compare these fingerprints against our server-side blacklist and whitelist for matches before sending match results to the client side. Any file that matches our blacklist is immediately removed, quarantined or dealt with based on the user’s instructions, while a non-match to our whitelist is presumed to be suspicious and further analyzed by our other technologies.

 

Our cloud-based anti-malware has the following advantages over traditional Internet security products:

 

·it ensures minimal lag time between initial discovery of new malware on a single user’s computer or mobile device and protection of all users from that malware, thus providing real-time response to new threats and robust protection to our users;

 

·our large user base provides large amounts of data from which we can detect many forms of newly created and variant malware, which significantly enhances our malware detection capabilities; and

 

·it eliminates the need for a traditional signature database stored on a user’s computer, freeing up computer resources otherwise required by traditional Internet security products.

 

The effectiveness of cloud-based anti-malware depends primarily on the size of the user cloud and the amount of information that it provides. With nearly 500 million users reporting new and potential threats, our user community contributes to its own protection.

 

360 Automatic Vulnerability Detection and Fix.     Since most Trojan horses attack a computer through its vulnerabilities, 360 Automatic Vulnerability Detection and Fix assesses the security status of a computer and automatically identifies, downloads and installs suitable vulnerability patches. It is a user-friendly tool for users to manage and safeguard the operating system and applications on their computers.

 

360 WebShield.     360 WebShield is an application for secure Internet browsing. Using a blacklist of malicious websites compiled through our user cloud and our server side detection system, 360 WebShield effectively blocks websites that may contain automatically downloaded malware or phishing or fraudulent content and warn users against these websites. 360 WebShield also filters advertisements, restores browser settings from and protects browser settings against unauthorized modification, scans downloaded files and maintains a clean and stable browsing environment.

 

360 Privacy Protector.     360 Privacy Protector protects users’ personal information and data stored on the hard drive of their computers. By identifying the files accessed by software programs running on a user’s computer and allowing the user to decide whether to grant access, it protects our users’ private files, including chat records and online banking information, against unauthorized access. In addition, with 360 Privacy Protector, our users can monitor the status of webcams on their computers to prevent peeping, utilize a strengthened and encrypted virtual drive to store their private and sensitive files with minimized risks of data loss or leakage and clear unwanted access history or records.

 

Quick PC Health Check.     Quick PC Health Check is a user-friendly tool to quickly monitor, diagnose and rate the security status and performance of a user’s computer. It also provides a user-friendly “one-click fix” to solve identified security risks, shorten the startup time and optimize system performance.

  

360 Mobile Safe. 360 Mobile Safe was launched in November 2009 and is a security program for the Google Android, Apple iOS and Windows Phone smartphone operating systems. It scans for malware using our cloud-based security technology, blocks spam text messages, filters incoming phone calls based on user-input blacklists and whitelists, optimizes phone performance and speed and encrypts data for privacy protection in the event that the phone is lost or stolen. As of December 2014, 360 Mobile Safe was used by over 744 million smartphone users in China.

 

Cloud Storage

 

Our cloud storage system offers users a space for file storage and the data backup. User data is encrypted and stored on our cloud servers in segments with at least two copies to ensure data security and integrity. Our unique segmentation redundancy technology enables users to restore a file with limited redundant data for high system reliability. Users can access and manage their files through PC software, web page and mobile platforms and enjoy the real-time synchronization among these platforms.

 

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Platform Products

 

360 Browsers.     Our 360 browsers, such as 360 Safe Browser and 360 Speed Browser, are based on dual-core technologies and provide our users with a fast and secure browsing experience. According to iResearch, in December 2014, 360 browsers had monthly active PC users of 361 million and a user penetration rate of 68.1% in China. We also offer 360 Mobile Browser for the iOS and Android operating systems.

 

Our 360 browsers can automatically block malicious websites, identify them among search results and scan files downloaded through the browser for security threats. Our 360 browsers also offer a “private browsing” option to allow users to surf the Internet anonymously without leaving historical access records. Furthermore, in addition to the traditional browser function of rendering web pages, our 360 browsers serve as an entrance for Internet related services, which we believe leads to greater user loyalty. For example, the Weibo reminder function promptly notifies our users of new comments to and new followers of their Weibos, enabling them to better utilize social networking applications. In addition, 360 browsers’ online bookmark folders allow users to store their bookmarks in the cloud and access the bookmarks at any time in any location on PC and mobile devices with their 360 accounts.  Also, 360 browsers offer password managers to help users easily access multiple personal accounts on different online services through a secure cloud-based system. Through these additional features, we have been able to increase our users’ reliance on and loyalty to our products and services.

 

We also offer 360 mobile browsers for the iOS and Android operating systems. Our 360 mobile browsers’ cloud-based web page rendering may reduce up to 90% of data traffic, which helps to optimize speed and user experience.  Using 360 accounts, users can seamlessly synchronize bookmarks and personal settings between the Android, iOS and PC platforms.

 

360 Personal Start-up Page.     Launched in 2009, 360 Personal Start-up Page serves as user’s start-up page aggregating popular and preferred web services and applications. As the default home page of our 360 browsers, 360 Personal Start-up Page allows users to access and utilize popular web applications from a convenient site. Eventually, it will also automatically customize the contents and design based on users’ preference and habit. In the fourth quarter of 2014, 360 Personal Start-up Page and its subpages had 132 million average daily unique visitors and generated 685 million average daily clicks. We count a “click” when a user of our Personal Startup Page and its subpages clicks one of the links on those pages, which will normally lead the user to either an internal page, such as a subpage of Personal Startup Page, or to an external page on a third-party website. Not all clicks generate revenue for us, as (i) many clicks are on links that are not monetized and (ii) many clicks lead users to internal pages.

 

360 Search. In August 2012, we launched 360 Search, a search engine using our proprietary search technology. It is the default search engine of our 360 browsers and is also accessible at www.so.com, haosou.com and 360.com. We estimate that 360 Search had a market share of approximately 30% in PRC PC search traffic in terms of search page views in December 2014. We launched our mobile search product in 2014 and continue to gain traction among users.

 

360 Mobile Assistant.     360 Mobile Assistant is an Android app store which allows users to browse, search and obtain various mobile applications for mobile devices, and through these applications access mobile Internet on a secure and user-friendly platform. It also allows users to conveniently obtain mobile contents, such as video, music, games and e-books. We have established strong relationships with app developers and content providers to provide a large quantity of mobile apps and other content on 360 Mobile Assistant. A substantial majority of 360 Mobile Assistant users use the Android operating system.

 

Online Advertising

 

We offer marketing opportunities to our customers by providing comprehensive online advertising service solutions, such as sponsored links, on both of our PC and mobile platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant. We charge fees to our customers based on the effectiveness of our comprehensive advertising services, which is typically measured by active users, clicks, transactions and other actions originated from our platform products.  PC and mobile online advertising are priced at different levels, primarily due to the material difference in (i) the formats of PC and mobile online advertising and (ii) the results from PC and mobile online advertising, in terms of traffic, users and/or business leads. However, the pricing of our advertising services is closely correlated with the effectiveness of our advertising links. Additionally, our fees are also affected by, among other factors, (i) the competitiveness of bidding for sponsored links and keywords by our customers, with more intensive bidding typically leading to higher pricing and (ii) the vertical industries that our customers operate in, which may result in different effectiveness and benefits of our online advertising services to our customers. Substantially all of our online advertising customers bid for advertising space on our products and services directly with us or through third-party advertising agencies as of the end of 2014. Please see “Item 5. Operating and Financial Review and Prospects - A. Operating Results - Overview of Financial Results - Revenues - Online Advertising.”

 

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Internet Value-added Services

 

Our Internet value-added services include offering games developed by third parties and other Internet value-added services to users.

 

We operate third-party developed games on our game platforms. We provide game players with a safe and convenient gaming environment.  Our game portfolio includes web games and mobile games. Users can access and play these games directly on our game platforms. We share revenues from game operations with game developers pursuant to the terms of our cooperation agreements. 

 

We also provide online lottery purchase services and serve as an agent for providing online distribution services and payment collection services, such as payment collection for mobile charges, and distribution and payment collection of e-books, on behalf of third parties. We generally charge commission as a percentage of the gross proceeds or collection amount. We provide payment collection services mainly through third-party professional payment and settlement institutions. In March 2015, we temporarily suspended our online lottery purchase services, pending the resolution of a joint administrative order from PRC authorities to online distribution of lottery tickets.

 

Other Services

 

We also generate an insignificant amount of revenues from offering enterprise information security products and related services and other ad-hoc services, such as IT outsourcing and system integration services, to enterprise customers.

 

Our Technology

 

Cloud-based Security Technologies

 

Our cloud-based security technology is composed of three parts: a cloud-based database of blacklisted and whitelisted program files and websites, the automatic scanning and analysis of potential malware and malicious websites and 360 security software installed on users’ computers. It compares the unique digital fingerprint of a program file to a blacklist of confirmed malware and malicious websites and whitelist of confirmed safe program files stored on our central servers. The blacklist and whitelist are updated by information retrieved from and submitted by our user cloud on a real-time basis.

 

We believe our cloud computing technology is one of the most advanced proprietary server-side cloud computing technologies in the Internet and mobile security industry. It combines the strengths of our large-scale parallel computing technology, our mass data storage technology, our high performance inquiry and search engine technology and our QVM malware detection technology.

 

Dual-core Browser

 

Our 360 browsers integrate Trident, the core browser technology of Microsoft’s Internet Explorer and Webkit, the open-source core browser technology of Google Chrome, and automatically switch between these two core technologies seamlessly to provide our users with an optimized browsing experience. Webkit increases the speed of opening web pages, while Trident improves the compatibility of our 360 browsers with online banking and video display web pages. We have also developed technologies to minimize the memory usage of our 360 browsers to prevent decreases in performance after long periods of use, and use separate processes for each browser tab to protect the application as a whole from bugs and glitches in the rendering engine. Our 360 browsers also incorporate multiple security features, including the Microsoft DEP/NX exploit protection mechanism, anonymous browsing and the functions of 360 WebShield and sandbox technology. Our 360 browsers also fully support HTML5, and achieved one of the highest benchmark scores in HTML5 testing among mainstream browsers in the market, according to www.html5test.com.

 

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Qihoo Search Engine Technology

 

Qihoo search engine technology consists of our proprietary search technologies, including a scalable spider system for crawling web pages, a scalable parallel computing platform for processing and analyzing web pages, a massive data storage platform, a high-performance indexing system and a high-performance query engine technology. Core components of Qihoo search engine technology are also used in our cloud-based security system to augment our ability to screen massive amounts of program files and Internet content and quickly identify threats.

 

Web Page Analysis Techniques enable our search engine to analyze the structure and contents of web pages, and to extract valuable information from massive data flow on web pages. High performance artificial intelligence algorithms will then pick up the information and automatically categorize web pages based on content, style and structure.

 

Anti-Spam Techniques enable our search engine to identify various spam pages, malicious pages, phishing pages, invalid pages and pages with inappropriate content by analyzing their structure, content, traffic patterns, hyperlink data and visiting logs. These techniques help our search engine determine which pages should be included into the index based on quality and popularity.

 

Web Crawling Techniques enable our search engine to identify high-quality web pages from a massive set of page addresses and to efficiently crawl the pages by deploying a large scale distributed processing system and applying data mining algorithms and other high performance data processing algorithms. We also develop multiple mode crawling systems that can adaptively crawl the newest web pages with very small latency and refresh indices with high frequency, thus enhancing overall crawling efficiency.

 

Mobile Web Crawling Techniques enable our search engine to pick out web pages which adapt the mobile screen by analyzing the page layout of web sites and web pages. In addition, these techniques enable our search engine to automatically convert PC web pages to layouts suitable for mobile devices with faster page rendering and less data traffic consumption.

 

Web Page Ranking Techniques enable our search engine to present search results with rank orders that reflect content relevancy. The techniques incorporate a weighted average scoring system on page analysis, a traditional page ranking system on page popularity and a feedback collecting system on page accuracy.

 

Natural Language Processing Techniques enable our search engine to accurately analyze, understand, and predict users’ search queries, therefore reducing the need for keyboard entry and lowering the bar for search usage in a multi-language and multi-cultural setting. The techniques include word segmentation for both English and Chinese, query auto-completion, automatic spelling correction and relevant query suggestion.

 

Deep Learning Techniques enable our search engine to search images with the input of images, rather than traditional text input, which provides the users a new and natural way of searching. The technology includes image tagging, automatic training, feature extraction, model building and image recognition.

 

In-app Search Techniques enable our search engine to identify structured data from a massive set of mobile apps, search inside apps, and present search results directly in the related apps.

 

Mapping Techniques enable our search engine to handle queries of POIs and routes, and make our search engine a platform for location-based services in both PC and mobile devices.

 

Qihoo Computational Advertising Technology

 

Qihoo Computational Advertising Platform - ClickEyes, provides targeted advertising services for hundreds of millions of Internet users every day, including search advertising services and targeted display advertising services for our Personal Start-up Pages, mobile advertising services and a big data platform. Our key computational advertising technologies include:

 

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Auction System is a web-based general second-price auction system through which advertisers can upload their creative and bid on separate keywords or bid words. The system automatically provides highly relevant advertisements based on the search keywords or browsed pages of users. Our advertising ranking system evaluates context relevance, the weight of advertising websites, click-through rates, keyword bids, as well as filtering criteria and other factors before ultimately displaying advertisements to the users. Our system determines a minimum reserve price for each keyword with a dynamic mechanism.

 

Anti-fraud Techniques use a statistical machine learning-based approach to implement a click anti-fraud mechanism, which ensures the click validity of our advertisers. The system can identify and filter invalid or fraudulent clicks based on IP, click distribution, cookies and other factors to ensure the integrity our advertising system.

 

Search Advertising Delivery System uses a query analysis model to analyze search users’ demand and use machine learning tools to implement advertising rankings before eventually presenting to users. The system also automatically optimizes advertisement placement based on user click feedback.

 

Display Advertising Delivery System analyzes the contents that user searched or visited through natural language processing technology and automatically identifies users’ immediate preferences. The system then combines users’ short-term preferences with their long-term needs through a machine learning mechanism to deliver the targeted display advertisements to users.

 

Mobile Advertising Delivery System receives advertisement requests from mobile software development kits (SDKs). It then analyzes user behavior via machine learning algorithm to identify users’ preferences and deliver the targeted mobile advertisement to users.

 

Big Data Platform leverages NLP and data mining technology for in-depth analysis of an enormous volume of advertisement and search data to determine short-term and long-term user intentions and identify correlations between advertisements and user preferences. The platform supports multiple business systems, including search advertising, display advertising, mobile advertising, and personalized recommendations.

 

Mobile Security Technology

 

Our mobile security products are based on our cloud technologies, providing various security solutions in secure communication, system optimization, privacy protection and anti-spam. Our mobile security products cover various mobile operating systems, including Google Android, Apple iOS and Windows Phone.

 

Anti-Spam Technology. Based on intelligent analysis of behaviors of common communication spam, including SMS spam and coldcall/robocall spam, we have built a cloud-based spam blacklist. 360 Mobile Safe utilize the blacklist to identify and block potential spam with high efficiency and low power consumption. The technology also allows mobile users to report new spam to our cloud on a real time basis, benefiting our entire user base immediately.

 

Encryption and Privacy Protection Technology. 360 Mobile Safe uses a high-strength cryptographic algorithm to encrypt user-specified private data, such as call logs, address books, images, video and audio clips and other files. Users can backup their data to our password-protected cloud storage services, and retrieve the data to any mobile device when needed. The technology also enables users to block unauthorized access to their private information, such as location, address book, SMSs and call details, by third party apps.

 

Anti-Theft Technology. Through remote control command, our anti-theft technology can locate registered devices and triggers these devices to ring loud alarm tones to help users find the devices. The technology also enables users to lock lost devices remotely and erase all data in the devices to prevent breach of privacy.

 

QVM

 

QVM is our proprietary technology that detects malware through an artificial-intelligence algorithm capable of machine learning to recognize new forms of malware. QVM technology offers a robust model for recognizing malware characteristics using the massive amount of data that we have compiled on confirmed malware in our blacklist and verified safe programs files in our whitelist. This model is used as a basis for a detection algorithm which is automatically enhanced and updated with new malware samples submitted by our users to our servers.

 

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Program files that do not appear in our blacklist and whitelist are scanned using QVM, and any “hits” returned by this technology are presumed to be malicious and removed or quarantined. As malware is constantly being created or morphing, QVM has the advantage of being able to detect threats that have not been previously identified.

 

360 HIPS

 

360 HIPS adopts a proactive defense technology that focuses on monitoring behaviors and actions performed by malware rather than its programming code signature or digital fingerprint. Generally, even if malware evades detection by our cloud-based security and QVM technologies, it must still perform certain actions to achieve its creator’s intentions, such as modifying system settings and accessing confidential information. 360 HIPS proactive defense technology monitors a computer’s running processes during procedures such as web browsing, downloading, software installation and data transmission and assesses these actions based on a pre-determined algorithm. If a process is deemed to be dangerous, the user is notified and information relating to that process is transmitted to our central servers for further processing. This proactive defense technology takes advantage of the collective intelligence and processing power of our cloud architecture to accurately and efficiently determine whether an action performed by a program is malicious.

 

360 Sandbox Technology

 

360 Sandbox Technology is a security system to provide users with protection in different processing environments, including online shopping, searches, downloads, content streaming, removable disk installation and email services. Our two proprietary proactive defense technologies, 360 HIPS and the sandbox technology, enable this system to intelligently monitor the user’s behaviors and actions and provide relevant protection through a pre-determined algorithm.  If a computing process is deemed to be suspicious, the user will be notified and such process will be isolated in a virtual environment where malicious actions can be performed without actual consequence to the user’s computer. 

 

Malicious Web Page Detection Technology

 

Our proprietary automated detection system for malicious web pages is a core component of our cloud-based security system. It automatically tests and recognizes malicious websites with an accuracy rate of over 99%. This detection system uses a collection of techniques, including simulated vulnerability environments, search spiders, collections of suspicious websites compiled by our user base and monitoring of browser processes and actions. We have also collected large amounts of data on phishing and fraudulent websites and used this information and machine-learning technology to develop an artificially intelligent algorithm for recognition of phishing and fraudulent websites.

 

System Performance Optimizing and Power Saving Technologies

 

Our system performance optimization technology assists our users to optimize the system settings and improve the system performance of their computers. It manages hard drive, desktop, documents, Internet browsing and security settings to reduce system start-up time and increase operating speed. It also cleans the registry, recycle bin, Internet access history and system patch files, improves hard drive performance through testing and defragmentation and automatically updates and backs up system files.

 

Our hardware diagnosis and power saving technology effectively diagnoses hardware status, saves power, prevents hardware malfunctions and prolongs the battery life of a computer by closely monitoring its power consumption and the temperature of its key components. This technology can be used on desktop, notebook and other personal computers.

 

Router Security Check and Repair Technologies

 

360 router security check and repair technologies support the security checking of mainstream home router DNSs, password management and web remote management settings to avoid the risk of network access and backdoor vulnerabilities caused by router, and establishes a malicious DNS auto-discovery system and mining system to detect router tampering by malicious scripts.

 

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AFE

 

AFE is our anti-fishing/anti-fraud webpage recognition and classification technology. It is based on artificial intelligence and machine learning algorithms. This technology can automatically detect and extract unique webpage features or combinations of unique features from webpage text content and structure and generate a signature database for webpages in different categories. Based on the signature matching result, AFE is able to classify URLs into more than 100 different categories for real-time webpage scans.

 

Product Development

 

To maintain and enhance our leadership position in the Internet industry, we will continue to invest in product development to enhance and increase our product offerings. Our primary product development goals are to develop new products and services in Internet security, cloud-related, search, mobile Internet, and smart hardware. We will also continue to strengthen our existing products and services and enhance user experiences. 

 

As of December 31, 2014, our product development team consisted of 4,467 development and technical staff members, approximately 73.8% of whom held bachelor’s or more advanced degrees.

 

Our internally developed technologies include our cloud-based security system, cloud computing and storage systems, Qihoo search engine technology, QVM, 360 HIPS and other technologies. See “— Our Technology.”

 

Our product development expenses include costs associated with new product development and enhancement for existing products, such as salaries and benefits, including share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation of equipment and amortization of acquired intangible assets. Product development expenses represented 47.5%, 38.0% and 29.2% of total revenues for each of the three years ended December 31, 2012, 2013 and 2014, respectively.

 

Network Infrastructure

 

Our network infrastructure is administered by our operations department, which handles hardware, system and network operation and maintenance. Our systems are designed for scalability and reliability to support growth in our user base. We lease bandwidth from telecommunication operators such as China Telecom, China Unicom and China Mobile to connect to the national Internet backbone. We believe that our current network facilities and broadband capacity provide us with sufficient capacity to carry out our current operations.

 

While we believe that our network infrastructure and maintenance will likely prevent network interruption resulting from attacks by hackers, there remains a possibility that such attacks could result in delays or interruptions on our network. For a further discussion, see “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Interruption or failure of our own information technology and communications systems or those of third-party service providers we rely upon could impair our ability to effectively provide our products and services and protect the privacy of our users, which could damage our reputation and harm our operating results.”

 

Customers

 

Our customers primarily comprise companies using our online advertising services, most of whom put actionable placements on our platform products, such as our 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant.

 

Our typical online advertising customers are online and offline businesses that need Internet users and traffic to support their operations. We define online advertising customers as customers who (i) ultimately receive Internet users and traffic from our advertising services to drive their businesses, and (ii) pay us directly or indirectly, through advertising agencies, for such users and traffic that they receive from us.

 

In 2012, 2013 and 2014, we had 860, 50,000 and approximately 100,000 customers that used our online advertising services. Since the beginning of 2013, we have gradually expanded our internal sales team and worked with advertising agencies to reach out to and recruit potential search advertising customers, which contributed to the significant increase in the number of our online advertising customers. Our five largest customers accounted for approximately 21.3%, 15.6% and 8.4% of our total revenues for the three years ended December 31, 2012, 2013 and 2014, respectively.

 

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In 2014, we started to offer enterprise information security products to enterprise customers, primarily comprising government agencies, research and education institutions, large state-owned enterprises and large private enterprises. In 2014, business was insignificant relative to our overall operations both in terms of revenue contribution and number of customers.

 

Game Developers

 

We operate third-party developed games on our game platform and generate revenues from selling in-game currencies online which are used by game players to purchase virtual items in these games.  We collect payments from game players in connection with the sale of in-game currencies and remit certain agreed-upon percentages of the proceeds to the game developers.

  

Revenues derived from our five largest game developers in aggregate accounted for approximately 15.4%, 9.7% and 13.3% of our total revenues for the three years ended December 31, 2012, 2013 and 2014, respectively.

 

Suppliers

 

Our suppliers are primarily providers of servers, network equipment and bandwidth that we need to maintain our network infrastructure and operations. Our suppliers of servers, network equipment and office computers are all from China and primarily include Huawei, Lenovo, Dell and other system integration suppliers. Under our framework agreements with those suppliers, we purchase servers, network equipment and office computers based on our requirements for each purchase order. The framework agreements typically last for one year, and certain of these agreements are automatically renewable for additional one-year terms unless terminated by either party. Our primary Internet data center, or IDC, suppliers include China Telecom, China Unicom and China Mobile. Under our agreements with IDC service providers, we lease server racks and bandwidth and the providers guarantee that the error rate, which is defined as accumulated failure time per month, will not exceed a very limited duration per calendar month. The agreements typically last for one year, some of which are automatically renewable for additional one-year terms unless terminated by either party.

 

Our largest supplier accounted for approximately 29.5%, 22.7% and 29.1% of our total purchases for the three years ended December 31, 2012, 2013 and 2014, respectively. Our five largest suppliers in aggregate accounted for approximately 56.2%, 58.2% and 66.4% of our total purchases for each of the three years ended December 31, 2012, 2013 and 2014, respectively.

 

Sales and Marketing

 

We have historically relied primarily on “word-of-mouth” from our large user base as a sales and marketing tool for our products and services. Trust and reliance our users is a key driver for the growth of our business, as potential new users hearing positive feedback from their friends and colleagues are more likely to try our products and services, which in turn enhances our “360” brand. Our public relations strategy has historically been focused on events related to our products and services, such as the launch of a new product or service, the update of existing products and services and awards and certifications we received for our products and services.

 

We have conducted advertising campaigns to reach a large number of potential users and customers. We also cooperate with other partners to promote our key mobile products. In addition, we have made significant sales and marketing efforts to promote our products through industry participants in distribution channels, such as increasing our cooperation with other software and hardware companies. While we will continue to control our sales and marketing expenses in the future by focusing on advertisements that we believe will provide significant benefits to our user base and brand recognition, we expect to continue to use external sales and marketing channels to promote our brand, products and services as we expand our operations.

 

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Intellectual Property

 

We rely on a combination of patent, copyright, trademark, software registration, non-competition and trade secret laws and agreements with our employees to establish and protect our intellectual property rights. All of our employees enter into agreements requiring them to keep confidential all proprietary and other information relating to our customers, methods, technologies, business practices and trade secrets. These agreements also stipulate that all software, inventions, trade secrets, works of authorship, developments and other processes, whether or not patentable or copyrightable, made by them during their employment are our property. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without our authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in the Internet and telecommunications-related industries are uncertain and still evolving. Infringement and misappropriation of our intellectual property could materially harm our business. See “Item 8. Financial Information — Legal and Administrative Proceedings.”

 

As of December 31, 2014, we had 309 registered trademarks in China and 78 registered trademarks outside of China, and held registered copyrights to 421 software programs covering almost all of our products. As of December 31, 2014, we had 4,193 pending patent applications and had received 265 authorized patents from various governmental authorities.

 

We have registered the domain name “360.cn” with China Internet Network Information Center and “360.com” with the Internet Corporation for Assigned Names and Numbers. In addition, we have registered 444 domain names with various domain name registration services as of December 31, 2014.

 

We currently license malware scanning engines and signature libraries and other security technologies from third parties, such as BitDefender SRL.

 

Competition

 

We primarily compete with Internet security product and service providers and PRC-based Internet companies.

 

The Internet security market in China is competitive among existing industry players, but contains high barriers to entry which make it difficult for new entrants to succeed, including:

 

·Brand.    The technological reputation of a brand is particularly important in the Internet security market, as users need to completely trust and rely on a service provider’s security software. To compete with the well-established brand of existing industry players, new entrants must commit significant resources to marketing and promotion.

 

·User base.    Cloud-based security technology has come to the forefront of the Internet security industry in recent years, and requires a large user cloud to be effective. It is difficult for new entrants with small user clouds that cannot detect malware effectively to attract users.

 

·Technology.    Cloud-based security technology requires a significant amount of technological expertise, infrastructure and resources. New entrants face significant lag time in developing their own technologies and establishing the infrastructure necessary to operate.

 

·Software.    Internet security software is generally mutually exclusive, meaning that an Internet user generally uses security software from a single software provider. It is difficult for new entrants to the market to capture users from existing and established brands.

 

·Business model.    We have established our broad user base through providing high quality pan-security products free of charge and generate revenues by leveraging that user base. New entrants into the Internet security market do not have the user base or the brand recognition to follow this business model successfully.

 

According to iResearch, in December 2014, we had 509 million monthly active users of our PC-based products and services, representing a user penetration rate among all Chinese PC Internet users of 96.1% in China. Our key mobile security product – 360 Mobile Safe had 744 million smartphone users as of December 2014. We believe that our technological know-how, large user base and established reputation in the Internet security market provide us with significant competitive advantages.

  

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We also compete with PRC-based Internet companies that build Internet platforms to offer similar value-added and online advertising services as we do. Our primary competitor in this market is Tencent, one of the largest Internet companies in China. In December 2014, Tencent’s QQ instant messaging software had an active user penetration rate in China of 90.9%, according to iResearch.

 

Additionally, in August 2012, we launched 360 Search, our proprietary search engine. Our primary competitors in the search market are Baidu and Sogou.

 

Regulations

 

This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China or our shareholders’ right to receive dividends and other distributions from us.

 

Regulations Relating to Our Business

 

Telecommunications Regulations

 

The PRC Telecommunications Regulations implemented on September 25, 2000 sets out a regulatory framework for telecommunications services providers in China. The Telecommunications Regulations require telecommunications services providers to obtain an operating license prior to the commencement of their operations. The Telecommunications Regulations categorize telecommunications services into basic telecommunications services and value-added telecommunications services. According to the Catalogue of Telecommunications Business attached to the Telecommunications Regulations, information services provided via fixed network, mobile network and Internet belong to value-added telecommunications services.

 

Foreign direct investment in telecommunications companies in China is governed by the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises promulgated in December 2001 and amended in September 2008, or the FITE Regulations. The FITE Regulations requires foreign-invested telecommunications enterprises in China to be established as Sino-foreign equity joint ventures. In addition, pursuant to the FITE Regulations and the relevant WTO agreements, foreign investors in a foreign-invested telecommunications enterprise engaging in value-added telecommunications services may hold up to 50% of the equity interest of such enterprise. The relevant rules do not impose geographic restrictions on the operations of a foreign-invested telecommunications enterprise.

 

However, for a foreign investor to acquire any equity interest in a value-added telecommunications business in China, it must satisfy a number of stringent performance and operational experience requirements, including demonstrating a track record and experience in operating a value-added telecommunications business overseas. Moreover, foreign investors that meet these requirements must obtain approvals from MIIT and MOFCOM or their authorized local counterparts, which retain considerable discretion in granting approvals.

 

In July 2006, MIIT publicly released the Notice on Strengthening the Administration of Foreign Investment in Operating Value-added Telecommunications Business, or the MIIT Notice, which reiterates certain provisions under the FITE Regulations. According to the MIIT Notice, if any foreign investor intends to invest in a PRC telecommunications business, a foreign-invested telecommunications enterprise must be established and such enterprise must apply for the relevant telecommunications business licenses. Under the MIIT Notice, domestic telecommunications enterprises may not rent, transfer or sell a telecommunications license to foreign investors in any form, nor may they provide any resources, premises, facilities and other assistance in any form to foreign investors for their illegal operation of any telecommunications business in China.

 

On September 28, 2009, the PRC General Administration of Press and Publishing, or the GAPP, together with the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued a Notice on Further Strengthening on the Administration of Pre-examination and Approval of Online Game and the Examination and Approval of Imported Online Game, or the GAPP Notice. The GAPP Notice provides that foreign investors are not permitted to invest in online game operation businesses in China through wholly foreign-owned entities, Sino-foreign equity joint ventures or cooperative joint venture investments and prohibits foreign investors from gaining control over or becoming domestic online game operators through indirect ways such as establishing other joint venture companies or contractual or technical arrangements. There are still substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the MIIT circular and the GAPP Notice.

 

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Internet Content Services

 

On September 25, 2000, the State Council promulgated the Administrative Measures on Internet Information Services, or the Internet Measures, as amended in 2011. According to the Internet Measures, commercial operators of Internet information services in China must obtain a value-added telecommunications license, or ICP license, from the relevant government authorities.

 

Information Security and Content Control

 

National security considerations are an important factor in the regulation of Internet content in China. According to the Decision of the Standing Committee of the National People’s Congress on Maintaining Internet Security, the following actions may be regarded as violations of laws and are subject to penalties, including criminal sanctions: (i) breaking into a computer or a system of strategic importance; (ii) disseminating politically disruptive information; (iii) leaking state secrets; (iv) spreading false commercial information; or (v) infringing intellectual property rights.

  

In addition, the MPS promulgated measures on December 16, 1997 that prohibit the use of the Internet in ways which, among other things, result in a leakage of national secrets or the distribution of socially destabilizing content. On December 13, 2005, the MPS promulgated Provisions on Technological Measures for Internet Security Protection, or the Internet Protection Measures, which require all ICPs to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. Under those measures, the ICPs must regularly update information security and content control systems for their websites with local public security authorities, and must also report any public dissemination of prohibited content. If the ICPs violate these measures, the PRC government may revoke its ICP license and shut down its websites. In addition, the PRC State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking national secrets or failing to comply with the relevant legislation regarding the protection of state secrets.

 

Internet Privacy

 

In recent years, PRC government authorities have legislated on the use of the Internet to protect personal information from unauthorized disclosure. For example, the Internet Measures prohibits an Internet information services provider from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. Pursuant to the BBS Measures, ICPs that provide electronic messaging services shall not disclose any user’s personal information to any third party without such user’s consent, unless the disclosure is required by law. ICPs are subject to legal liability if unauthorized disclosure results in damages or losses to users. In addition, the PRC regulations authorize the relevant telecommunications authorities to demand rectification of unauthorized disclosure by ICPs.

 

The PRC laws do not prohibit ICPs from collecting and analyzing person information of their users. The PRC government, however, has the power and authority to order ICPs to submit personal information of an Internet user if such user posts any prohibited content or engages in illegal activities on the Internet. However, PRC criminal law prohibits companies and their employees from illegally trading or disclosing customer data obtained through the course of their business operations.

 

In addition, the MIIT promulgated the Several Provisions on Regulating the Market Order of Internet Information Services, which became effective as of March 15, 2012. This regulation stipulates that ICPs must not, without users’ consent, collect information on users that can be used, alone or in combination with other information, to identify the user, or User Personal Information, and may not provide any User Personal Information to third parties without prior user consent. ICPs may only collect User Personal Information necessary to provide their services and must expressly inform the users of the method, content and purpose of the collection and processing of such User Personal Information. In addition, an ICP may use User Personal Information only for the stated purposes under the ICPs’ scope of services. ICPs are also required to ensure the proper security of User Personal Information, and take immediate remedial measures if User Personal Information is suspected to have been disclosed. If the consequences of any such disclosure are expected to be serious, the ICP must immediately report the incident to the telecommunications regulatory authorities and cooperate with the authorities in their investigations. Furthermore, on December 28, 2012, the Standing Committee of the National People’s Congress enacted the Information Protection Decision, to further enhance the protection of users’ personal information in electronic form. The Information Protection Decision provides that ICPs must expressly inform their users of the purpose, manner and scope of the ICPs’ collection and use of users’ personal information, publish the ICPs’ standards for their collection and use of users’ personal information, and collect and use users’ personal information only with the consent of the users and only within the scope of such consent. The Information Protection Decision also mandates that ICPs and their employees must keep strictly confidential users’ personal information that ICPs collect, and that ICPs must take such technical and other measures as are necessary to safeguard the information against disclosure, damages and loss. Furthermore, the MIIT promulgated the Provision on Personal Information Protection of Telecommunication and Internet Users in July 2013, which provides the definition of personal information and further specifies the principles and requirements of the collection and use of personal information by telecommunication and Internet service providers.

 

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Advertising Business

 

Foreign Ownership in Advertisement Business:

 

The principal regulations governing foreign ownership in advertising businesses in China include:

 

·The Foreign Investment Industrial Guidance Catalog;

 

·The Administrative Regulations on Foreign-invested Advertising Enterprises; and

 

·The Circular Regarding Investment in the Advertising Industry by Foreign Investors through Equity Acquisition.

 

These regulations require foreign entities that directly invest in the PRC advertising industry to have at least a two-year track record with a principal business in the advertising industry outside China. Since December 2005, foreign investors have been permitted to directly own a 100% interest in advertising companies in China, but such foreign investors are also required to have at least a three-year track record with a principal business in the advertising industry outside China. PRC laws, rules and regulations do not permit the transfer of any approvals or licenses, including business licenses containing a scope of business that permits engagement in the advertising business.

 

As a result of the current PRC laws, rules and regulations that impose substantial restrictions on foreign investment in the Internet and advertising businesses in China, we conduct this portion of our operations through a series of contractual arrangements among our PRC subsidiaries and our consolidated controlled entities. See “ Item 7. Major Shareholders and Related Party Transactions ¾ B. Related Party Transactions ¾ Contractual Arrangements Among Our Subsidiaries, Our VIEs and the Respective Shareholders of the VIEs.”

 

Competent Authority Governing Advertisement Business:

 

The State Administration for Industry and Commerce, or the SAIC is responsible for regulating advertising activities in China. The principal regulations governing advertising in China, including online advertising, include:

 

·The Advertising Law;

 

·The Administration of Advertising Regulations; and

 

·The Implementation Rules for the Administration of Advertising Regulations.

 

 

These regulations stipulate that companies that engage in advertising activities in China must obtain from SAIC or its local branches a business license which specifically includes operating an advertising business within its business scope. Companies conducting advertising activities without such a license may be subject to penalties, including fines, confiscation of illegal revenues and orders to cease advertising operations. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation.

 

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Software Products

 

According to the PRC Regulation of Computer Information System Security and the Administrative Measures on Inspection and Sales License of Security Products for Computer Information System, sale of security products for computer information system, including hardware and software products, requires approval and a sales license before their distribution. A new sales license is required if an approved security product has any functional changes.

 

On March 5, 2009, MIIT issued the Administrative Measures on Software Products, or the Software Measures, to regulate software products and promote the development of the PRC software industry. The Software Measures provide for a registration and filing system for software products both made in China and imported from overseas and require registration of all software products with the competent local government authorities in charge of software industry administration. Registered software products may enjoy certain preferential treatments granted by relevant software industry regulations. Software developers or producers may sell or license their registered software products directly or through distributors. Each registration is valid for five years and renewable upon expiration.

 

Regulation of Electronic Publications and Internet Publishing

 

The Rules for the Administration of Electronic Publications, or Electronic Publication Rules, regulate the production, publishing and import of electronic publications in the PRC. In addition, under the Provisional Measures for Administration of Internet Publication promulgated, Internet publishing is broadly defined as any act of Internet information providers to select, edit and process content or programs and post such content or programs on the Internet for users to view, use or download, including books, newspapers, electronic publications and so on. Under relevant rules and measures issued by the GAPP, providing online download services of software may be deemed as Internet publishing activities, which require an Internet publishing license.

 

Games and Virtual Currency

 

The Provisional Regulations for the Administration of Internet Culture promulgated in 2003 and as amended in 2004 and 2011 applies to entities engaging in activities related to “Internet cultural products,” including music and performance, online games, animation features, audiovisual products, performed plays and artwork converted for dissemination via the Internet. Such entities are required to apply for an Internet culture operating permit from the relevant local branches of the MOC for engaging in any of the following types of activities:

 

·production, duplication, importation, issuance or broadcasting of online cultural products;

 

·dissemination of online cultural products on the Internet or transmission of such products to computers, fixed-line or mobile phones, radios, television sets or gaming consoles for the purpose of browsing, reading, using or downloading such products; or

 

·exhibition, competitions or other activities involving online cultural products.

 

Notice 35 issued by the State Commission Office for Public Sector Reform on September 7, 2009 interprets the responsibilities of relevant governmental authorities on the administration and supervision of the animation, online game and culture market. Notice 35 provides that the GAPP shall be responsible for reviewing a online game before its publication on the Internet and the MOC shall administer and supervise published online games.

 

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On June 4, 2009, the MOC and the MOFCOM jointly issued a notice regarding strengthening the administration of online game virtual currency, or the Virtual Currency Notice, which requires businesses that (i) issue online game virtual currency (in the form of prepaid cards or prepayment or prepaid card points) or (ii) offer online game virtual currency transaction services to apply for approval from the MOC within three months following the date of the notice. The notice also prohibits businesses that issue online game virtual currency from providing services that would enable the trading of such virtual currency. Furthermore, the Provisional Measures for the Administration of Online Games in 2010, or the Online Game Measures, strengthens the MOC’s supervision of the development, production, online operation and issuance of online games and virtual currency. A company shall obtain the online culture operating permit in order to conduct online game operation and issuance and transaction of virtual currency. Such permit is valid for three years and renewable before its expiration. The Online Game Measures sets out detailed restrictions on online game operations, such as examination and filing of the games’ content, installment of anti-fatigue system and implementation of real-name registration. In addition, based on the Online Game Measures, the virtual currency issued by an online game operator could be only used to exchange such operator’s online game products.

 

On February 15, 2007, the MOC, the People’s Bank of China and other relevant government authorities jointly issued the Notice on Internet Cafes. The Notice on Internet Cafes authorizes the People’s Bank of China to strengthen the administration of virtual currency in online games in order to avoid any adverse impact on the economy and financial system. This notice strictly limits the total amount of virtual currency that an online game operator can issue and an individual game player can purchase. It also distinguishes virtual transactions from real transactions through electronic commerce and that specifies virtual currency should only be used to purchase virtual items.

 

Laws Relating to Intellectual Property

 

China has adopted comprehensive legislation governing intellectual property rights, including trademarks, patents and copyrights. China is a signatory to the main international conventions on intellectual property rights and has been a member of the Agreement on Trade related Aspects of Intellectual Property Rights since its accession to the WTO in December 2001.

 

Patent Law

 

In accordance with the PRC Patent Law, the State Intellectual Property Office is responsible for administering patents in the PRC. The patent administration departments of provincial, autonomous region or municipal governments are responsible for administering patents within their respective jurisdictions.

 

The Chinese patent system adopts a “first to file” principle, which means that, where more than one person files a patent application for the same invention, a patent will be granted to the person who filed the application first. To be patentable, invention or utility models must meet three conditions: novelty, inventiveness and practical applicability. A patent is valid for 20 years in the case of an invention and 10 years in the case of utility models and designs. A third-party user must obtain consent or a proper license from the patent owner to use the patent. Otherwise, the use constitutes an infringement upon patent rights.

 

Trademark Law

 

In accordance with the PRC Trademark Law, the Trademark Office of the State Administration for Industry and Commerce is responsible for the registration and administration of trademarks in China. The State Administration for Industry and Commerce under the State Council has established a Trademark Review and Adjudication Board for resolving trademark disputes.

 

As with patents, China has adopted a “first-to-file” principle for trademark registration. If two or more applicants apply for registration of identical or similar trademarks for the same or similar commodities, the application that was filed first will receive preliminary approval and will be publicly announced. For applications filed on the same day, the trademark that was first used will receive preliminary approval and will be publicly announced.

 

Registered trademarks are valid for ten years from the date the registration is approved. A registrant may apply to renew a registration within twelve months before the expiration date of the registration. If the registrant fails to apply in a timely manner, a grace period of six additional months may be granted. If the registrant fails to apply before the grace period expires, the registered trademark shall be deregistered. Renewed registrations are valid for ten years.

 

Copyright

 

The Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products. In addition, there is a voluntary registration system administered by the China Copyright Protection Center.

 

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The Rules of Protection on Information Network Dissemination Rights address copyright protection issues relating to the Internet. In addition, on December 17, 2012, the Supreme People's Court promulgated the Provisions on Several Issues Concerning the Application of Law for Trial of Civil Dispute Cases Involving Infringement of the Right to Network Dissemination of Information, or the Network Dissemination of Information Provision, which stipulate that the dissemination by network users or network service providers of works, performance or audio or video recordings without the permission of the holder of the rights to such dissemination will constitute infringement of such rights, and that network service providers that aid or abet network users’ infringement of the rights of another to network dissemination of any works or recordings may be liable for such network users’ infringing activities.

 

Regulation of Foreign Currency Exchange and Dividend Distributions

 

Foreign Currency Exchange

 

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, as amended in August 2008. Under the Regulations, RMB are freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions. In order to convert RMB for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, the prior approval of, and registration with, SAFE are required.

 

On August 29, 2008, SAFE promulgated Circular 142, which regulates the purposes for which foreign-invested companies may convert foreign currency into RMB. The notice requires that the registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans. Violations of Circular 142 can result in severe penalties, including heavy fines. Furthermore to strengthen Circular 142, on November 9, 2011 the SAFE promulgated Circular 45, which prohibits a foreign invested company from converting its registered capital in foreign exchange currency into RMB for the purpose of making domestic equity investments, granting entrusted loans, repaying inter-company loans, and repaying bank loans that have been transferred to a third party.

 

The dividends paid by a subsidiary to its overseas shareholders are deemed income to the shareholders and are taxable in China. Pursuant to the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign currency, subject to a cap approved by SAFE, for settlement of current account transactions without the approval of SAFE. Foreign currency transactions under the capital account are still subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. On March 3, 2015, the SAFE promulgated a Circular 19, which shall become effective on June 1, 2015, superseding Circular 142. According to Circular 19, although it restates certain restrictions on use of investment capital in foreign currency by foreign invested company, it specifies that the registered capital of a foreign-invested company in foreign currency can be converted into RMB voluntarily and be allowed to use for equity investment in the PRC subject to certain reinvestment registration with local SAFE made by the invested company. However, since Circular 19 is newly issued, its interpretation and enforcement involve significant uncertainties.  

 

Dividend Distribution

 

The principal regulations governing distributions of dividends of foreign holding companies include the Foreign-invested Enterprise Law (1986), as amended in 2000, and its Administrative Rules. 

 

Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. There is no material difference between accumulated profits calculated in accordance with PRC accounting standards and regulations and the accumulated profits presented in our financial statements. In addition, foreign-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. These reserves are not distributable as cash dividends.

 

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Under the New EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor which is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax. According to Mainland and Hong Kong Special Administrative Region Arrangement on Avoiding Double Taxation or Evasion of Taxation on Income agreed between mainland China and Hong Kong Special Administrative Region in August 2006, dividends payable by an FIE in China to a company in Hong Kong which directly holds at least 25% of the equity interests in the FIE will be subject to a reduced withholding tax rate of 5% upon receiving approval from in-charge tax authority. In accordance with several notices issued by the SAT, in order to enjoy the preferential treatment on dividend withholding tax rates, an enterprise must be the “beneficial owner” of the relevant dividend income, and no enterprise is entitled to enjoy preferential treatment pursuant to any tax treaties if such enterprise qualifies for such preferential tax rates through any transaction or arrangement, the major purpose of which is to obtain such preferential tax treatment. The PRC tax authorities will review and grant tax preferential treatment on a case-by-case basis and adopt the “substance over form” principle in the review and has the right to make adjustments to the applicable tax rates.

 

Circular 37

 

Circular 37, issued by SAFE and effective in July 2014, regulates foreign exchange matters in relation to the use of SPVs by PRC residents or entities to seek offshore investment and financing and conduct round trip investment in China. Under Circular No. 37, prior to a PRC resident’s using its legally owned onshore or offshore assets or interests to finance an offshore company, or SPV, each PRC resident, whether a natural or legal person, must complete the “overseas investment foreign exchange registration” procedures with the relevant local SAFE branch. Failure to complete the registration would prevent the domestic subsidiaries of the SPV from receiving a renewal of the foreign exchange certificate of these subsidiaries, and may also subject a PRC resident to fines. In addition, an amendment to the registration with the local SAFE branch is required to be filed by any PRC resident that holds interests in the SPV upon (i) any change with respect to the basic information of the SPV, such as its name, term of operation or domestic individual resident shareholder, (ii) an increase or decrease in its capital, (ii) a transfer or swap of its shares, or (iii) a merger, division or other material event.

 

Upon completion of a round of financing by the SPV, the proceeds may be repatriated inside China. Profit or dividend may be credited to a foreign exchange current account or otherwise settled. Foreign exchange proceeds from a change in capital may, subject to the approval of the foreign exchange authority, be retained in a capital account opened for that purpose or otherwise settled. Any violation of Circular No. 37 constitutes an evasion of foreign exchange laws. Any PRC resident that violates Circular No. 37 may be subject to penalties and prevented from repatriating any funds received from financings inside China.

 

Circular 7

 

On December 25, 2006, the People’s Bank of China issued the Administrative Measures of Foreign Exchange Matters for Individuals, and SAFE issued implementation rules on January 5, 2007, both of which became effective on February 1, 2007. Under these regulations, all foreign exchange matters involved in employee stock ownership plans, stock option plans or related plans in which onshore individuals participate require the approval of SAFE or its authorized branch. On February 15, 2012, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or Circular 7.

  

Under Circular 7, PRC residents who participate in an employee stock option plan in an overseas publicly-listed company are required to register with SAFE or its local office and complete certain other procedures. A PRC agent, which could be the PRC subsidiary of such overseas publicly-listed company, is required to retain a financial institution with stock brokerage qualification at the listing place or a qualified institution to handle matters relating to the exercise or sale of share options. We and our PRC employees, directors and senior management who receive share options will be subject to these regulations when we are listed in the United States. Our 2006 employee share option scheme, 2006 Employee Share Vesting Scheme and 2011 Share Incentive Plan have been filed with and approved by SAFE.  However, if we or our PRC optionees fail to comply with these regulations or any of our future share incentive plans are not filed with or approved by SAFE, we or our PRC optionees may be subject to fines and other legal or administrative sanctions.

 

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M&A Regulations and Overseas Listings

 

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the SAT, the SAIC, CSRC and SAFE, jointly issued the M&A Rules, which became effective on September 8, 2006, as amended in 2009. The M&A Rules require offshore SPVs controlled directly or indirectly by PRC companies or individuals and formed for the purpose of listing equity interests in PRC companies on overseas exchanges to obtain CSRC approval prior to such listing.

 

On September 21, 2006, the CSRC published procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require filing documents with the CSRC and take several months to complete. The application of this new PRC regulation remains unclear, with no consensus currently existing among leading PRC law firms regarding the scope of the CSRC approval requirement.

 

PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review. On February 3, 2011, the General Office of the State Council issued the Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which sets out the scope, content, work mechanism and procedures of the security review. The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the aforementioned Notice, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

 

Labor Laws

 

The principal labor laws and regulations in the PRC include the PRC Labor Law, the PRC New Labor Contract Law, the PRC Social Insurance Law, the Work-related Injury Insurance Regulations, the Interim Provisions on Registration of Social Insurance and the Interim Regulations on the Collection and Payment of Social Insurance Fees. Pursuant to the PRC Labor Law and the New Labor Contract Law, employers must enter into written labor contracts with full-time employees in order to establish an employment relationship.

 

Employers must pay their employees wages equal to or above local minimum wage standards, establish labor safety and workplace sanitation systems, comply with state labor rules and standards and provide employees with appropriate training regarding workplace safety. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in fines or other administrative sanctions or, in the case of serious violations, criminal liability.

 

C.Organizational Structure

 

The following chart illustrates our corporate structure, including our principal operating subsidiaries, consolidated affiliated entities and our ownership structure as of the date of this annual report:

 

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The following table sets forth the details of our principal subsidiaries as of the date of this annual report:

 

Name   Country of
Incorporation		   Ownership
Interest		    
Qizhi Software (Beijing) Co., Ltd.   China     100 %
Tianjin Qisi Technology Co., Ltd.   China     100 %
Qifei Xiangyi (Beijing) Software Co., Ltd.   China     100 %
Qiji International Development Limited   Hong Kong     100 %
360 International Development Co. Limited   Hong Kong     100 %
Qifei International Development Co. Limited   Hong Kong     100 %

 

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D.Property, Plant and Equipment

 

Our principal executive offices are located at Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, China.  In August 2012, we entered into definitive agreements to purchase these new office premises with an area of approximately 69,205 square meters in Chaoyang District, Beijing, China for total cash consideration of RMB1.4 billion ($222.2 million). As of the date of this annual report, we have paid approximately $222.2 million of this consideration. At the end of 2014, approximately 69,205 square meters of these new office premises were in use. We also lease approximately 50,701 square meters of office space in Beijing and other cities in China.

 

Item 4A.UNRESOLVED STAFF COMMENTS

 

None.

 

Item 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this annual report. This report contains forward-looking statements. See “— G. Safe Harbor.” In evaluating our business, you should carefully consider the information provided under the caption “Item 3. Key Information — D. Risk Factors” in this annual report. We caution you that our businesses and financial performance are subject to substantial risks and uncertainties.

 

A.Operating Results

 

Overview

 

We are a leading Internet company in China. As of December 2014, we held leadership positions in a number of key PC and mobile Internet product categories:

 

·We were the No. 1 PC Internet security product provider in China with 479 million monthly active users, representing a user penetration rate of 90.5%, according to iResearch.

 

·We were the No. 1 mobile security product provider in China with over 744 million smartphone users.

 

·We were the No. 1 PC browser provider in China in terms of time spent usage with 361 million monthly active users, representing a user penetration rate of 68.1%, according to iResearch.

 

·We were the No. 1 Android mobile app store operator in China with over 600 million smartphone users.

 

We offer the above PC and mobile Internet security products free of charge and generate revenues primarily through offering the following services:

 

·Online advertising.   We offer marketing opportunities to our customers by providing comprehensive online advertising service solutions, such as sponsored links, on both of our PC and mobile platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant. We generally offer online advertising services solutions to our customers on a pay-for-effectiveness basis.

 

·Internet value-added services.   We offer games developed by third parties to users and generate revenues through sharing of in-game item sales with game developers. We also offer online lottery purchase services and serve as an agent for providing online distribution services and payment collections services, and generally charge commission as a percentage of the gross proceeds or collection amount. In March 2015, we temporarily suspended our online lottery purchase services, pending the resolution of a joint administrative order from PRC authorities to online distribution of lottery tickets.

 

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·Other services. We also offer enterprise information security products and related services, such as firewalls, gateways and internet security monitoring system, to enterprise customers. In addition, on an ad-hoc project basis, we offer IT outsourcing and systems integration services to enterprise customers. The contribution of these services to our revenues is insignificant.

 

We have grown significantly since we commenced operations in 2005. Monthly active users of our PC-based products increased from 456 million in December 2012 to 475 million in December 2013 and 509 million in December 2014. Total smartphone users of our primary mobile security product, 360 Mobile Safe, increased from 207 million in December 2012 to 467 million in December 2013 and 744 million as of December 2014. Our revenues increased from $329.0 million in 2012 to $671.1 million in 2013 and $1,390.7 million in 2014. We first became profitable in 2009. Our net income increased from $46.7 million in 2012 to $99.7 million in 2013 and $222.8 million in 2014.

 

The most significant factors that affect the financial performance and results of operations of our business are:

 

User base

 

Our success in generating revenues, especially from our online advertising and Internet value-added services, largely depends on our ability to maintain and increase the number of users of our products and services. The size of our user base drives the online traffic or transactions originated from our platform products, for which we get paid by our online advertising customers. The number of users using our platform products also represents the size of the addressable market for our Internet value-added services and the potential for generating additional sources of revenues. In order to attract and retain users, we must continue to invest significant resources to provide comprehensive and effective products and services.

 

Pricing and revenue sharing

 

We charge fees to our customers based on the effectiveness of our comprehensive advertising services solutions, which is typically measured by active users, clicks, transactions and other actions originated from our platform products on both PC and mobile. PC and mobile online advertising are priced at different levels, primarily due to the material difference in (i) the formats of PC and mobile online advertising and (ii) the results from PC and mobile online advertising, in terms of traffic, users and/or business leads.  However, the pricing of our advertising service on both PC and mobile platforms is closely correlated with the effectiveness of our advertising links. Additionally, our fees are also affected by, among other factors, (i) the competitiveness of bidding for sponsored links and keywords by our customers, with more intensive bidding typically leading to higher pricing and (ii) the vertical industries that our customers operate in, which may result in different effectiveness and benefits of our online advertising services to our customers. Please see “- Overview of Financial Results - Revenues - Online Advertising.” Our ability to increase fee rates is limited by the competitive landscape and subject to acceptance by our customers.

 

Our online game businesses for both PC and mobile are based on revenue sharing arrangements with third-party developers. Therefore, our online revenues depend in part on our percentage share of the revenues generated operating those games on our platform.

 

Revenue mix

 

Our revenues and costs of revenues are affected by changes in our revenue mix. We generate revenues mainly through providing Internet services, including online advertising and Internet value-added services. Revenues from online advertising decreased from 67.3% in 2012 to 62.2% in 2013, and further to 54.4% in 2014, and revenues from Internet value-added services increased from 31.4% in 2012 to 37.7% in 2013, and further to 43.9% in 2014. As we continue to monetize our services, the business model of these services may evolve, resulting in changes in our revenue mix. At the same time, costs associated with each revenue stream may vary from time to time, causing fluctuations in gross margin and operating margin.

 

Product development

 

In order to attract and retain users, we have invested significant resources in developing new products and services in Internet security, cloud-related, search, mobile Internet, and smart hardware so as to develop and strengthen our products and services and enhance user experience. In 2012, 2013 and 2014, our product development expenses were $156.3 million, $255.2 million and $406.3 million, respectively, representing 47.5%, 38.0% and 29.2% of our revenues in the corresponding periods. We expect our product development expenses to continue to increase as we endeavor to develop attractive products and services that enable users to enjoy a more secure and a higher quality Internet experience.

 

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Sales and Marketing

 

Our sales and marketing effort enables us to build our customer base, strengthen our brand, and distribute our products to end users through different channels. Historically, we have invested significant resources in sales and marketing to drive business growth, allowing us to compete effectively in the market. In 2012, 2013 and 2014, our sales and marketing expenses were $58.2 million, $110.1 million and $333.7 million, respectively, representing 17.7%, 16.4% and 24.0% of our revenues, respectively. We expect our sales and marketing expenses to continue to increase as we expand our customer base, strengthen our brand and reach an even larger number of users.

  

Overview of Financial Results

 

We evaluate our business using a variety of key financial measures.

 

Revenues

 

The following table sets forth our revenues by source both in absolute amounts and as percentages of total revenues for the periods indicated:

 

   Year Ended December 31, 
   2012   %   2013   %   2014   % 
   ($ in thousands, except percentages) 
Revenues:                              
Internet services   328,882    100.0    671,088    100    1,370,695    98.6 
Online advertising   221,488    67.3    417,133    62.2    756,431    54.4 
Internet value-added services   103,316    31.4    252,684    37.7    611,187    44.0 
Other services   4,078    1.3    1,271    0.1    3,077    0.2 
Others   150    0.0    —    0.0    19,965    1.4 
    329,032    100.0    671,088    100.0    1,390,660    100 

 

Online Advertising   

 

We generate online advertising revenues primarily through monetization of user traffic on our PC and mobile platform properties. We generally offer comprehensive online advertising service solutions to our customers on a pay-for-effectiveness basis.

 

There are increasing numbers of customers who request comprehensive advertising solutions that may include any combination of Personal Start-up Page advertisements, search advertisements and mobile advertisements. PC advertising adopts a cost per click, cost per page view or cost per transaction model, while mobile advertising adopts a cost per app downloaded or cost per app activated model. Because our comprehensive advertising solutions provide both brand-building and transaction-generating functions for our customers, we may charge these customers on a total package basis. We view search as an integrated part of our online advertising business, and as such in many cases it may not feasible to clearly separate search and non-search online advertising.

 

The most significant factors that directly or indirectly affect our online advertising revenues are:

 

·The number of our users that actively use our platform products. Generally speaking, the more users we have, the more online activities they generate, which serve as the basis for monetization.

 

·The number of activities initiated on our websites and our partners’ websites through sponsored links, which are affected primarily by factors such as the location and prominence of the sponsored links, the relevance between advertising keywords and our customers’ businesses, and the rate at which users click on sponsored links.

 

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·The total number of sponsored links displayed on our platform products. Generally speaking, the more sponsored links we have, the better we can monetize our users’ activities.

 

·The effectiveness of our sponsored links, which is typically measured by active users, clicks, transactions and other actions originated from our platform products. The pricing of our advertising service is closely correlated with the effectiveness of our sponsored links.

 

·The number of our customers and the competitiveness of bidding for sponsored links and keywords by customers. Generally speaking, the more customers we have, the more intensive bidding is. More intensive bidding typically leads to higher pricing, all other factors held equal.

 

·The vertical industries that our customers operate in, which may result in different effectiveness and benefits of online advertising. For example, sponsored links to e-commerce websites can directly lead to sales of products and revenues to the customer, while links to video-sharing websites typically increase site traffic and brand awareness, but do not directly lead to revenue-generating transactions for the customer. As such, the pricing of these links may differ materially from customer to customer.

 

·The total online marketing budgets of our customers, which may fluctuate materially due to macroeconomic trends and the different stages of development of vertical industries. The fluctuation of our customers’ online marketing budgets may affect the volume of advertising links that customers are able to purchase and prices of each link that customers are able to pay.

 

The interaction of these factors affects the performance and results of operations of our online advertising business. In summary, the increase in the effectiveness of our advertising services, along with the growth of our user base, has in turn increased our number of customers and the revenues we generate from each customer, and in turn the size of our total online advertising business.

 

Internet Value-added Services.   Our Internet value-added services include offering games developed by third parties and other Internet value-added services to users.

 

We operate third-party developed games on our game platform products, such as sub-pages of Personal Start-up Page and the app store of 360 Mobile Assistant. We provide game players a safe and convenient gaming environment.  Our game portfolio primarily includes web games and mobile games. Users can access and play these games directly on our platform products. We share revenues from game operations with game developers pursuant to the terms of our cooperation agreements.

 

A substantial majority of playing users on our game platform are casual players who play the games on a “free” basis. Typically, only a small percentage of playing users will purchase in-game virtual items in order to advance to higher stages. These users can make the purchase through their registered accounts on our game platforms. We refer to these accounts as the “paying accounts.” As such, total number of paying accounts is a key driver for our game revenue growth. In December 2014, monthly game paying accounts on our game open platforms was approximately 1.2 million, compared to over 700,000 in December 2013.

 

As of the end of 2014, there were over 1,600 games on our game platforms, compared to over 800 games at the end of 2013. A significant majority of the games on our game platform has shorter life cycles than traditional MMORPGs. As we significantly expand our game portfolio to include additional types of games, the average life cycles of our games may change accordingly. The life cycle measurement of games is less relevant to our game operations because different types of games may have significantly different life cycles and monetization patterns. A longer or shorter “active life” does not necessarily mean larger or smaller revenue contribution. Top games on our game platforms tend to change from period to period. A majority of the top ten games in 2014 were not among the top ten games in 2013. The top ten games contributed approximately 42.1% of total game revenues in 2014, compared with 33% in 2013. Our most popular game in 2014 was different from our most popular game in 2013. In 2014, the most popular game generated approximately 15% of our game revenues.

 

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We also provide online lottery purchase services and serve as an agent for providing online distribution services and payment collection services, such as payment collection for mobile charges, and distribution and payment collection of e-books, on behalf of third parties. We generally charge commission as a percentage of the gross proceeds or collection amount. We provide payment collection services mainly through third-party professional payment and settlement institutions. In March 2015, we temporarily suspended our online lottery purchase services, pending the resolution of a joint administrative order from PRC authorities to online distribution of lottery tickets.

 

Other Services

 

We also generate an insignificant amount of revenues from offering enterprise information security products and related services and other ad-hoc services, such as IT outsourcing and system integration services to enterprise customers.

 

Cost of Revenues and Operating Expenses

 

The following table sets forth the cost of revenues and operating expenses, both in absolute amounts and as percentages of total revenues for the periods indicated:

 

   Year Ended December 31, 
   2012   %   2013   %   2014   % 
   ($ in thousands, except percentages) 
Revenues:   329,032    100.0    671,088    100.0    1,390,660    100.0 
Cost of revenues:                              
Internet services   32,762    10.0    87,838    13.1    297,645    21.4 
                               
Others   40    0.0    —    0.0    7,817    0.5 
Total cost of revenues   32,802    10.0    87,838    13.1    305,462    21.9 
Operating expenses                              
Selling and marketing   58,178    17.7    110,104    16.4    333,701    24.0 
General and administrative   35,643    10.8    117,148    17.4    94,260    6.8 
Product development   156,269    47.5    255,248    38.0    406,250    29.2 
Total operating expenses   250,090    76.0    482,500    71.8    834,211    60.0 

 

Cost of Revenues

 

Cost of revenues mainly consists of cost of Internet services.

 

Cost of Internet services primarily consist of business tax, value-added tax and related surcharges, traffic acquisition costs, payment collection costs, salaries and benefits, costs of bandwidth and utilities, depreciation of equipment, cost of inventories and revenue sharing to third-party business partners. Our Internet services are subject to PRC business tax, value-added tax and related surcharges on our revenues. We expect our business tax, value-added tax and related surcharges will continue to increase in line with increases in our revenues. Payment collection costs in connection with Internet services represent the fees that we pay to providers of mobile payment and online banking services for processing payments from our users. Other costs incurred in connection with Internet services primarily comprise salaries and benefits for service operation personnel and authorization fees for the operation of third-party games.

 

Operating Expenses

 

Our selling and marketing expenses primarily consist of salaries and benefits, including share-based compensation expenses, for our sales and marketing personnel and advertising and promotion expenses. We expect to incur higher selling and marketing expenses as we intensify our efforts to build our brand and promote our products and services.

 

Our general and administrative expenses primarily consist of salaries and benefits, including share-based compensation expenses, for our administrative personnel and fees that we pay to legal, accounting and other professional service providers. We expect to incur higher general and administrative expenses as we expand our operations.

 

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Our product development expenses relate to the research, development and strengthening of our products and services in Internet security, cloud-related, search, mobile Internet, and smart hardware. Our product development expenses primarily consist of salaries and benefits, including share-based compensation expenses, of our product development personnel, costs of bandwidth and utilities, license and technical service fees, depreciation of equipment and amortization of acquired intangible assets. We expect product development expenses to continue to increase as we continue to develop and enhance products and develop technologies related to the Internet, such as browser and mobile Internet technologies.

 

The table below shows the effect of the share-based compensation expenses on our operating expense line items for the periods indicated:

 

   Year Ended December 31, 
   2012   2013   2014 
   ($ in thousands) 
Share-based compensation expenses included in:               
Cost of revenues   4    —    — 
Selling and marketing   21,260    15,389    15,571 
General and administrative   8,365    69,101    16,891 
Product development   20,976    36,597    62,594 
Total   50,605    121,087    95,056 

 

We expect to continue to grant share options and nonvested shares under our share incentive plans and incur further share-based compensation expenses in future periods.

 

Acquisitions and Investments

 

In December 2014, we entered into an agreement with Coolpad Group Limited, a leading smartphone manufacturer in China, to form a joint venture which will focus on designing, manufacturing, marketing and distributing smartphones and other mobile Internet devices. We acquired a 45% stake in the joint venture at a consideration of $409.05 million in cash. The transaction is expected to close in the second quarter of 2015.

 

In May 2014, we acquired a controlling equity interest in MediaV Holding Company Limited, a leading precision advertising platform for PRC and mobile Internet in China, for $134.3 million. MediaV’s cloud-based big data analysis services enable customers to deliver advertising to target audience precisely.

 

Other than the above, we made a total of $113.3 million and $582.6 million in investments and acquisitions in small to mid-sized companies whose businesses complement our business in 2013 and 2014, respectively.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our board of directors. Actual results may differ from these estimates under different assumptions or conditions.

 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

 

We believe that the following critical accounting policies are the most sensitive and require more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report.

 

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Revenue Recognition

 

We generate revenues primarily through providing Internet services, consisting primarily of online advertising and Internet value-added services.

 

We consider revenue to be realizable and earned when all of the following criteria exist:

 

·persuasive evidence of a sales arrangement exists;

 

·delivery has occurred or services have been rendered;

 

·the price is fixed or determinable; and

 

·collectability is reasonably assured.

 

Internet Services

 

Internet services revenues includes online advertising, Internet value-added services and other services.

 

Online Advertising

 

 

We offer marketing opportunities to our customers by providing online advertising services, such as sponsored links (advertising links), on our platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant. We generally offer these advertising links to our customers on a pay-for-effectiveness basis, which primarily includes a cost over time period model and cost for performance model. We charge fees to our customers directly or indirectly determined based on the effectiveness of advertising services, which is typically measured by active users, clicks, transactions and other actions originated from our platform products. PC and mobile online advertising are priced at different levels, primarily due to the material difference in (i) the formats of PC and mobile online advertising and (ii) the results from PC and mobile online advertising, in terms of traffic, users and/or business leads. Additionally, our fees are also affected by, among other factors, (i) the competitiveness of bidding for sponsored services and keywords by our customers, with more intensive bidding typically leading to higher pricing and (ii) the vertical industries that our customers operate in, which may result in different effectiveness and benefits of our online advertising services to our customers. For advertising contracts that are charged on a cost over a time period basis, we recognize revenues ratably over the period the advertising is provided. For contracts that are charged on a cost for performance basis, the revenues are estimated by us based on our internal data, which is confirmed with the respective customers.

 

We occasionally engage in nonmonetary transactions to allow certain third parties to provide traffic on the non-monetization location of our platform products to show their brand or products in exchange for our brand promotion or more downloads of our platform or security products, and to allow certain third parties to bundle our platform or security products with third parties’ software products in exchange for more downloads of our platform or security products. We recognize revenues and expenses at fair value from a nonmonetary transaction only if the fair value of the services exchanged in the transaction is determinable based on the entity’s own historical practice of receiving cash, marketable securities, or other consideration that is readily convertible to a known amount of cash for similar services from customers unrelated to the counterparty in the nonmonetary transaction. No such transactions were recognized in 2012, 2013 and 2014.

 

Internet Value-added Services

 

Our Internet value-added services include offering games developed by third parties, and other Internet value-added services to our users.

 

Games. We provide game services and generate revenues from selling in-game currency, which will later be used by game players to purchase in-game virtual items. Our game portfolio includes mobile games and web games. All of the games are developed by third-party game developers and can be accessed and played by game players directly through our platform products. We primarily view the game developers to be our customers and consider our responsibility under our agreements with the game developers to be promotion of the game developers' games or assisting game developers to enhance game-playing experience. Sometimes, we get exclusive rights in a certain region, that is, other platforms cannot provide the game without our permission in that region.

 

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We generally collect payments from game players in connection with the sale of in-game currencies and remit certain agreed-upon percentages of the proceeds to the game developers and records revenue net of remittances. Revenue from the sale of in-game currency is primarily recorded net of remittances to game developers and deferred until the estimated consumption date (i.e., the estimated date in-game currencies are consumed within the game if we only provide game promotion services, or the estimated date that virtual items are consumed if game enhancement service is also delivered). The in-game currencies are consumed typically within a short period of time after purchase which ranges from a few days to a few weeks depending on the game. Length of the consumption period is impacted by the portfolio mix of games and the monetization policy and marketing activity of each individual game as determined by game developers. The virtual items mainly consist of instant items and durable items. The life of instant items is less than one day, and the life of durable items is within months. An insignificant amount of revenue is recognized from durable items.

 

Purchases of in-game currency or virtual items are not refundable after they have been sold unless there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the monthly revenue generated by a game is insignificant. To date, we have never been required to pay cash refunds to game players or game developers as a result of the discontinuation of a game.

 

Other Internet value-added services. We provide online lottery purchase services and serve as an agent to offer online distribution services and payment collection services on behalf of our partners. We provide payment collection services, such as the collection of mobile charges and e-books purchase prices, mainly through third-party professional payment and settlement institutions. We generally charge commission as a percentage of the gross proceeds or collection amount, and the revenue is estimated by us based on our internal system, which is confirmed with our partners.

 

Other Services

 

We offer enterprise information security products and related services to customers, such as firewalls, gateways and internet security monitoring system. Most of our revenue arrangements with customers are the sale of hardware products, bundled with software that is essential to the functionality of the hardware. We recognize revenue for the sale of such hardware products after a sales agreement is signed, the price is fixed or determinable, products are delivered to customers, and collection of the resulting receivables is assured. Product is considered delivered to the customers once it has been shipped and titled, risk of loss and rewards of ownership have been transferred.

 

 Consolidation of Variable Interest Entities

 

PRC regulations currently limit direct foreign ownership of business entities providing Internet services in China, where certain licenses are required for the provision of such services. To comply with these PRC regulations, we conduct a substantial majority of our business through our VIEs and their subsidiaries. Qizhi Software, our wholly-owned PRC subsidiary, holds the power to direct the activities of the VIEs that most significantly affect our economic performance and bears the economic risks and receives the economic benefits of the VIEs through a series of contractual agreements with the VIEs and/or their nominee shareholders, including:

 

·business operation agreements;

 

·technology consulting and services agreements;

 

·equity disposition agreements;

 

·loan agreements;

 

·equity pledge agreements;

 

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·powers of attorney; and

 

·spousal consent letters.

 

We believe these contractual agreements are currently legally enforceable under PRC law and regulations. More specifically, we believe the terms of the equity disposition agreement gives us substantive kick-out rights so that we can have the power to control the VIEs' nominee shareholders and thus the power to direct the activities that most significantly impact the VIEs' economic performance. Through these contractual agreements, we believe that the nominee shareholders of the VIEs do not have direct or indirect ability to make decisions regarding the activities of the VIEs that could have a significant impact on the economic performance of the VIEs because all of the voting rights of the VIEs’ nominee shareholders have been contractually transferred to Qizhi Software. More specifically, we believe the terms of the equity disposition agreement gives us substantive kick-out rights so that we can have the power to control the VIEs’ nominee shareholders. Therefore, we have effective control over the VIEs. In addition, we believe that our ability to exercise effective control, together with the technology consulting and services agreements and the equity pledge agreements, give us the rights to receive substantially all of the economic benefits from the VIEs. Hence, we believe that the nominee shareholders of the VIEs do not have the rights to receive the expected residual returns of those VIEs, as such rights have been transferred to Qizhi Software. Therefore, we evaluated the rights we obtained through entering into these contractual agreements and concluded we have the power to direct the activities that most significantly affect the VIEs’ economic performance and also have the rights to receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, we are the primary beneficiary of the VIEs and have consolidated the financial results of the VIEs and their subsidiaries in our consolidated financial statements since the later of the date of acquisition and incorporation.

 

We believe that the possibilities are remote that any oversight or regulatory bodies in China would question the enforceability of Qizhi Software’s contractual arrangements with the VIEs pursuant to the current PRC laws. The shareholders of the VIEs are also our shareholders and therefore have no current interest in acting contrary to the contractual arrangements. However, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements and if the shareholders of the VIEs were to reduce their shareholdings in our Company, their interests may diverge from our interests, which may increase the risk that they would act contrary to the contractual arrangements, such as causing the VIEs to not pay service fees under the contractual arrangements when required to do so. See “Item 3. Key Information – D. Risk Factors – Risks Related to Our Corporate Structure – In order to comply with PRC laws and regulations limiting foreign ownership of Internet businesses, we conduct our Internet businesses through our consolidated affiliated entities in China by means of contractual arrangements. If the PRC government determines that these contractual arrangements do not comply with applicable regulations, our business could be materially and adversely affected” and “- Risks Related to Our Corporate Structure – The shareholders of our VIEs may have potential conflicts of interest with us, which may adversely affect our business.”

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.

 

Goodwill is tested for impairment at the reporting unit level on an annual basis (December 31 for our Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

 

In the evaluation of the goodwill for impairment, we may first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, goodwill is then tested following a two-step process.

 

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The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit's goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

 

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

 

In 2014, we assessed the qualitative factors to determine it is not “more likely than not” that the fair value of each reporting unit is less than its respective carrying amount. We did not incur any impairment loss on goodwill for the years ended December 31, 2012, 2013 and 2014.

 

Intangible Assets with Indefinite Lives

 

An intangible asset that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of assets with their carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates and market price. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Market prices are based on potential purchase quotes from third party.

 

Our management performs impairment assessment on intangible assets with indefinite lives on December 31 of each year or when events or changes in circumstances indicate that the assets might be impaired. Our management used the discounted cash flow method to estimate the fair value of intangible assets with indefinite lives. During the years ended December 31, 2012, 2013 and 2014, we recognized $197,000, $841,000 and nil of impairment losses, respectively, on our intangible assets with indefinite lives.

 

Intangible Assets with Definite Lives

 

We generally seek the assistance of an independent valuation firm to determine the fair value of the identifiable tangible and intangible net assets of an acquired business.

 

We can use several methods to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of the expected future net cash flows. We then discount these cash flows to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. 

 

We amortize intangible assets with determinable useful lives on a straight-line basis.

 

We evaluate intangible assets with determinable useful lives for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We measure recoverability of long-lived assets to be held and used as part of a reporting unit by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If we believe the assets are impaired, the impairment will equal the amount by which the carrying value of the assets exceeds the fair value of the assets.

 

Our management estimated the fair value of the intangible assets with definite lives based on the discounted value of estimated future cash flows. The evaluation requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2012, 2013 and 2014, we recognized $1,151,000, $107,000 and nil of impairment losses, respectively, on our intangible assets with definite lives.

 

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Equity Method Investments

 

Investee companies over which we have the ability to exercise significant influence, but do not have a controlling interest, are accounted for using the equity method. Significant influence is generally considered to exist when we have an ownership interest in the voting stock of the investee between 20% and 50%, and other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

 

 

An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. We estimated the fair value of these investee companies based on discounted cash flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long term growth rate of a company’s business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital. Certain of our equity method investments experience a deteriorating financial position and performance and we do not expect them to generate any positive future cash flows. Accordingly, we accrued an impairment charge of $1.5 million, $4.1 million and $1.9 million in 2012, 2013 and 2014, respectively, on these equity method investments based on their fair value which would be minimal.

 

Cost Method Investments

 

For equity investments that are not considered as debt securities or equity securities that have readily determinable fair values and over which we neither have significant influence nor control through investment in common stock or in-substance common stock, the cost method is used. Investments in limited partnerships over whose operating and financing policies we have virtually no influence and with investment less than five percent are accounted for using the cost method.

 

We review our cost method investments for impairment whenever an event or circumstance indicates that an other-than-temporary impairment has occurred. We consider available quantitative and qualitative evidence in evaluating potential impairment of our cost method investments. An impairment charge is recorded if the cost of an investment exceeds its fair value and such excess is determined to be other-than-temporary. The Company estimated the fair value of these investee companies based on discounted cash flow approach. Factors we consider in making such a determination include the length of time that the fair value of the investment is below our carrying value; the financial condition, operating performance and the prospects of the equity investee; and other company-specific information such as recent financing rounds. As a result of the assessment process for our cost method investments, we recognized impairment charge of $0.8 million, $0.9 million and $0.6 million in 2012, 2013, and 2014 respectively.

 

Available-for-sale Investments

 

Investments not classified as trading or as held-to-maturity are classified as available-for-sale investments. Available-for-sale investments which are intended to be realized in cash during the next 12 months are classified as short-term investments, and the others are classified as long-term investments. Available-for-sale investments are reported at fair values with the unrealized gains or losses recorded as accumulated other comprehensive income (loss) if the decline in fair value is considered temporary or in the consolidated statements of operations if the change in fair value is considered other than-temporary.

 

We continually review our available-for-sale investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors we consider in our determination are the length of time that the fair value of the investment is below its carrying value, the financial condition, operating performance and the prospects of the equity investee. Upon assessment for our available-for-sale investments, we recognized no impairment charge in 2012, 2013, and 2014.

 

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Legal and Other Contingencies

 

The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. In determining whether a loss should be accrued, we evaluate, among other factors, the probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our financial statements.

 

Based on information currently available, we can only reasonably estimate possible loss at this stage for two legal cases. As a result, $0.9 million was accrued for these two legal cases as of December 31, 2014. No accrual for contingency loss was made as of December 31, 2012 and $0.9 million was accrued for two legal cases as of December 31, 2013.

 

Income Taxes

 

In preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include in our consolidated balance sheets. We must then assess the likelihood that we will recover our deferred tax assets from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance, we must include an expense within the tax provision in our statement of operations.

 

Management must exercise significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

 

U.S. GAAP requires that the impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during that period. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. We did not recognize any significant unrecognized tax benefits during the periods presented in this annual report.

 

 

Uncertainties exist with respect to the application of the New EIT Law to our operations, specifically with respect to our tax residency status. The New EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” are located within the PRC. The New EIT Law’s implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”

 

Because of the uncertainties resulted from limited PRC tax guidance on the issue, it is uncertain whether our legal entities organized outside of the PRC constitute residents under the New EIT Law. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operations. See “Item 3. Key Information — D. Risk Factors — Risk Related to Doing Business in China — Dividends we receive from our PRC subsidiaries, dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.”

 

Share-based Compensation

 

Our share-based payment transactions are measured based on the grant date fair value of the equity instrument we issued and recognized as compensation expense over the requisite service period, with a corresponding impact reflected in additional paid-in capital.

 

At the time of the grants, the exercise prices for options granted under our 2006 Employee Share Option Scheme were determined by CEO with inputs by management based on various objective and subjective factors, and the exercise prices for options granted under our 2011 Share Incentive Plan were determined by our compensation committee.

 

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The fair values of our option awards were estimated on the date of grant using the Black-Scholes and binomial option pricing model using the following assumptions:

 

   2012   2013   2014 
Weighted average risk-free interest rate   2.83% - 3.35%    3.40% - 4.02%    3.96% - 4.61% 
Weighted average expected term (number of years)   6.35    6.35    5.85 - 6.35 
Weighted average expected volatility   46.98% - 74.00%    46.04% - 46.68%    44.28% - 46.02% 
Weighted average expected dividend yield   —    —    — 

 

The risk-free rate for periods within the expected life of the option is based on the implied yield rates of U.S. dollar denominated bond issued by the Chinese government as of the valuation dates. The expected life of options represents the period of time the granted options are expected to be outstanding. The expected life is estimated based on a consideration of factors including contractual term, vesting period and empirical study on historical exercise behavior of employee share options. Our employees who received our stocks options are assumed to exhibit similar behavior. As we expected to grow our business with internally generated cash, we did not expect to pay dividends in the foreseeable future.

 

Before April 1, 2011 (the closing date of our initial public offering), the estimated fair value of the ordinary shares underlying our options as of the respective grant dates was determined based on a retrospective valuation.  When estimating the fair value of the ordinary shares on the grant dates, our management has considered a number of factors, including the result of a third-party appraisal and our equity transactions, while taking into account standard valuation methods and the achievement of certain events.  We also determined of the fair value of our ordinary shares with the assistance of an independent valuation firm. After April 1, 2011, the fair value of our ordinary shares is determined from the closing sales price of our ADSs as quoted on the New York Stock Exchange.

 

Because we do not maintain an internal market for our shares, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business.

 

Newly Adopted Accounting Pronouncements

 

See Note 2 to our consolidated financial statements included elsewhere in this annual report for recently issued accounting standards that we believe may have implications on our consolidated financial statements for future periods.

 

Taxation

 

Cayman Islands

 

We are incorporated in the Cayman Islands.  The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. Payments of dividends and capital in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands income or corporation tax. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are not party to any double tax treaties that are applicable to any payments made to or by us.

 

Hong Kong

 

Our wholly-owned subsidiaries in Hong Kong are subject to the uniform tax rate of 16.5% for the year ended December 31, 2014. Under the Hong Kong tax laws, these subsidiaries are exempted from the Hong Kong income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

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Singapore

 

Our wholly-owned subsidiary in Singapore is subject to the unified tax rate of 17% for the year ended December 31, 2014. There are no withholding taxes in Singapore on remittance of dividends.

 

Japan

 

Our majority-owned subsidiary in Japan is subject to the unified tax rate of 25.5% plus 2.55% surcharge in Japan for the year ended December 31, 2014. It also needs to pay fixed amount local income tax to the local tax authorities by monthly based on the employee headcount and capital amount. The normal withholding tax rate is 20% in Japan on remittance of dividends and could be reduced to 10% under the tax treaty between Hong Kong and Japan.

 

United States

 

Our wholly-owned subsidiary in U.S. is subject to the progressive tax rate from 15% to 39% for the federal income tax in the U.S. and 8.7% for the state income tax in Delaware for the year ended December 31, 2014. The normal withholding tax rate is 30% in the U.S. on remittance of dividends.

 

PRC

 

Prior to the effective date of the New EIT Law on January 1, 2008, domestic enterprises in China were generally subject to an enterprise income tax at a statutory rate of 33% unless they qualified for certain preferential treatment. Effective as of January 1, 2008, the New EIT Law applies a uniform enterprise income tax rate of 25% to all domestic enterprises and foreign-invested enterprises and defines new tax incentives for qualifying entities.

  

Pursuant to the New EIT Law, enterprises that previously enjoyed preferential treatments of low tax rates will be subject to the new enterprise income tax rate of 25% after a five-year transitional period. Moreover, tax exemption or reduction with fixed terms enjoyed by enterprises including us will continue until the expiration of the prescribed period. One of our operating subsidiaries, Qizhi Software, and two of our VIEs, Beijing Qihu and Beijing Star World, receive preferential tax treatment in the PRC as “high and new technology enterprises.” Another two of our operating subsidiary, Tianjin Qisi and Qifei Xiangyi, receives preferential tax treatment in the PRC as “software enterprise.” Specifically, each of Qizhi Software, Beijing Qihu and Beijing Star World, was entitled to a reduced EIT rate of 15% for 2012, 2013 and 2014. Tianjin Qisi received its “software enterprise” status in March 2011 and was entitled to the preferential tax treatment of “two-year exemption plus three-year half rate” starting from 2012, being its first profit-making year for EIT purposes. Tianjin Qisi was entitled to a preferential tax rate of 12.5% for the year ended December 31, 2014. Qifei Xiangyi was recognized as Software Enterprise by relevant PRC government authorities on November 11, 2013 and entitled to the preferential tax treatment of “two-year exemption plus three-year half rate” commencing from its first profit-making year for EIT purposes. For the year ended December 31, 2013 and 2014, Qifei Xiangyi enjoyed the two-year tax exemption.

 

In addition, the New EIT Law treats enterprises established outside of China with “de facto management bodies” within the PRC as a PRC resident enterprise for tax purposes. The implementation rules define the term “de facto management bodies” as establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties of an enterprise. The State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, which sets out certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore incorporated enterprise is located in China. We do not believe that we should be treated as a “resident enterprise” for PRC tax purposes. However, if considered a “PRC resident enterprise” for tax purposes, we would be subject to the PRC enterprise income tax at a rate of 25% on our worldwide income. We will continue to monitor our tax status. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — We may be subject to PRC taxation on our worldwide income.”

 

Pursuant to the New EIT law and its implementation rules, dividends payable to foreign investors are subject to a 10% withholding tax. Pursuant to the grandfathering arrangement, dividends receivable from our PRC subsidiaries in respect of their undistributed profits prior to December 31, 2007 are exempt from withholding tax. Under the taxation arrangement between the PRC and Hong Kong, a qualified Hong Kong tax resident which is the “beneficial owner” and directly holds 25% or more of the equity interest in a PRC-resident enterprise is entitled to a reduced withholding tax rate of 5% upon receiving approval from the relevant tax authority.

 

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Results of Operations

 

The following table sets forth a summary of our consolidated results of operations, both in absolute amounts and as percentages of total revenues, for the periods indicated.

 

   Year Ended December 31, 
   2012   Percentage
of
Revenues		   2013   Percentage
of
Revenues		   2014   Percentage
of
Revenues		 
   ($ in thousands, except percentages) 
                         
Revenues:                              
Internet services                              
Online advertising   221,488    67.3%   417,133    62.2%   756,431    54.4%
Internet value-added services   103,316    31.4%   252,684    37.7%   611,187    44.0%
Other services   4,078    1.3%   1,271    0.1%   3,077    0.2%
Total   328,882    100.0%   671,088    100%   1,370,695    98.6%
Others   150    0.0%   —    0.0%   19,965    1.4%
Total revenues   329,032    100.0%   671,088    100%   1,390,660    100%
                               
Cost of revenues:                              
Internet services   32,762    10.0%   87,838    13.1%   297,645    21.4%
Others   40    0.0%   —    0.0%   7,817    0.5%
Total cost of revenues   32,802    10.0%   87,838    13.1%   305,462    21.9%
                               
Subsidy income   2,570    0.8%   2,349    0.4%   8,506    0.6%
Operating expenses:                              
Selling and marketing   58,178    17.7%   110,104    16.4%   333,701    24.0%
General and administrative   35,643    10.8%   117,148    17.4%   94,260    6.8%
Product development   156,269    47.5%   255,248    38.0%   406,250    29.2%
Total operating expenses   250,090    76.0%   482,500    71.8%   834,211    60.0%
                               
Income from operations   48,710    14.8%   103,099    15.4%   259,493    18.7%
Interest income   6,715    2.1%   10,398    1.5%   25,605    1.8%
Interest expense   —    0.0%   (5,572)   (0.7)%   (25,518)   (1.8)%
Other income   1,243    0.4%   590    0.1%   1,803    0.1%
Exchange gain (loss)   49    0.0%   5,105    0.8%   (11,899)   (0.9)%
(Loss) gain in connection with short-term investments   (52)   0.0%   327    0.0%   10,230    0.7%
Gain in connection with long-term investments   2,464    0.7%   11,216    1.6%   26,780    1.9%
Gain (loss) on disposal of subsidiaries   3,566    1.1%   (1,144)   (0.2)%   —    0.0%
Income before income tax expense and loss from equity method investments   62,695    19.1%   124,019    18.6%   286,494    20.6%
Income tax expense   (11,379)   (3.5)%   (23,423)   (3.5)%   (51,425)   (3.7)%
Loss from equity method investments   (4,845)   (1.5)%   (2,747)   (0.4)%   (18,906)   (1.4)%
Net income   46,471    14.1%   97,849    14.7%   216,163    15.5%
Add: Net loss attributable to noncontrolling interest   275    0.1%   1,803    0.3%   6,605    0.5%
Net income attributable to Qihoo 360 Technology Co. Ltd.   46,746    14.2%   99,652    15.0%   222,768    16.0%

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Revenues

 

Revenues increased by 107.2%, from $671.1 million in 2013 to $1,390.7 million in 2014, primarily as a result of strong performances in both online advertising and Internet value-added services, mainly driven by strong ramp-ups in search monetization and mobile monetization.

 

Revenues from online advertising increased by 81.3%, from $417.1 million in 2013 to $756.4 million in 2014. The solid growth was primarily driven by:

 

·The continued growth of our traffic provides fundamental support to monetization. The more traffic and users’ activities there are on our platform products, such as Personal Startup Page and search engine, the more likelihood that users may click one of the advertising links on those platforms. Advertisers pay for traffic and users’ activities. In 2014, average daily clicks of our Personal Startup Page and its subpages increased by 20%, and total page views of 360 Search increased by 70%.

 

·We have been continuously expanding our customer base, which drives our revenue growth. Our online advertising customers increased from approximately 50,000 in 2013 to 100,000 in 2014. The increase in our online advertising customers was mainly due to our effective sales and marketing efforts both through direct sales and agency networks.

 

·We have been gradually improving the efficiency of our monetization back-end system. This improvement results in better matching between users’ intention and advertising placement. Better matching generally leads to better results in advertising customers’ business activities, which in turn should drive higher prices for our advertising service. On a combined basis, the total number of paid clicks increased by approximately 21.7%, average price per paid click increase by approximately 74.1% from 2013 to 2014. In addition, average revenue per paid customer decreased from approximately $8,000 to $7,500. The decrease in average revenue per advertising customer primarily reflected our successful selling effort to expand advertising customer base, which resulted in advertising customer growth significantly outpacing advertising revenue growth in 2014.

 

Revenues from Internet value-added services increased by 141.9%, from $252.7 million in 2013 to $611.2 million in 2014. The robust growth was mainly driven by a strong ramp-up in mobile games and incremental contribution from PC games. The total number of paying users on our game platform increased from 700,000 in 2013 to approximately 1,200,000 in 2014, and the number of games commercially running on our platform increased from 800 in 2013 to 1,600 in 2014.

 

Cost of Revenues

 

Our cost of revenues increased by 247.8%, from $87.8 million in 2013 to $305.5 million in 2014, primarily due to (i) an increase of $79.3 million in traffic acquisition costs related to the growth of our online advertising service revenue, (ii) an increase of $50.9 million in value-added tax and related surcharges in line with revenue growth, (iii) an increase of $39.2 million in payment collection costs for Internet services and revenue sharing to third-party partners in line with revenue growth, and (iv) an increase of $33.7 million in bandwidth costs, depreciation of equipment mainly related to the continued ramp-up in our search monetization. Our cost of revenues as a percentage of our total revenues increased from 13.1% in 2013 to 21.9% in 2014 primarily due to the increase in traffic acquisition costs related to the growth of our online advertising service, which do not fluctuate in line with changes in our total revenues.

 

Operating Expenses

 

Selling and Marketing Expenses. Selling and marketing expenses increased by 203.1%, from $110.1 million in 2013 to $333.7 million in 2014. This increase was primarily due to (i) an increase of $168.9 million in advertising and promotion expenses related to increased brand promotion activities and promotion of our security and platform products and (ii) an increase of $41.9 million in salaries and benefits as a result of increased headcount of sales and marketing personnel.

 

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General and Administrative Expenses. General and administrative expenses decreased by 19.5%, from $117.1 million in 2013 to $94.3 million in 2014. This decrease was primarily due to an decrease of $52.2 million in share-based compensation associated with the vesting of restricted shares and share options granted to our key employees and senior management, which resulted from an one-off $57.0 million share-based compensation charge in relation to share incentive grants to our two co-founders in 2013, and partially offset by (i) an increase of $14.3 million in salaries and benefits for our general and administrative personnel as a result of increased headcount, (ii) an increase of $6.9 million in office related expenses as a result of expanding our operations and (iii) an increase of $2.6 million in professional fees incurred for legal proceedings and other administrative activities.

 

Product Development Expenses. Product development expenses increased by 59.2%, from $255.2 million in 2013 to $406.3 million in 2014. This increase was primarily due to (i) an increase of $69.2 million in the salaries and benefits for our product development personnel as we hired additional employees in 2014 to develop our platforms and products, (ii) an increase of $26.2 million in depreciation and amortization expenses from the acquisition of property, equipment and intangible assets for the expansion of our business to facilitate the development and strengthening of our technologies and products; (iii) an increase of $26.0 million in share-based compensation associated with the vesting of shares and share options granted to our key product development employees, (iv) an increase of $15.8 million in bandwidth costs, as we leased additional bandwidth to develop and innovate products and services and (v) an increase of $9.6 million in license and technical service expenses, as we used additional licenses for our operations. 

 

Interest Expense.

 

Interest expenses increased by 358.0%, from $5.6 million in 2013 to $25.5 million in 2014, primarily due to the interest expense on our convertible senior notes issued in 2013 and 2014.

 

Income Tax Expense

 

Income tax expenses increased from $23.4 million in 2013 to $51.4 million in 2014, primarily due to an increase in taxable income for our subsidiaries and VIEs from 2013 to 2014. Our effective tax rate for the years ended December 31, 2014 was approximately 14%. Our effective tax rate for these two years was lower than the PRC statutory EIT rate of 25% primarily due to effect of income tax holidays and preferential tax rates enjoyed by certain of our PRC entities, which was partially offset by the tax benefit related to the net operating loss of our Cayman Islands holding company not being utilized.

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Revenues

 

Revenues increased by 104.0%, from $329.0 million in 2012 to $671.1 million in 2013, primarily as a result of strong performance in both online advertising and Internet value-added services, driven by strong user traffic growth and further penetration of performance based advertising on our platform products.

 

Revenues from online advertising increased by 88.3%, from $221.5 million in 2012 to $417.1 million in 2013. This increase was primarily due to increased monetization of user activities on 360 Personalized Start- up Pages and incremental contribution from search and mobile advertising. Our online advertising customers increased from 860 in 2012 to approximately 50,000 in 2013. The increase in our online advertising customers was mainly due to the ramp-up in search monetization. Revenues from Internet value-added services increased by 144.6%, from $103.3 million in 2012 to $252.7 million in 2013. This increase was primarily due to an increase of paying users on our game platforms and game operations capacity.

 

Cost of Revenues

 

Our cost of revenues as a percentage of our total revenues increased from 10.0% in 2012 to 13.1% in 2013 primarily due to the increase in bandwidth costs, depreciation of equipment and staff salaries and benefits as a result of the ramp-up in our search monetization, which contain fixed portions that would not fluctuate in line with changes in our total revenues.

 

Operating Expenses

 

Selling and Marketing Expenses. Selling and marketing expenses increased by 89.3%, from $58.2 million in 2012 to $110.1 million in 2013. This increase was primarily due to (i) an increase of $41.2 million in advertising and promotion expenses relating to increased brand promotion activities and promotion of our security and platform products and (ii) an increase of $13.3 million in salaries and benefits as a result of increased headcount of sales and marketing personnel, partially offset by a decrease of $5.9 million in share-based compensation associated with unvested shares and share options granted to key sales and marketing employees and external consultants as some of our external consultants had completed their service.

 

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General and Administrative Expenses. General and administrative expenses increased by 241.4%, from $34.3 million in 2012 to $117.1 million in 2013. This increase was primarily due to (i) an increase of $60.7 million in share-based compensation associated with the vesting of shares and share options granted to our key employees and senior management, which included a one-off $57.0 million share-based compensation charge in relation to share incentive grants to our two co-founders to reward them for our outstanding performance in the past several years, (ii) an increase of $7.1 million in salaries and benefits for our general and administrative personnel as a result of increased headcount, (iii) an increase of $8.4 million in professional fees incurred for legal proceedings and other administrative activities and (iv) an increase of $4.0 million in office related expenses as a result of expanding our operations.

 

Product Development Expenses. Product development expenses increased by 63.3%, from $156.3 million in 2012 to $255.2 million in 2013. This increase was primarily due to (i) an increase of $41.4 million in the salaries and benefits for our product development personnel as we hired additional employees in 2013 to develop our platforms and products, (ii) an increase of $21.6 million in bandwidth costs, as we leased additional bandwidth to develop and innovate products and services, (iii) an increase of $18.7 million in depreciation and amortization expenses from the acquisition of property, equipment and intangible assets for the expansion of our business to facilitate the development and strengthening of our technologies and products; and (iv) an increase of $15.6 million in share-based compensation associated with the vesting of shares and share options granted to our key product development employees.

 

Interest Expense.

 

Interest expenses increased from nil in 2012 to $5.6 million in 2013 due to the interest expense in connection with the issuance of our convertible senior notes in 2013.

 

Income Tax Expense

 

Our effective tax rate for the years ended December 31, 2012 and 2013 was approximately 10%. Our effective tax rate for these two years was lower than the PRC statutory EIT rate of 25% primarily due to effect of income tax holidays and preferential tax rates enjoyed by certain of our PRC entities, which was partially offset by the tax benefit related to the net operating loss of our Cayman Islands holding company not being utilized. Our income tax expenses increased from $11.4 million in 2012 to $23.4 million in 2013, primarily due to an increase in taxable income for our subsidiaries and VIEs from 2012 to 2013.

 

B. Liquidity and Capital Resources

 

Our principal sources of liquidity have been cash generated from operating activities and proceeds from our initial public offering and the concurrent private placement in April 2011. As of December 31, 2014, we had outstanding debt of $1,635.0 million in the form of convertible senior notes. Our cash and cash equivalents primarily consist of cash on hand and term deposits. We believe the cash we received from the initial public offering and concurrent private placement in April 2011 and our convertible senior notes offering in September 2013 and August 2014 and the anticipated cash flow from operations will provide us with sufficient capital to meet our anticipated cash needs for the foreseeable future. If we have additional liquidity needs in the future, we may obtain additional financing, including credit facility and equity offering or debt financing in capital markets, to meet such needs.

 

We are a holding company and conduct our operations primarily through our subsidiaries and VIEs in China. For the years ended December 31, 2012, 2013 and 2014, our VIEs in China contributed an aggregate of 92.1%, 78.6% and 76.9%, respectively, of our consolidated revenues. Our operations not conducted through contractual arrangements with our VIEs primarily consist of our advertisement agency services and technology support services. As of December 31, 2013 and 2014, our VIEs accounted for an aggregate of 20.3% and 28.7%, respectively, of our consolidated total assets, and 17.2% and 17.2%, respectively, of our consolidated total liabilities. The assets not associated with our VIEs primarily consists of cash and cash equivalent, accounts receivables, property and equipment and land use rights. As of December 31, 2013 and 2014, $801 million and $1,877 million, respectively, of these assets were denominated in U.S. dollars and $448 million and $495 million respectively, of these assets were denominated in RMB. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries, which in turn depend upon earnings of our VIEs transferred to our subsidiaries in the form of payments under the technology consulting and services agreements. As of December 31, 2014, the total amount of service fees payable to our wholly owned subsidiaries from our VIEs was $3.3 million. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with accounting standards and regulations applicable to such subsidiaries. As of December 31, 2014, our PRC subsidiaries and VIEs had aggregate undistributed earnings of approximately $651 million that were available for distribution. These undistributed earnings are considered to be indefinitely reinvested, and will be subject to PRC dividend withholding taxes upon distribution.

 

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Under PRC law, each of our PRC subsidiaries must set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of our PRC subsidiaries with foreign investments must also set aside a portion of its after-tax profits to fund an employee welfare fund at the discretion of the board. We expect to continue to accrue for staff welfare benefits, including pension benefits, medical care, unemployment insurance, employee housing fund, maternity insurance and work-related injury insurance, based on certain percentages of the employees’ respective salaries and to make cash contributions to state-sponsored plans out of the amounts accrued. The amount of such cash contributions may increase due to our expanding workforce as we grow our business or increase salary levels. However, we do not expect that such increase will have a material effect on our liquidity. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these subsidiaries. In addition, dividend payments from our PRC subsidiaries could be delayed as we may only distribute such dividends upon completion of annual audits of the subsidiaries. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — We may rely on dividends and other distributions from our subsidiaries in China to fund our cash and financing requirements, and any limitation on the ability of our subsidiaries to make payments to us could materially adversely affect our ability to conduct our business.” There is no material difference between the accumulated profits calculated pursuant to PRC accounting standards and the accumulated profits presented in the financial statements.

 

Our cash held inside the PRC were $157.7 million, $301.9 million and $367.4 million as of December 31, 2012, 2013 and 2014, respectively, and our cash held outside the PRC were $222.9 million, $711.6 million and $1,277.8 million as of December 31, 2012, 2013 and 2014, respectively. Furthermore, our cash held inside our VIEs were $58.1 million, $116.6 million and $239.9 million as of December 31, 2012, 2013 and 2014, respectively, and our cash held outside our VIEs were $322.6 million, $896.9 million and $1,405.3 million as of December 31, 2012, 2013, and 2014, respectively. Cash transfers from our PRC subsidiaries and consolidated affiliated entities to our subsidiaries outside of China are subject to PRC government control of currency conversion. Qizhi Software needs to obtain the approval from or registration with the relevant government authorities if it plans to convert cash denominated in Renminbi into U.S. dollars and remit it to our subsidiaries outside of China. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”

 

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

 

   Year Ended December 31, 
   2012   2013   2014 
   ($ in thousands) 
Net cash provided by operating activities   117,788    210,226    380,299 
Net cash used in investing activities   (83,927)   (196,874)   (661,494)
Net cash provided by financing activities   1,986    613,498    919,714 
Effect of exchange rate on cash and cash equivalents   1,086    5,951    (6,750)
Net increase in cash and cash equivalents   36,933    632,801    631,769 
Cash and cash equivalents at beginning of year   343,731    380,664    1,013,465 
Cash and cash equivalents at end of year   380,664    1,013,465    1,645,234 

 

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Operating Activities

 

Our primary source of cash provided by operating cash flows is Internet services revenue, including revenues from online advertising and revenues from Internet value-added services. Our primary uses of cash from operating activities include payments for personnel-related expenses, advertising costs, bandwidth, other general corporate expenditures and income taxes.

 

Cash provided by operating activities consist of net income adjusted for certain non-cash items, including share-based compensation expense, depreciation and amortization, as well as the effect of changes in working capital and other activities.

 

Net cash provided by operating activities increased to $380.3 million in 2014 from $210.2 million in 2013. Although our growing business generated substantial net cash inflow as our revenues increased by $719.6 million from $671.1 million in 2013 to $1,390.7 million in 2014, the cash paid for cost of revenues and operating expenses also increased by $491.3 million from $430.1 million in 2013 to $921.4 million in 2014.

 

Net cash provided by operating activities increased to $210.2 million in 2013 from $117.8 million in 2012. Although our growing business generated substantial net cash inflow as our revenues increased by $342.1 million from $329.0 million in 2012 to $671.1 million in 2013, the cash paid for cost of revenues and operating expenses also increased by $225.6 million from $204.5 million in 2012 to $430.1 million in 2013.

 

For 2014, net cash provided by operating activities of $380.3 million was primarily attributable to our net income of $216.2 million, adjusted by (i) noncash items of share-based compensation expense of $95.1 million, (ii) depreciation and amortization of $82.5 million from the acquisition of property, equipment and intangible assets for the expansion of our business to facilitate the development and strengthening of our technologies and products, (iii) loss on equity method investments of $18.9 million and (iv) an increase in cash from working capital items of $1.1 million, partially offset by (i) gain in connection with long-term investments of $26.8 million and (ii) loss (gain) in connection with short-term investments of $10.2 million. The net increase in cash from working capital items was primarily due to the $56.2 million increase in accounts receivable, prepaid expenses and other current assets, accounts payable, deferred revenue, accrued expenses and related income tax due to fast growth of our business, partially offset by the payment for land use rights of $55.1 million in accordance with the contractual payment schedule.

 

For 2013, net cash provided by operating activities of $210.2 million was primarily attributable to our net income of $97.8 million, adjusted by noncash items of (i) share-based compensation expense of $121.1 million, which included a one-off $57.0 million share-based compensation charge in relation to share incentive grants to our two co-founders, (ii) depreciation and amortization of $42.6 million from the acquisition of property, equipment and intangible assets for the expansion of our business to facilitate the development and strengthening of our technologies and products, (iii) impairment of long-term investments of $5.0 million, (iv) loss on equity method investments of $2.7 million and (v) miscellaneous non-cash expenses of $3.5 million, partially offset by (i) a decrease in cash from working capital items of $46.7 million and (ii) disposal of long-term investments of $15.8 million. The net decrease in cash from working capital items was primarily due to the payment for land use rights of $72.9 million in accordance with the contractual payment schedule and increases in accounts receivable and prepaid expenses and other current assets all in line with and as a result of the growth of our business, partially offset by increases in accounts payable, deferred revenue and accrued expenses and other current liabilities due to our fast growth in our online advertising and game services.

 

For 2012, net cash provided by operating activities of $117.8 million was primarily attributable to our net income of $46.5 million, adjusted by noncash items of (i) share-based compensation expense of $50.6 million, (ii) depreciation and amortization of $16.5 million, (iii) impairment of long-term investments of $2.3 million, (iv) loss on equity method investments of $4.8 million and (v) an increase in cash from working cap capital items of $4.3 million, partially offset by (i) gain on disposal of long-term investments of $4.8 million and (ii) miscellaneous expenses of $2.4 million. The net increase in cash from working capital items was primarily due to the increases in accrued expenses and other current liabilities as a result of the growth of our business and increases in deferred revenue due to increase in recharge amount of our game related business, partially offset by the payment for land use rights of $14.1 million in accordance with the contractual payment schedule and increases in accounts receivable and prepaid expenses and other current assets as a result of the growth of our business.

 

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Investing Activities

 

Net cash used in investing activities amounted to $661.5 million in 2014, primarily due to cash outflows for (i) payment for the purchase of property and equipment and intangible assets of $170.1 million, (ii) capital contribution of $325.0 million for long-term investments and $148.9 million for business acquisition, and (iii) purchase of short-term investments for $82.9 million, partially offset by (i) cash inflows from the disposal of certain investments for $22.6 million and (ii) proceeds from sale of short-term investments for $41.8 million.

 

Net cash used in investing activities amounted to $196.9 million in 2013, primarily due to cash outflows for (i) payment for the purchase of property and equipment and intangible assets of $121.4 million and (ii) capital contribution of $81.0 million for long-term investments and $9.8 million for business acquisition, partially offset by cash inflows from the disposal of certain investments and a subsidiary of a VIE for $15.6 million.

 

Net cash used in investing activities amounted to $83.9 million in 2012, primarily due to cash outflows for (i) payment for the purchase of property and equipment and intangible assets of $73.9 million and (ii) capital contribution of $8.0 million for cost method investments and $16.2 million for equity method investments, partially offset by cash inflows for disposal certain investments and a subsidiary of an VIE for $13.8 million.

  

Financing Activities

 

Net cash provided by financing activities amounted to $919.7 million in 2014, primarily due to cash inflows for (i) the receipt of $1,016.4 million proceeds from the issuance of senior convertible notes, net of issuance costs and (ii) proceeds from exercise of share options of $15.9 million, partially offset by (i) payment for share repurchase of $104.2 million, and (ii) repayment of short-term loan for $13.9 million.

Net cash provided by financing activities amounted to $613.5 million in 2013, primarily due to cash inflows for (i) the receipt of $587.9 million proceeds from the issuance of senior convertible notes, net of issuance costs and (ii) the receipt of $23.7 million proceeds from the exercise of share options by our employees and external consultants.

 

Net cash provided by financing activities amounted to $2.0 million in 2012, primarily due to the receipt of proceeds from exercise of share options by our employees and external consultants.

   

Capital Expenditures

 

We incur capital expenditures primarily for the purchase of servers, network equipment and other computer hardware for our business expansion and the purchase of new office premises and related facilities. Our capital expenditures were $134.2 million in 2012, $71.0 million in 2013 and $246.8 million in 2014. We expect to incur approximately $150.0 million in capital expenditures for 2015 for the purchase of servers, network equipment and other computer hardware for our business expansion, as well as the purchase of new office premises and related facilities.

 

C.Research and Development, Patents and Licenses, etc.

 

Product Development

 

In order to attract and retain users, we have invested significant resources in developing security products, cloud-based services, search engine-related products, mobile Internet products and other Internet products and services and improve our products and services and enhance user experience. As of December 31, 2014, our product development team consisted of 4,467 development and technical staff members, approximately 73.8% of whom held bachelor’s or more advanced degrees.

 

Our internally developed technologies include our cloud-based security system, Qihoo search engine technology, cloud storage system, QVM, 360 HIPS and other technologies. See “Item 4. Information On The Company — B. Business Overview — Our Technology.”

 

Our product development expenses include costs associated with new product development and enhancement for existing products, such as salaries and benefits, including share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation of equipment and amortization of acquired intangible assets. Product development expenses represented 47.5%, 38.0% and 29.2% of total revenues for the three years ended December 31, 2012, 2013 and 2014, respectively.

 

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Intellectual Property

 

We rely on a combination of copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights and brands. We have registered our “Qihoo” and “Qihu” brands and our “360” logo with relevant government authorities in China, the United States and Japan and have pending applications for the “Qihoo” and “Qihu” brands and the “360” logo with relevant government authorities in the European Union.

 

As of December 31, 2014, we had 309 registered trademarks in China and 78 registered trademarks outside of China, and held registered copyrights to 421 software programs covering almost all of our products. As of December 31, 2014, we had 4,193 pending patent applications and had received 265 authorized patents from various governmental authorities.

 

We have registered the domain name “360.cn” with China Internet Network Information Center. In addition, we have registered 444 domain names with various domain name registration services as of December 31, 2014.

 

D.Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for 2014 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

E.Off-Balance Sheet Commitments and Arrangements

 

We have not entered, and do not expect to enter, into any off-balance sheet arrangements. We also have not entered into any financial guarantees or other commitments to guarantee the payment obligations of third parties. In addition, we have not entered into any derivative contracts indexed to equity interests and classified as shareholders’ equity. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to it or that engages in leasing, hedging or research and development services with it.

  

F.Contractual Obligations

 

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2014:

 

   Payment Due by Period 
Contractual Obligations  Total   Less
than
1 Year		   1 - 3
Years		   3 - 5
Years		   More
than
5 Years		   Other 
   ($ in thousands) 
Operating obligations (1)   44,669    27,437    10,521    4,138    2,573    - 
Other commitments(2)   130,178    26,644    53,288    33,913    16,333    - 
Total   174,847    54,081    63,809    38,051    18,906    - 

 

 

(1)         Operating obligations represent future rental commitments related to facilities and offices under non-cancelable operating lease agreements and fee commitments related to obtaining exclusive rights of operation for the games on our platforms.

 

(2)         Other commitments represent future commitment relates to interest payable in connection with the issuance of Convertible Senior Notes.

 

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G.Safe Harbor

 

This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995.

 

You can identify these forward-looking statements by terminology such as “will,” “expects,” “believes,” “anticipates,” “intends,” “estimates” and similar statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about Qihoo 360 and the industry. Potential risks and uncertainties include, but are not limited to: our ability to continue to innovate and provide attractive products and services to attract and retain users; our ability to keep up with rapid changes in technologies and Internet-enabled devices; our ability to leverage its user base to attract customers and users for our revenue-generating services; our dependence on online advertising for a substantial portion of our revenues; our ability to compete effectively; and our success in defending our Company against unsubstantiated reports and allegations by third parties. This annual report on Form 20-F also contains data related to the Internet industry in China taken from third party reports. China’s Internet industry may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the Internet industry subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

All information provided in this annual report on Form 20-F is as of the date on which the statements are made in this annual report on Form 20-F, and we undertake no obligation to update any forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as may be required by law. Although we believe that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results. You should read this annual report on Form 20-F completely and with the understanding that our actual future results may be materially different from what we expect. Further information regarding risks and uncertainties faced by us is included in our filings with the U.S. Securities and Exchange Commission.

 

Item 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.Directors and Senior Management

 

The following table sets forth information about our directors and executive officers as of the date of this annual report. The business address of all of our directors and executive officers is Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China.

 

Name   Age   Position
Hongyi Zhou   44   Chairman of the board and chief executive officer
Xiangdong Qi   50   Director and president
Shu Cao   39   Director and chief engineer
Neil Nanpeng Shen   47   Director
Ming Huang   51   Director
William Mark Evans   57   Director
Eric Chen   45   Director
Jianwen Liao   47   Director
Jue Yao   41   Chief financial officer
Alex Zuoli Xu   46   Co-chief financial officer
John Liu   51   Chief business officer
Jie Chen   38   Senior vice-president
Guangdong Yu   36   Senior vice-president
Xiaohong Shi   44   Vice-president of technology

 

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Hongyi Zhou is a co-founder of our company and has served as our chairman and chief executive officer since August 2006. Mr. Zhou has over ten years of managerial and operational experience in China’s Internet industry. Prior to founding our company, Mr. Zhou was a partner at IDG Ventures Capital since September 2005, a global network of venture capital funds, where he assisted small- to medium-sized software companies in sourcing funding to support their growth. Mr. Zhou was the chief executive officer of Yahoo! China from January 2004 to August 2005. In 1998, Mr. Zhou founded www.3721.com, a company engaged in Internet search and online marketing business in China, and served as its chairman and chief executive officer until www.3721.com was acquired by Yahoo! China in January 2004.  Mr. Zhou also serves as a director of a number of privately owned companies based in China. Mr. Zhou received his bachelor’s degree in computer software in 1992 and his master’s degree in system engineering in 1995 from Xi’an Jiaotong University, China.

 

Xiangdong Qi is a co-founder of our company and has served as our director and president since our inception. Prior to founding our company, Mr. Qi served as a vice president of Yahoo! China from January 2004 to August 2005, where he was responsible for Yahoo! China’s operations and marketing. From August 2003 to January 2004, Mr. Qi was the general manager of www.3721.com, responsible for its overall operations and strategic planning. Mr. Qi worked at Xinhua News Agency from 1986 to March 2004. Mr. Qi received his bachelor’s degree in wireless communications from Changchun College of Posts and Telecommunications in China in 1986 and his MBA degree from Beijing University of Science and Technology in China in 2007.

 

Shu Cao has been our director since 2006 and served as our chief engineer since October 2005. Prior to joining us, Mr. Cao served as the chief engineer of Yahoo! China from November 2003 to September 2005 and was responsible for system operation and maintenance. Mr. Cao has extensive experiences in software engineering, information technology infrastructure and system operation. Mr. Cao was the co-founder of www.3721.com and served as its head of operations from January 1999 to August 2003. Mr. Cao received his bachelor’s degree in computer science from Zhejiang University in China in 1998.

 

Neil Nanpeng Shen has been our director since 2006. Mr. Shen is the founding managing partner of Sequoia Capital China. Mr. Shen co-founded Ctrip.com International Ltd., or Ctrip, a NASDAQ-listed company and the largest travel service provider in China, and served as its chief financial officer from 2000 to October 2005 and as its president from August 2003 to October 2005. He also co-founded Home Inns and Hotels Management Inc., or Home Inns, a NASDAQ-listed company and leading economy hotel chain in China. Prior to founding Ctrip and Home Inns, Mr. Shen had over eight years of experience at major investment banks in New York and Hong Kong. Currently, Mr. Shen is a co-chairman of Home Inns, a director of Ctrip, a director of E-House (China) Holdings Limited, a NYSE-listed real estate services company in China. He is also a director of a number of privately owned companies based in China. Mr. Shen received his bachelor’s degree from Shanghai Jiaotong University in China in 1988 and his master’s degree from Yale University in 1992.

  

Dr. Ming Huang has been our director since March 2011. He has been a professor of finance at the Johnson Graduate School of Management at Cornell University since July 2005 and a professor of finance at China-European International Business School (“CEIBS”) since July 2010. Dr. Huang also served as a professor of finance at Cheung Kong Graduate School of Business in China from July 2008 to June 2010 and Dean of the School of Finance at Shanghai University of Finance and Economics from April 2006 to March 2009. Prior to 2005, he was an associate professor of finance at the Graduate School of Business at Stanford University from September 2002 to June 2005 and an associate dean and visiting professor of finance at Cheung Kong Graduate School of Business from July 2004 to June 2005. Dr. Huang's academic research primarily focuses on behavioral finance, credit risk and derivatives. In recent years, his research has focused on Chinese capital market and public companies. Dr. Huang also serves as an independent director at JD.com (Nasdaq: JD), Yingli Green Energy Holding Company Limited (NYSE: YGE), Fantasia Holdings Group Co., Ltd. (HKSE: 1777), WH Group Limited (HKSE: 0288), Guosen Securities Co Ltd (002736:Shenzhen), and China Medical System Holdings Ltd. (HKSE: 0867). Dr. Huang received his bachelor's degree in physics from Peking University, his doctorate degree in theoretical physics from Cornell University and his doctorate degree in finance from Stanford University.

 

William Mark Evans has been our director since March 2011. Mr. Evans has been a general partner of Balderton Capital, a U.K. based venture capital firm, since September 2002 and currently serves as a director of Yoox Group S.p.A., an online retail company listed on the Borsa Italiana, and a number of private companies. From April 2004 to October 2006, Mr. Evans served as the chairman of the audit committee of the board of directors of Shanda Interactive Entertainment Inc., a company listed on NASDAQ prior to 2012. Prior to that, Mr. Evans held a variety of senior management positions at Goldman Sachs, including chairman of Goldman Sachs Asia from 1993 to 1997. Mr. Evans received his bachelor’s degree in economics from Queen’s University in Canada in 1981 and his MLitt degree in economics from the University of Oxford in 1985.

 

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Dr. Eric Chen has been our director since January 2014. Dr. Chen joined Silver Lake in 2008 as Managing Director, and has been a senior advisor to Silver Lake since 2015. Prior to Silver Lake, Dr. Chen was a senior vice president and executive committee member of ASML, a global leader in semiconductor technology. Dr. Chen joined ASML following its acquisition of Brion Technologies in 2007, the company he co-founded in 2002 and served as the CEO since inception. He was formerly a senior vice president at J.P. Morgan, where he coordinated the global research effort in the electronics sector and conducted equity research for a number of technology segments. Dr. Chen studied physics at Peking University and received his Ph.D. in electrical engineering from Stanford University.

 

Dr. Jianwen Liao has been our director since December 2014. Dr. Liao is the associate dean, academic director of Innovation Center, and professor of managerial practice in strategy, innovation and entrepreneurship at the Cheung Kong Graduate School of Business. His professional experience spans across North America and Asia. He was a tenured associate professor at the Stuart School of Business, Illinois Institute of Technology during 2006 to 2012. Additionally, he held various visiting professor positions at Hong Kong University of Science and Technology, China European International Business School and Peking University. Dr. Liao is primarily engaged in cross disciplinary research in strategy, innovation and entrepreneurship, and in particular the interactions between new economy and traditional economy. He has won several awards for his research and teaching, including the research grant awards from the U.S. Small Business Administration for years 2007 and 2008 and the Excellence in Teaching award in 2009 at Stuart School of Business at Illinois Institute of Technology. Dr. Liao also serves as an independent director at Colour Life Services Group Co., Limited, Fantasia Holdings Group Co., Limited, China Mengniu Dairy Company Limited and 361 Degrees International Limited. Dr. Liao received his bachelor of engineering from Northeastern University in July 1988, his master of economics from Renmin University of China in February 1991 and his Ph.D of business administration from Southern Illinois University at Carbondale in August 1996.

 

Jue Yao has been our co-chief financial officer since 2012, with expanded responsibilities involving strategic development since 2014, and vice president of finance since 2008. Ms. Yao served as our financial director from 2006 to 2008. Prior to joining us in 2006, Ms. Yao held various positions at Sohu.com Inc. from 1999 to 2006, including financial director, where she was responsible for its strategic planning, budgeting and finance of wireless value-added and gaming business units. From 1996 to 1999, Ms. Yao was a senior auditor at KPMG. Ms. Yao graduated from University of International Business and Economics in China with a bachelor’s degree in international accounting in 1996. She is a chartered accountant in China.

 

Alex Zuoli Xu has been our co-chief financial officer since February 2011. Mr. Xu has extensive experiences in investment research and business management. Prior to joining us, Mr. Xu was a managing director at Cowen & Company, LLC, an investment banking service provider, where he led the firm’s investment research in China on Chinese companies listed in the United States. From March 2010 to August 2010, he served as the chief financial officer of Yeecare Holdings, a private health care product distributor in China, and from May 2008 to March 2010, as the chief strategy officer of China Finance Online Co., Ltd., a Chinese Nasdaq-listed online financial information/service company. Prior to that, Mr. Xu was a senior VP at Brean Murray, Carret & Co, a research-driven investment and merchant bank, covering U.S.-listed Chinese companies. He was part of a top-ranked research team at Banc of America Securities, LLC from 2003 to 2007, and was an equity research associate at UBS from 2002 to 2003. Mr. Xu received his bachelor’s degree in applied physics from Beijing University of Posts and Telecommunications in 1990 and an M.B.A. from Cornell University in 2002. Mr. Xu is a CFA charterholder.

 

Dr. John Liu has been our chief business officer since January 2014. Prior to joining us, Dr. Liu served as the corporate vice president and head of Greater China at Google Inc. since January 2008, where he was responsible for business development and operations in Greater China. From 2002 to 2007, Dr. Liu was the chief executive officer of China Operations at SK Telecom. Prior to that, Dr. Liu held various senior management positions in a number of tech and telecom companies. Dr. Liu received his bachelor’s degree from Beijing Normal University in 1983 and earned his Ph.D from Technical University in Denmark in 1997.

 

Jie Chen has been our senior vice president since March 2014 and our vice president since 2010, taking leadership roles in various functions, including platform operations such as PC browsers and 360 Mobile Application Store, as well as mobile games. Ms. Chen joined us in March 2006. From 2004 to 2006, she was the deputy chief editor and a director at Yahoo! China, where she was responsible for website content production and management. From 2002 to 2004, Ms. Chen served as an editor at Sohu.com Inc., primarily responsible for the operation and management of the finance channel of Sohu.com. From 2000 to 2002, she worked as a senior editor at Sina Corp. Ms. Chen received her bachelor’s degree in investment economics from Central University of Finance and Economics in 1999.

 

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Guangdong Yu has been our senior vice president since March 2014 and our vice president since 2011, responsible for development of Internet products such as 360 Start-up Page and 360 Search and their commercialization. Mr. Yu joined us in September 2006. Prior to that, Mr. Yu was a sales director at TOM.com from 2003 to 2006. From 2001 to 2003, he worked at the marketing department of LG Electronics Inc. Mr. Yu received his bachelor’s degree in international finance from Beijing College of Finance in 2001.

 

Xiaohong Shi has been our vice president of technology since 2006. From January 2004 to August 2005, Mr. Shi was the chief technology officer of Yahoo! China, where he was responsible for technology research and development. From 1999 to 2003, Mr. Shi was the chief technology officer of www.3721.com, a company engaged in Internet search and online marketing business in China. From November 1998 to August 1999, Mr. Shi was a project manager at Founder Group, a leading Chinese information technology company. Mr. Shi received his Ph.D., master’s and bachelor’s degrees in computer science from Xi’an Jiaotong University in 1998, 1995 and 1992, respectively.

 

B.Compensation of Directors and Executive Officers

 

Compensation of Directors and Executive Officers

 

For the year ended December 31, 2014, we paid an aggregate of approximately $2.3 million in cash compensation to our directors and executive officers and granted 6,250 restricted shares to our directors and officers. For the year ended December 31, 2014, we did not set aside or accrue any amounts to provide pension, retirement or similar benefits for our executive officers and directors.

 

Share Option Plans

 

Our board of directors and shareholders have adopted three incentive plans, namely, our 2011 share incentive plan, 2006 employee share option scheme and 2006 share vesting scheme. These incentive plans were adopted to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive directors, officers, advisors and key employees and to promote the success of our business.

 

2011 Share Incentive Plan

 

The maximum aggregate number of Class A ordinary shares that may be issued pursuant to all awards under the 2011 Plan, is 6,272,601 shares plus an annual increase on the first day of each year beginning in 2012 and ending in 2021, equal to the greater of (i) five percent (5%) of the shares outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such greater number of shares as determined by our board of directors. The following paragraphs describe the principal terms of the 2011 Plan.

 

Types of Awards.     The types of awards we may grant under our 2011 Plan include the options to purchase our ordinary shares at a specified price and in a specified period determined by our compensation committee. Under the 2011 Plan, we may also grant awards of our (i) restricted shares, (ii) restricted share units, (iii) dividend equivalents, (iv) deferred shares, (v) share payments and (vi) share appreciation rights under the terms and conditions determined by our compensation committee.

 

Plan Administration.     The compensation committee of our board of directors (or another committee or a subcommittee of our board of directors assuming the functions of our compensation committee under the 2011 Plan) will administer the 2011 Plan. The committee will determine the terms and conditions of each grant, including but not limited to, the exercise, grant or purchase prices, any reload provision, any restrictions or limitations on the awards, vesting schedules, restrictions on the exercisability of the awards, any acceleration or waivers, and any provision related to non-competition and recapture of gain on the awards.

 

Eligibility.     We may grant awards to directors, officers, advisors and employees of our company, which include our subsidiaries and any entity in which we hold actual or de facto control by equity ownership or contractual arrangement.

 

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Award Agreement.     Awards granted under the 2011 Plan will be evidenced by an award agreement that will set forth the terms and conditions and limitations for each award. Share awards may be evidenced by way of an issuance of certificates or book entries with appropriate legends. The certificates and book entry procedures may be subject to counsels’ advice, stop-transfer orders of other conditions or restrictions where the 2011 Plan administrator deems necessary or advisable to comply with the required laws and regulations.

 

Vesting.     The 2011 Plan provides that the plan administrator may set the period during which an option or a share appreciation right can be exercised and may determine that an option or a share appreciation right may not be exercised for a specified period after it is granted. Such vesting can be based on criteria selected by the administrator. At any time after the grant of an option or a share appreciation right, the administrator may, in its sole discretion and subject to terms and conditions it determines, accelerate the period during which an option or a share appreciation right vests. No portion of an option or a share appreciation right unexercisable at the termination of service of an option or a share appreciation right holder with our company or subsidiaries can become exercisable afterwards, unless otherwise provided by the administrator. The vast majority of share options granted under the 2011 Plan vest in accordance with the following schedule: (i) 20% of granted options vest 12 months after the start of vesting period; (ii) 20% of the granted options vest 24 months after the start of vesting period; (iii) 30% of the granted options vest 36 months after the start of vesting period; and (iv) 30% of the granted options vest 48 months after the start of vesting period.

 

Exercise Price and Term of Awards.     The exercise price per share of options granted under the 2011 Plan is determined by the plan administrator in the award agreement. The price may be fixed or variable related to the fair market value of our ordinary shares. The term of any option granted should not exceed ten years. However, in the case where our incentive option is granted to individual who, at the date of grant, owns more than ten percent of the total combined voting power of all classes of our shares, the price granted shall not be less than 110% of fair market value on the date of grant and the option is exercisable for no more than five years from the date of grant.

 

For ordinary share awards granted under the 2011 Plan, namely (i) restricted shares, (ii) restricted share units, (iii) dividend equivalents, (iv) deferred shares, and (v) share payments, the consideration shall not be less than the par value of the shares purchased unless otherwise permitted by applicable laws and regulations. The terms of the share awards are set by the plan administrator in its sole discretion.

 

The exercise price of share appreciation right under the 2011 Plan is determined by the plan administrator and set forth in the award agreement which may be a fixed or variable price related to the fair market value of the shares. The term of the share appreciation right will not exceed ten years.

 

Transfer Restriction.     The awards granted under the 2011 Plan may not be sold, pledged, assigned or transferred in a manner other than by will or the laws of descent and distribution or, subject to the consent of the plan administrator, as required under the applicable domestic relations laws.

 

Amendments or Termination.     The 2011 Plan provides that in the event of any changes affecting our ordinary shares or our share price, the plan administrator can make proportionate and equitable adjustments to reflect such changes. Upon or in anticipation of a corporate transaction, including acquisition, disposal of substantially all or all assets, reverse takeover, dissolution, the plan administrator should in its discretion provide for replacement or assumption of such award. In the event of other changes, the compensation committee should in its discretion make adjustments in the number and class of shares subject to awards outstanding on the date of such change to prevent dilution or enlargement of rights. The 2011 Plan will expire and no further awards may be granted after the tenth anniversary of the plan was adopted.

 

As of March 31, 2015, we have granted options to purchase a total of 981,500 ordinary shares with exercise prices from $14.5 to $31.63 per ADS, and 415,250 restricted shares to our directors and executive officers under the 2011 Plan.

 

2006 Employee Share Option Scheme

 

In November 2010 and January 2011, our board of directors approved increases of the number of shares under our 2006 employee share option scheme. The following paragraphs describe the principal terms of our 2006 employee share option scheme.

 

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Types of Awards.     We may grant options to purchase our ordinary shares under our 2006 employee share option scheme.

 

Plan Administration.     The 2006 employee share option scheme is, upon the approval of the compensation committee established from time to time under our board of directors, administered by our chief executive officer. Our chief executive officer will determine the provisions and terms and conditions of each award grant, including, among other things, the number of awards, exercise price, option vesting schedules, forfeiture provisions and form of payment upon settlement of an award.

 

Eligibility.     We may grant awards to our employees, officers, directors of or consultants to our company, which include our subsidiaries or any entities in which we hold actual or de facto control by equity ownership or contractual arrangement.

 

Notice of Grant.     A grantee is delivered a written notice in the form our chief executive, subject to the 2006 employee share option scheme, determines from time to time. The notice specifies the number of options granted as well as other terms and conditions of the award, including performance criteria on which the grant is made. The grantee may by written notice given to us renounce his or her rights to the notice of grant, and the grant is deemed not having been made.

 

Vesting Schedule.     The options granted in each award vests in the grantee as follows: (i) 25% vests twelve months after the grant is made; (ii) 25% vests 24 months after the grant is made; (iii) 25% vests 36 months after the grant is made; and (iv) 25% vests 48 months after the grant is made. If the grantee ceases to become eligible for any reason prior to certain exit events, the option vested but not exercised as well as the options not yet vested will automatically lapse and expire.

 

Exercise of Option.     Options are personable to the grantee, who may not transfer, mortgage or create interests (legal or beneficial) on the option unless having received prior written consent by our chief executive officer. Grantees do not enjoy any rights, interests or benefits attached to the underlying shares unless the options have vested in and exercised by the grantees. Unless our chief executive officer agrees and so notifies the grantee separately in writing, grantees may not exercise any vested options prior to the occurrence of certain material events such as our initial public offering, sale of all or substantially all of our issued share capital, sale of all or substantially all of its assets and winding up of our company until any of these events is consummated. Under the 2006 employee share option scheme, the grantees are deemed to have authorized the nominee as designated by us to act and execute documents to exercise the options. Unless agreed by our chief executive officer in writing, all rights, including voting rights, attached to the shares allotted under the 2006 employee share option scheme and held by the nominee belong to and are exercised by the nominee at its sole and absolute discretion. The grantees have the right to all monetary benefits deriving from the shares when the shares are disposed of.

 

Exercise Price.     The exercise price is fixed by reference to the date on which the grant is made. Generally, our chief executive officer may determine the price at either (i) the latest valuation price per share certified by our auditors or (ii) the latest price per share at which we have issued any shares prior to the date the subject grant is made. We shall permit payment of the exercise price by an appropriate assignment, transfer, direction or authorization, which is in the form our chief executive officer may reasonably require, to the extent that the cash proceeds receivable by the grantee from certain enumerated events, equals to the exercise price payable by the grantee to us.

 

Amendment and Termination.     Our chief executive officer may at any time terminate our 2006 employee share option scheme. Amendments to our 2006 employee share option scheme are subject to resolution of our compensation committee. Any amendment of our 2006 employee share option scheme must not adversely affect awards already granted or agreed to be granted without written consent of a majority in the number of holders of unexercised options. Unless terminated earlier, the 2006 employee share option scheme will expire and we may not grant awards after the tenth anniversary of its adoption date on January 25, 2006.

 

As of March 31, 2015, we have granted options to purchase a total of 1,125,500 ordinary shares to our directors and executive officers with exercise prices of $2.25 to $7.8 per ADS under our 2006 employee share option scheme.

 

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2006 Employee Share Vesting Scheme

 

In January 2006, Young Vision, one of our principal shareholders, holders of Series A preferred shares and certain other parties entered into a share incentive agreement. The share incentive agreement was subsequently amended and restated when we issued our Series B preferred shares in November 2006 and Series C preferred shares in January 2010. Under the incentive agreement, Young Vision allocated a total of 21,603,645 ordinary shares of our company to an equity incentive pool designed to award our employees and consultants according to our 2006 Employee Share Vesting Scheme. 18,086,101 of these 21,603,645 shares in the equity pool are to vest in grantees on a four-year vesting schedule commencing from November 7, 2006. The remaining 3,517,544 ordinary shares will be granted to employees who join our company as a result of acquisitions or mergers. In February 2011, Young Vision transferred 11,826,000 and 5,550,654 of our ordinary shares in the equity pool to Sino Honor and Strengthen Goal Limited, respectively. Sino Honor, a British Virgin Islands company, is wholly-owned by Shu Cao, our director and chief engineer. Strengthen Goal Limited, a British Virgin Islands company, is wholly-owned by Xiaohong Shi, our vice president of technology. Each of Mr. Cao and Mr. Shi disclaims beneficial ownership in the shares held by Sino Honor and Strengthen Goal Limited, respectively. Grantees are only entitled to rights to monetary benefits by receiving dividends, if any, on the vested shares. Unless our company agrees in writing, grantees may not dispose of the vested shares prior to the occurrence of certain material events such as our initial public offering, sale of all or substantially all of our issued share capital, sale of all or substantially all of our assets and winding up of our company until any of these events is consummated. Young Vision holds the voting rights for the ordinary shares reserved in this equity incentive pool, including those shares underlying the options that have been granted and vested. Subject to limited circumstances such as the termination of his employment with us, Hongyi Zhou, our chairman and chief executive officer, administers this equity incentive pool and has the discretion to change or impose any restrictions on the manner in which the shares in this equity incentive pool will be granted. Under the 2006 Employee Share Vesting Scheme, if the grantee’s employment is terminated, we may repurchase all or part of the vested shares at RMB1.0, depending on the date on which his employment is terminated and the reasons for such termination.

 

As of March 31, 2015, a total of 4,483,952 shares from this equity incentive pool were granted to our directors and executive officers under our 2006 employee share vesting scheme.

 

C.Board Practices

 

Board of Directors

 

Our board of directors currently consists of eight directors. A director is not required to hold any shares to qualify for appointment. A director may vote in respect of any contract, proposed contract or arrangement notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he may be counted in the quorum at the meeting of the directors at which such contract or proposed contract or arrangement is considered. A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company must declare the nature of such interest. Our board of directors may exercise all the powers of our company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation of our Company or of any third party.

 

Committees of the Board of Directors

 

We have three committees under the board of directors: an audit committee, a compensation committee and a corporate governance and nominating committee. We have adopted a charter for each of the three committees.

 

Audit Committee

 

Our audit committee currently consists of Dr. Eric Chen, Mr. Ming Huang and Dr. Jianwen Liao. Each of Dr. Chen, Mr. Huang and Dr. Liao is an “independent director” within the meaning of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Securities Exchange Act. Dr. Ming Huang is the chair of our audit committee.

 

The purpose of the audit committee is to assist our board of directors with its oversight responsibilities regarding: (i) the integrity of our financial statements, (ii) our compliance with legal and regulatory requirements, (iii) the independent auditor’s qualifications and independence and (iv) the performance of our internal audit function and independent auditor.

 

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The audit committee is responsible for, among other things:

 

·appointing the independent auditors and pre-approving all audit and non-audit services permitted to be performed by the independent auditors;

 

·reviewing with the independent auditors any audit problems or difficulties and management’s response;

 

·discussing the annual audited financial statements with management and the independent auditors;

 

·reviewing major issues as to the adequacy of our internal control over financial reporting and any special audit steps adopted in light of material control deficiencies; and

 

·meeting separately and periodically with management and the independent auditors.

 

In 2014, our audit committee held four meetings and passed resolutions eight times.

 

Compensation Committee

 

Our compensation committee consists of Messrs. Neil Nanpeng Shen, William Mark Evans and Dr. Eric Chen. Our board of directors has determined that each of Messrs. Shen, Evans and Dr. Chen is an “independent director” within the meaning of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Mr. Shen is the chair of our compensation committee.

 

Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers. Members of our compensation committee are not prohibited from direct involvement in determining their own compensation. Our chief executive officer may not be present at any compensation committee meeting during which his compensation is deliberated. Our compensation committee is responsible for, among other things:

 

·approving and overseeing the compensation package for our executive officers;

 

·reviewing and approving any amendments to our compensation plans and the compensation of our directors; and

 

·reviewing periodically regarding any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

 

 In 2014, our compensation committee passed resolutions five times.

 

Corporate Governance and Nominating Committee

 

Our corporate governance and nominating committee currently consists of Dr. Eric Chen, Mr. Ming Huang and Dr. Jianwen Liao. Our board of directors has determined that each member of the corporate governance and nominating committee is an “independent director” within the meaning of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. Dr. Eric Chen is the chair of our corporate governance and nominating committee.

 

Our corporate governance and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

 

·identifying and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy;

 

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·reviewing annually with the board the current composition of the board in light of the characteristics of independence, skills, experience and availability of service to us;

 

·advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any corrective action to be taken; and

 

·monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.

 

In 2014, our corporate governance and nominating committee passed resolutions four time(s).

 

Duties of Directors

 

Under Cayman Islands law, our directors owe to us fiduciary duties, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors also have a duty to exercise the skill they actually possess with the care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association. Our company has the right to seek damages against any director who breaches a duty owed to us.

 

Employment Agreements

 

We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a conviction or plea of guilty to a felony, negligence or dishonesty to our detriment and serious or persistent breach or non-observance of the officer’s duties. Furthermore, we may terminate the officer without cause, at any time, upon one month written notice or by payment of one month salary in lieu of notice. An executive officer may terminate his employment at any time with a one-month notice or by payment of one month salary.  In addition, the executive may resign prior to the expiration of the Agreement if such resignation or an alternative arrangement with respect to the Employment is approved by the Board.

 

Each executive officer has agreed to hold, at all times during the term of his employment agreement, in strict confidence and not to use, except as required in the performance of his duties in connection with the employment, any confidential information, technical data, trade secrets and know-how of our company or the confidential information of any third party, including our affiliated entities and our subsidiaries, received by us. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice, during the period of his employment with us, and to assign all right, title and interest in them to us.

 

We do not have service contracts with any of our directors that provide for benefits upon termination of employment.

 

Indemnification Agreements

 

We have entered into indemnification agreements with each of our directors to indemnify them against certain liabilities and expenses arising from their being a director. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

D.Employees

 

We had 3,168, 4,187 and 5,738 employees as of December 31, 2012, 2013 and 2014, respectively. As of December 31, 2014, we had 4,467 employees in product development, 828 in sales and marketing, and 443 in administration, respectively. 

 

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E.Share Ownership

 

The following table sets forth information with respect to the beneficial ownership of our shares as of December 31, 2014 by:

 

·each of our directors and executive officers; and

 

·each person known to us to own beneficially more than 5% of our shares.

 

 

   Ordinary Shares
Beneficially Owned (1)(2)		   % 
Directors and Executive Officers:          
Hongyi Zhou (3)   31,313,235    16.2%
Xiangdong Qi (4)   15,014,126    7.8%
Shu Cao (5)   6,714,046    3.5%
Neil Nanpeng Shen (6)   2,990,952    1.5%
Ming Huang   —    — 
William Mark Evans   —    — 
Eric Chen   —    — 
Jianwen Liao   —    — 
Jue Yao   *    * 
Alex Zuoli Xu   *    * 
John Liu   —    — 
Jie Chen   *    * 
Guangdong Yu   *    * 
Xiaohong Shi (7)   4,322,548    2.2%
All directors and executive officers as a group   62,720,051    32.4%
           
Principal Shareholders:          
Global Village Associates Limited (8)   31,177,755    16.1%
Young Vision Group Limited (9)   15,014,126    7.8%

 

  * Less than 1% of our outstanding ordinary shares.
     
  (1) Beneficial ownership is determined in accordance with Rule 13d-3 of the General Rules and Regulations under the Exchange Act and includes voting or investment power with respect to the securities.
     
  (2) The percentage of beneficial ownership is calculated by dividing the number of shares beneficially owned by such person or group by 193,416,331 ordinary shares, being the number of shares outstanding as of December 31, 2014.
     
  (3) Consists of (i) 135,480 Class A ordinary shares beneficially owned by Mr. Zhou in the form of ADSs, and (ii) 51,723 Class A ordinary shares held by Global Village, and (iii) 1,785,566 Class A ordinary shares in the form of ADSs held by Global Village, and (iv) 29,340,466 Class B ordinary shares held by Global Village. Global Village is a British Virgin Islands company, which is wholly-owned by Fair Point International Limited (“Fair Point”), a British Virgin Islands company, which is wholly-owned by a revocable trust constituted under the laws of Singapore with Hongyi Zhou and his wife as the settlers and Mr. Zhou as investment manager with sole voting and dispositive power and certain family members of Mr. Zhou as the beneficiaries. The registered address of Global Village is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The registered address of Fair Point is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
     
  (4) Consists of (i) 1,340,781 Class A ordinary shares in the form of ADSs held by Young Vision, and (ii) 13,673,345 Class B ordinary shares held by Young Vision. Young Vision is a British Virgin Islands company, which is wholly-owned by East Line Holdings Limited (“East Line”), a British Virgin Islands company, which is in turn wholly-owned by Mr. Qi. Mr. Qi expressly disclaims beneficial ownership in 574,039 Class B ordinary shares allocated to award the Issuer’s employees and consultants under the Issuer’s 2006 Employee Share Vesting Scheme. The registered address of East Line is Abbott Building, Road Town, Tortola, British Virgin Islands. The registered address of Trade Right is the Bahamas Financial Centre, Shirley and Charlotte Streets, P.O. Box N-3023, Nassau, Bahamas.

 

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  (5) Consists of (i) 5,425,641 Class A ordinary shares in the form of ADSs, (ii) 337,230 Class B ordinary shares, (iii) 876,564 Class A ordinary shares issuable upon the exercise of options exercisable within 60 days of December 31, 2014, all of which are held by Sino Honor, a British Virgin Islands company wholly-owned by Mr. Cao, (iv) 24,026 Class A ordinary shares in the form of ADSs, (v) 11,998 Class A ordinary shares issuable upon the exercise of options exercisable within 60 days of December 31, 2014, all of which are held by Mr. Cao, (vi) 28,584 Class A ordinary shares in the form of American depositary shares, (vii) one Class B ordinary share and (viii) 10,002 Class A ordinary shares issuable upon the exercise of options exercisable within 60 days of December 31, 2014, all of which are held by Flying Great Limited (“Flying Great”), a British Virgin Islands company wholly-owned by Mr. Cao. Mr. Cao expressly disclaims beneficial ownership in the 6,302,205 Class A and 337,230 Class B ordinary shares held by Sino Honor, which were allocated to award the Issuer’s employees and consultants under the Issuer’s 2006 Employee Share Vesting Scheme. The registered address of Sino Honor is P.O. Box 933, 3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The registered address of Flying Great is P.O. Box 933, 3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.
     
  (6) Consists of (i) 1,787,427 Class B ordinary shares held by Sequoia Capital China I, L.P., (ii) 205,385 Class B ordinary shares held by Sequoia Capital China Partners Fund I, L.P. and (iii) 276,649 Class B ordinary shares held by Sequoia Capital China Principals Fund I, L.P., (iv) 56,379 Class A ordinary shares in the form of ADSs held by Sequoia Capital China UR Holdings Limited and (v) 665,112 Class A ordinary shares in the form of ADSs held by Neil Nanpeng Shen. Sequoia Capital China I, L.P. Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China Principals Fund I, L.P. are collectively referred to as the Sequoia Funds. The Sequoia Funds are managed by Sequoia Capital China Advisors Limited, a company incorporated in the Cayman Islands. The Sequoia Funds’ general partner is Sequoia Capital China Management I, L.P. The general partner of Sequoia Capital China Management I, L.P. is SC China Holding Limited, a company incorporated in the Cayman Islands. SNP China Enterprises Limited, a company incorporated in the British Virgin Islands, is the director of and wholly owns SC China Holding Limited. Neil Nanpeng Shen is the director of and wholly owns SNP China Enterprises. The principal business office of Sequoia Capital China I., L.P. and its affiliates is 2800 Sand Hill Road, Suite 101, Menlo Park, CA 94025.
     
  (7) Consists of (i) one Class A ordinary share, (ii) 3,014,727 Class A ordinary shares in the form of ADSs, (iii) 11,232 Class B ordinary shares, (iv) 435,639 Class A ordinary shares issuable upon the exercise of options exercisable within 60 days of December 31, 2014, all of which are held by Strengthen Goal Limited (“Strengthen Goal”), a British Virgin Islands company wholly-owned by Mr. Shi, (v) 5,099 Class A ordinary shares in the form of ADSs, all of which are held by Mr. Shi, (vi) 855,849 Class A ordinary shares in the form of American depositary shares, (vii) one Class B ordinary share, all of which are held by Elite Wisdom Development Limited (“Elite Wisdom”), a British Virgin Islands company wholly-owned by Mr. Shi. Mr. Shi expressly disclaims beneficial ownership in the 3,014,728 Class A and 11,232 Class B ordinary shares held by Strengthen Goal, which were allocated to award the Issuer’s employees and consultants under the Issuer’s 2006 Employee Share Vesting Scheme. The registered address of Strengthen Goal Limited is P.O. Box 933, 3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands. The registered address of Elite Wisdom Development Limited is P.O. Box 933, 3rd Floor, Omar Hodge Building, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.
     
  (8) Global Village is wholly-owned by Fair Point. Fair Point is wholly-owned by a revocable trust constituted under the laws of Singapore with Hongyi Zhou and his wife as the settlers and Mr. Zhou as investment manager with sole voting and dispositive power and certain family members of Mr. Zhou as the beneficiaries. The registered address of Global Village is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.  The registered address of Fair Point is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
     
  (9) Young Vision is wholly-owned by East Line. East Line is wholly-owned by Mr. Qi.  The registered address of Young Vision is 2nd Floor, Abbott Building, Road Town, Tortola, British Virgin Islands. The registered address of East Line is Abbott Building, Road Town, Tortola, British Virgin Islands.  Young Vision and East Line expressly disclaims beneficial ownership in 574,039 Class B ordinary shares allocated to award our employees and consultants under our 2006 Employee Share Vesting Scheme.

 

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As of December 31, 2014, 193,416,331 of our ordinary shares, including 147,485,168 Class A ordinary shares and 45,931,163 Class B ordinary shares, were issued and outstanding. Based on a review of the register of members maintained by our Cayman Islands registrar, we believe that 147,418,884 ordinary shares, or approximately 76.2% of our issued and outstanding shares, were held by the record shareholders in the United States, represented by 98,279,256 ADSs held of record by The Bank of New York Mellon, the depositary of our ADS program.

 

Holders of our Class A ordinary shares are entitled to one vote per share, while holders of our Class B ordinary shares are entitled to five votes per share. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

Item 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.Major Shareholders

 

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

 

B.Related Party Transactions

 

The amounts due from related parties mainly represent borrowings provided by us to our investees in which we do not hold controlling interests, and amounts in connection with services provided by us to such investees, which arose in the ordinary course of business.

 

The amounts due to related parties mainly represent unpaid revenue sharing in connection with game operation, which arose in the ordinary course of business.

 

These transactions between us and related parties were insignificant, both individually and in aggregate.

 

Contractual Arrangements Among Our Subsidiaries, Our VIEs and the Respective Shareholders of the VIEs

 

Qizhi Software, our PRC operating subsidiary, is a wholly foreign-owned enterprise and is subject to PRC legal restrictions on foreign ownership in the telecommunications sector. See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulations Relating to Our Business — Telecommunications Regulations.” Accordingly, we conduct our business activities primarily through two VIEs, namely Beijing Qihu and Beijing Star World. The registered shareholders of Beijing Qihu, Beijing Star World and other VIEs are our shareholders, directors, officers or key employees, who directly or indirectly hold our shares, including Mr. Xiangdong Qi, our director and president. We, through Qizhi Software, have entered into contractual arrangements with Beijing Qihu, Beijing Star World and their respective registered shareholders, which enable us to:

 

·direct the activities that most significantly affect the economic performance of Beijing Qihu, Beijing Star World and their subsidiaries;

 

·receive substantially all of the economic benefits from Beijing Qihu and Beijing Star World that could be significant to them and as if we were their sole shareholder; and

 

·have an exclusive option to purchase all of the equity interests in Beijing Qihu and Beijing Star World when and to the extent permitted by PRC law.

 

Qizhi Software has also entered into similar contractual arrangements with twenty-one other VIEs that do not have significant business operations. Accordingly, we are considered the primary beneficiary of these VIEs and have consolidated the VIEs’ financial results of operations, assets and liabilities in our consolidated financial statements.

 

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Equity Disposition Agreements

 

Qizhi Software entered into equity disposition agreements with Beijing Qihu, Beijing Star World and their respective registered shareholders, who irrevocably granted Qizhi Software or its designated person exclusive options to purchase, when and to the extent permitted under PRC law, any part or all of the equity interests in Beijing Qihu and Beijing Star World. The exercise price for the options to purchase all of the equity interests in Beijing Qihu and Beijing Star World is the minimum amount of consideration permissible under the then applicable PRC law. The agreements have an initial term of ten years and are renewable at Qizhi Software’s sole discretion. These equity disposition agreements provide, among other things, that without Qizhi Software’s prior written consent:

  

·the registered shareholders of each VIE may not transfer, encumber, grant security interest in, or otherwise dispose of in any way any equity interests in their respective VIEs;

 

·Beijing Qihu and Beijing Star World may not sell, transfer, mortgage or otherwise dispose of in any way their respective assets, business or income, nor may they create any security interest therein (other than created in the ordinary course of their respective business);

 

·no shareholders resolution should be passed to increase or reduce the registered capital of each VIE or otherwise alter the capital structure of such VIE;

 

·the articles of association of each VIE should not be supplemented, altered or modified in any way;

 

·Beijing Qihu and Beijing Star World may not declare or pay any dividends to their respective registered shareholders;

 

·Beijing Qihu and Beijing Star World may not merge with any third parties, or purchase or transfer any assets or businesses from or to any third parties;

 

·Beijing Qihu and Beijing Star World may not engage in any transactions that may cause substantially adverse effects on their respective assets, obligations, operations, share capital and other rights;

 

·Beijing Qihu and Beijing Star World may not incur any indebtedness, except where transactions were entered into in the ordinary course of business; and

 

·the registered shareholders of the VIEs will apply the proceeds from the disposition of the shares of their respective VIEs to repay the loans extended by Qihoo 360 under the loan agreements described below.

 

Loan Agreements

 

Under loan agreements between Qihoo 360 and the registered shareholders of Beijing Qihu and Beijing Star World, as the case may be, Qihoo 360 extended loans of (i) an aggregate principal amount of RMB80 million ($12.0 million) to the registered shareholders of Beijing Qihu and (ii) an aggregate principal amount of RMB10 million ($1.5 million) to the registered shareholders of Beijing Star World. The registered shareholders obtained the loans to fund the initial registered capital of and contribute additional registered capital to Beijing Qihu and Beijing Star World, as the case may be. Each loan agreement has a term of five or ten years and is renewable for another ten-year term upon the parties’ agreement.

 

Equity Pledge Agreements

 

Under Qizhi Software’s equity pledge agreements with Beijing Qihu, Beijing Star World and their respective registered shareholders, the registered shareholders of Beijing Qihu and Beijing Star World pledged all of their respective equity interests in Beijing Qihu and Beijing Star World to Qizhi Software to secure the performance of the registered shareholders’, Beijing Qihu’s and Beijing Star World’s obligations under the business operation agreements and the equity disposition agreements described herein. If Beijing Qihu or Beijing Star World breaches any of their respective contractual obligations under these agreements seriously, Qizhi Software, as pledgee, will be entitled to dispose of the pledged equity interests. The registered shareholders of Beijing Qihu and Beijing Star World agreed not to dispose of or otherwise create any new encumbrance on their respective equity interests in Beijing Qihu and Beijing Star World or agree to Beijing Qihu and Beijing Star World merging with other entities or reorganizing in any other form, as the case may be, without Qizhi Software’s prior written consent. Unless terminated at Qizhi Software’s sole discretion, each equity pledge agreement has a term of ten years and will be automatically renewed upon the expiration of the ten-year term.

 

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Business Operation Agreements

 

Under the business operation agreements among Qizhi Software, Beijing Qihu and Beijing Star World, as the case may be, and the respective registered shareholders of Beijing Qihu and Beijing Star World, Beijing Qihu and Beijing Star World and their respective registered shareholders may not enter into any transaction that could materially affect the assets, liabilities, interests or operations of Beijing Qihu and Beijing Star World, as the case may be, without Qizhi Software’s prior written consent. In addition, directors, chairman, general managers, financial controllers or other senior managers of Beijing Qihu and Beijing Star World, as the case may be, must be Qizhi Software’s nominees appointed by the registered shareholders of Beijing Qihu and Beijing Star World. Each business operation agreement has a term of ten years and is renewable at Qizhi Software’s sole discretion.

 

Technology Consulting and Services Agreements

 

Under a technology development and licensing agreement dated July 1, 2011 between Qizhi Software and Beijing Qihu, Qizhi Software agreed to provide Beijing Qihu with technology development and support services related to Beijing Qihu’s 360 Safe Browser. Under this agreement, Beijing Qihu agreed to pay Qizhi Software RMB7.8 million ($1.2 million) within 30 days of the date of the agreement. In 2014, based on this agreement, Beijing Qihu agreed to pay RMB309 million ($50.17 million) in technology development and support service fees related to 360 Safe Browser to Qizhi Software.

 

Under a technology development agreement dated April 1, 2012 between Tianjin Qisi and Beijing Qihu, Tianjin Qisi agreed to provide Beijing Qihu with technology development services related to Beijing Qihu’s web information management platform. Beijing Qihu agreed to pay RMB5 million ($0.8 million) within 30 days from the date of the agreement and 5% of its revenues generated from the network business to Tianjin Qisi. This agreement has a term of four years. Afterwards, Tianjin Qisi and Beijing Qihu signed a supplementary agreement, which amended the amount Beijing Qihu would pay to Tianjin Qisi to be based on the monthly statement agreed with both parties. In 2014, pursuant to these agreements, Beijing Qihu paid RMB99 million ($16.14 million) to Tianjin Qisi.

 

Under a technology development agreement dated April 1, 2012 between Tianjin Qisi and Beijing Star World, Tianjin Qisi agreed to provide Beijing Star World with technology development services related to Beijing Star World’s 360 Game Browser. Under this agreement, Beijing Star World agreed to pay Tianjin Qisi RMB5.0 million ($0.8 million) within 30 days from the date of the agreement and 15% of its revenues generated from the operation of the 360 Game Browser. This agreement has a term of four years. Afterwards, Tianjin Qisi and Beijing Star World signed a supplementary agreement, which amended the amount that Beijing Star World would pay to Tianjin Qisi would be based on the monthly statement agreed with both parties. In 2014, pursuant to these agreements, Beijing Star World paid RMB250 million ($40.5 million) to Tianjin Qisi.

 

Under a technology development agreement dated September 15, 2012 between Beijing Star World and Qifei Xiangyi, Qifei Xiangyi agreed to provide Beijing Star World with technology development related to Beijing Star World’s game operation management system. Beijing Star World agreed to pay to Qifei Xiangyi RMB9.0 million ($1.4 million) as the fixed service fees in 2012 and certain percentage of revenues generated from the game business for the period between October 2012 to September 2017, based on both parties’ negotiation. Unless earlier terminated, this agreement has a term of five years. On December 1, 2012, Beijing Star World and Qifei Xiangyi signed a supplementary agreement, which amended the amount Beijing Star World would pay to Qifei Xiangyi would base on the monthly statement agreed with both parties. In 2014, pursuant to these agreements, Beijing Star World agreed to pay RMB490 million ($79.41 million) to Qifei Xiangyi.

 

Under a technology development agreement dated January 5, 2013 between Qizhi Software and Beijing Qihu, Qizhi Software agreed to provide Beijing Qihu with technology development and support services related to Beijing Qihu’s advertising business. Beijing Qihu agreed to pay RMB8 million ($1.3 million) within 30 days after the date of the agreement and 30% of Beijing Qihu’s revenues from its advertising business from March 2013 to January 2017 to Qizhi Software. This agreement has a term of four years. The amount Beijing Qihu would pay to Qizhi Software would base on the monthly statement agreed with both parties. In 2014, pursuant to these agreements, Beijing Qihu agreed to pay total of RMB309 million ($50.17 million) in technology development and support service fees related to its advertising business to Qizhi Software.

 

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Under a technology service agreement dated July 1, 2013 between Beijing Qichuang and 3G, Beijing Qichuang agreed to provide 3G with technology services related to 3G’s marketing platform of Internet virtual products. 3G agreed to pay 9.5% of 3G’s monthly general sales of virtual products from September 2013 to Beijing Qichuang. In 2014, pursuant to these agreements, 3G agreed to pay total of RMB432.2 million ($70.10 million) in technology service fees related to its marketing platform of Internet virtual products.

 

Under a technology development agreement dated September 10, 2013 between Qizhi Software and Beijing Star World, Qizhi Software agreed to provide Beijing Star World with technology development and support services related to Beijing Star World’s platform system of game hall software. Beijing Star World agreed to pay RMB8 million ($1.3 million) within 90 days after the date of the agreement and certain percentage of revenues generated from the game hall operation business for the period between October 2013 to June 2017, based on both parties’ negotiation. This agreement has a term of four years. In 2014, pursuant to these agreements, Beijing Star World agreed to pay total of RMB135 million ($21.87 million) in technology development and support service fees related to its business of game hall operation business to Qizhi Software.

 

Powers of Attorney

 

Each registered shareholder of Beijing Qihu and Beijing Star World has executed a power of attorney to appoint Qizhi Software to be his or her attorneys, and irrevocably authorize Qizhi Software to vote on his or her behalf on all of the matters concerning Beijing Qihu and Beijing Star World, as the case may be, that may require shareholders’ approval.

 

Spousal Consent Letter

 

The spouse of each married shareholder of Beijing Qihu and Beijing Star World has signed a spousal consent letter, whereby the spouse agrees that (i) the equity interests of Beijing Qihu and Beijing Star World owned by such shareholder will be disposed of only in accordance with the applicable Equity Disposition Agreement, Equity Pledge Agreement, Loan Agreement and other related agreements executed by the shareholder, (ii) such equity interests do not constitute communal property with such shareholder and (iii) the spouse irrevocably and unconditionally waives all rights and benefits with respect to such equity interests, including the right to sue in any court and under all applicable laws.

 

Concurrent Private Placement

 

In conjunction with our initial public offering in April 2011, affiliates of certain of our existing shareholders, or the private placement investors, purchased an aggregate of 5,172,414 Class A ordinary shares at the initial offering price of $14.50 per ADS. This investment was made pursuant to an offer exempt from registration with the SEC pursuant to Regulation S and Section 4(2) of the Securities Act. These private placement investors were TB Alternative Assets Ltd., Highland VII—PRI (2) S.à r.l., Highland VIIB—PRI (2) S.à r.l., Highland VIIC—PRI (2) S.à r.l., Highland ENT VII—PRI (2) S.à r.l., Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., and CDH Net Technology Limited. In connection with this investment, we paid a placement fee equal to 7% of the aggregate purchase price for the investment to UBS AG and Citigroup Global Markets Inc. as the placement agents and (ii) grant these private placement investors certain registration rights.

 

Employment Agreements

 

See “Item 6. Directors, Senior Management and Employees — C. Board Practices — Employment Agreements.”

 

Share Option Plan

 

See “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — Share Option Plans.”

 

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C.Interests of Experts and Counsel

 

Not applicable.

 

Item 8.FINANCIAL INFORMATION

 

A.Consolidated Statements and Other Financial Information

 

We have appended consolidated financial statements filed as part of this annual report.

 

Legal and Administrative Proceedings

  

In October 2010, Tencent Technology (Shenzhen) Company Ltd. and Shenzhen Tencent Computer Systems Company Limited, or Tencent, brought an unfair competitive practices claim against us in the Chaoyang District People’s Court of Beijing, alleging that we misled users with statements that Tencent’s QQ instant messaging program invades users’ privacy and seeking retraction of the statements and RMB4.0 million ($0.6 million) in damages. In September 2011, the court ruled that our actions constituted unfair competition and awarded RMB0.4 million ($0.1 million) as damages to Tencent. In November 2010, we brought a defamation claim against Tencent in the Xicheng District People’s Court of Beijing, alleging that Tencent made defamatory statements on its website against us and seeking retraction of the statements and RMB1.0 in nominal damages. In March 2012, we increased our sought damages to RMB1.0 million ($0.2 million). The court ruled in our favor, ordering Tencent to retract the defamatory statements and make public apology to our company on Tencent’s website in April 2014.

 

In June 2011, Tencent brought an unfair competitive practices claim against us in the Higher People’s Court of Guangdong province, alleging that our 360 QQ Bodyguard program interferes with users’ proper usage of Tencent’s QQ instant messaging program and seeking RMB125.0 million ($20.1 million) in damages, cessation of the unfair competitive practices and public apology. In April of 2013, the first instance judgment was issued by the Higher People’s Court of Guangdong province, which ruled in Tencent’s favor. We were ordered to pay Tencent a sum of RMB5.0 million ($0.8 million) and have accrued this as liabilities as of December 31, 2013. We appealed in May 2013 and the court of second instance upheld the judgment of the court of first instance in February 2014.

 

In November 2011, we brought a claim for abuse of dominant market position against Tencent in the Higher’s People’s Court of Guangdong province, alleging that Tencent engaged in monopolistic activities such as restricting users of its QQ instant messaging program from using our products and bundling its security programs with the QQ instant messaging program and seeking RMB150.0 million ($24.2 million) in damages, cessation of the monopolistic activities and public apology.  This claim was rejected by the court in the first instance judgment. We subsequently submitted our appeal in April 2013 and the court of second instance heard the case in November 2013. The court of second instance dismissed the appeal and sustained the original judgment of the court of first instance in October 2014.

 

In October 2012, two affiliates of Baidu brought an unfair competitive practices and copyright infringement claim against us in the First Intermediate People’s Court of Beijing, alleging that we breached the Robots Exclusion Protocol to access Baidu’s content without authorization and seeking RMB100.0 million ($16.1 million) in damages. The court heard the case in October 2013 and ruled that our actions constituted unfair competition and awarded RMB500,000 ($80,585) as damage to Baidu in August 2014. Baidu appealed in the Higher People’s Court of Beijing in August 2014. This case is currently pending.

 

In February 2013, we brought a defamation claim against Shanghai Jingwen Culture Communication Co., Ltd., or Shanghai Jingwen, in the Xuhui District People’s Court of Shanghai, alleging that Shanghai Jingwen published and distributed a series of false articles and reports against us on its website and electronic newspapers by maliciously accusing the level of safety and security of our products. We sought retraction of the defamatory statements, an apology from Shanghai Jingwen and RMB50.0 million ($8.1 million) in damages. In September 2014, the court ruled that Shanghai Jingwen’s actions constituted defamation and awarded RMB1.5 million ($0.2 million) and public apology to us. Shanghai Jingwen appealed to the First Intermediate People’s Court of Shanghai, and this case is currently pending.

 

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In October 2013, two affiliates of Sogou brought an unfair competitive practices claim against us in the Intermediate People’s Court of Xi’an, alleging that we used our software to change user default settings without their permission, including setting their default browser as our 360 Safe Browser, which interfered with their use of Sogou’s browser. The claim sought cessation of the unfair competitive practices and RMB45.5 million ($7.3 million) in damages. This case was heard in July 2014 and is currently pending. In September 2013, we brought an unfair competitive practices claim against two affiliates of Sogou , in the Second Intermediate People’s Court of Beijing, alleging that Sogou made defamatory statements on its public Weibo account and through online videos against us and seeking cessation of the unfair competitive practices, a retraction of the defamatory statements and RMB50.0 million ($8.1 million) in damages. This case was heard in May 2014 and the court ruled in December 2014 that the litigation shall be suspended, pending for the outcome of the unfair competition case brought by Sogou against us in Xi’an.

 

In October 2013, two affiliates of Sogou brought an unfair competitive practices claim against us in the Second Intermediate People’s Court of Beijing, alleging that our 360 Safe Guard issued blocking notifications for other types of software, which negatively impacted their ability to run their business. The claim sought cessation of the unfair competitive practices and RMB50.0 million ($8.1 million) in damages. In January 2015, the court ruled that our actions constituted unfair competition and awarded RMB5.1 million ($0.8 million) in damages to Sogou. We appealed to the Higher People’s Court of Beijing and the case is currently pending.

 

In December 2014, Baidu brought an unfair competitive practice claim against us in the Intellectual Property Court of Beijing, alleging that our 360 Safe Guard issued pop-up notifications to block Baidu’s security software and made defamatory comments against Baidu in user’s name. The claim sought cessation of the unfair competitive practices and RMB10.1 million ($1.6 million) in damages. This case is currently pending.

 

In December 2014, Baidu brought an unfair competitive practice claim against us in the Intellectual Property Court of Beijing, alleging that our search engine showed negative information when users are searching relevant key words to the Chinese characters of “Baidu” or “Li Yanhong,” which caused severe reputational damage to Baidu. The claim sought cessation of the unfair competitive practices and RMB10.2 million ($1.6 million) in damages. This case is currently pending.

 

In December 2014, Baidu brought an unfair competitive practice claim against us in the Intellectual Property Court of Beijing, alleging that we set ten key words in the pull-down menu of the search results prompt box of Baidu’s search engine and by clicking those key words the users would be redirected to the search results pages of 360 search engine. The claim sought cessation of the unfair competitive practices and RMB10.0 million ($1.6 million) in damages. This case is currently pending.

 

Other than the aforementioned, we are currently not a party to any material legal or administrative proceedings, and we are not aware of threatened material legal or administrative proceedings against us. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.

 

Based on information currently available, we cannot reasonably estimate the loss that is reasonably possible at this stage. No accrual for contingency loss was made as of December 31, 2012 and $0.9 million was accrued for two legal cases as of December 31, 2013. $0.9 million was accrued for two legal cases as of December 31, 2014.

 

Dividend Policy

 

We have never declared or paid any dividends on our ordinary shares. We do not anticipate paying any dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and expand our business.

 

Holders of our ADSs are entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our Class A ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, and the depositary will distribute them to the holders of ADSs, after deducting its fees and expenses, according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical.

  

B.Significant Changes

 

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

 

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Item 9.THE OFFER AND LISTING

 

A.Offering and Listing Details.

 

Our ADSs are listed on the New York Stock Exchange under the symbol “QIHU.” Every two ADSs represent three of our Class A ordinary shares. For the period from March 30, 2011 to April 24, 2015, the trading price of our ADSs on the New York Stock Exchange has ranged from $13.71 to $124.42 per ADS.

 

The following table provides the high and low trading prices for our ADSs on the New York Stock Exchange for the periods specified.

 

   Sales Price ($) 
   High   Low 
Annual High and Low          
2012   29.80    13.71 
2013   96.74    27.76 
2014   124.42    53.84 
           
Quarterly High and Low          
Second Quarter 2013   49.09    28.11 
Third Quarter 2013   94.90    46.43 
Fourth Quarter 2013   96.74    73.00 
First Quarter 2014   124.42    78.70 
Second Quarter 2014   105.49    74.10 
Third Quarter 2014   104.81    66.05 
Fourth Quarter 2014   76.70    53.84 
First Quarter 2015   63.47    44.56 
           
Monthly High and Low          
November 2014   76.70    65.54 
December 2014   73.61    53.84 
January 2015   61.80    54.38 
February 2015   63.47    45.68 
March 2015   54.72    44.56 
April 2015 (through April 24, 2015)   63.89    50.42 

 

B.Plan of Distribution

 

Not applicable.

 

C.Markets

 

Our ADSs, every two representing three of our Class A ordinary shares, have been listed on the New York Stock Exchange since March 30, 2011 under the symbol “QIHU.”

 

D.Selling Shareholders

 

Not applicable.

 

E.Dilution

 

Not applicable.

 

F.Expenses of the Issue

 

Not applicable.

 

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Item 10.ADDITIONAL INFORMATION

 

A.Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

 

We incorporate by reference into this annual report our fifth amended and restated memorandum and articles of association filed as Exhibit 3.2 to our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Securities and Exchange Commission on March 14, 2011.

 

C.Material Contracts

 

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

 

D.Exchange Controls

 

See “Item 4. Information on the Company — B. Business Overview — Regulations — Regulation of Foreign Currency Exchange and Dividend Distributions — Foreign Currency Exchange” and “— Dividend Distribution.”

 

E.Taxation

 

Cayman Islands Taxation

 

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. Payments of dividends and capital in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands income or corporation tax. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties that may be applicable on instruments executed in, or brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company.  There is no exchange control legislation under Cayman Islands law and accordingly there are no exchange control regulations imposed under Cayman Islands law.

 

People’s Republic of China Taxation

 

On March 16, 2007, the National People’s Congress, the PRC legislature, enacted the Enterprise Income Tax Law, which became effective on January 1, 2008, and on December 6, 2007, the State Council promulgated the Implementation Rules to the Enterprise Income Tax Law, or the Enterprise Income Tax Law Implementation Rules, which also became effective on January 1, 2008. Under the Enterprise Income Tax Law and the Enterprise Income Tax Law Implementation Rules, foreign invested enterprises, and domestic companies are subject to a uniform income tax rate of 25%, unless otherwise specified.

 

Under the Enterprise Income Tax Law and the Enterprise Income Tax Law Implementation Rules, dividends payable to foreign investors are subject to the PRC withholding tax at the rate of 10% unless the foreign investor’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a different withholding arrangement.

 

Under the Enterprise Income Tax Law, enterprises organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered PRC resident enterprises and therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. The Enterprise Income Tax Law Implementation Rules define the term “de facto management body” as the management body that exercises full and substantial control and management over the business, personnel, accounts and properties of an enterprise. We may be considered a PRC resident enterprise for enterprise income tax purposes, in which case: (i) we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income; (ii) dividend income received by us from our PRC subsidiaries would be exempt from the PRC withholding tax since such income is exempted under the Enterprise Income Tax Law for a PRC resident enterprise recipient; and (iii) dividends paid by us, and gains from the disposition of our ordinary shares or ADSs, may be subject to PRC withholding taxes.

 

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U.S. Federal Income Taxation

 

The following discussion describes material U.S. federal income tax consequences to U.S. Holders (as defined below) under current law of an investment in the ADSs or the Class A ordinary shares to which such ADSs relate. This discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets (generally, property held for investment) and that have the U.S. dollar as their functional currency.

 

This discussion is based on the tax laws of the United States as of the date of this annual report, including U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

 

The following discussion neither deals with the tax consequences to any particular investor nor describes all of the tax consequences applicable to persons in special tax situations such as:

 

·banks;

 

·certain financial institutions;

 

·insurance companies;

 

·regulated investment companies;

 

·real estate investment trusts;

 

·broker-dealers;

 

·traders that elect to use mark-to-market method of accounting;

 

·U.S. expatriates or entities covered by U.S. anti-inversion tax rules;

 

·tax-exempt entities;

 

·persons liable for alternative minimum tax;

 

·persons holding an ADS or ordinary shares as part of a straddle, hedging, conversion or integrated transaction;

 

·persons holding an ADS or ordinary shares through a bank, financial institution or other entity, or a branch thereof, located, organized or resident outside the United States;

 

·persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock;

 

·persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; or

 

·partnerships or pass-through entities, or persons holding ADSs or ordinary shares through such entities.

 

In addition, the discussion below does not describe any tax consequences arising out of the 3.8% Medicare tax on “net investment income.”

 

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INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.

 

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes:

 

·an individual who is a citizen or resident of the United States;

 

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

 

·an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

·a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. If you own ADSs, you should be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs should not be subject to U.S. federal income tax. The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the underlying security (for example, pre-releasing ADSs to persons that do not have the beneficial ownership of the securities underlying the ADSs). Accordingly, the creditability of any PRC taxes and the availability of the reduced tax rate for dividends received by non-corporate holders (as described below) could be affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of ADSs are not properly treated as beneficial owners of underlying ordinary shares.

 

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

 

Subject to the PFIC rules discussed below, the gross amount of any distributions we make to you with respect to the ADSs or ordinary shares (including any amounts withheld to reflect PRC withholding taxes) generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Any such dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

 

To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits (as determined under U.S. federal income tax principles), such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to the extent such excess amount exceeds your tax basis in your ADSs or ordinary shares, as capital gain. We currently do not, and we do not intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore, a U.S. Holder should expect that any distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return of capital or as capital gain under the rules described above.

 

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With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, any dividends generally may be taxed at the lower capital gains rate applicable to “qualified dividend income,” provided that (1) either (a) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States or (b) we are eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program, (2) we are neither a PFIC nor treated as such with respect to you (as discussed below) for the taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period under clause (3) has been met. Under U.S. Internal Revenue Service authority, ADSs will be considered for purposes of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the New York Stock Exchange, as our ADSs are expected to be. However, based on existing guidance, it is not entirely clear whether any dividends that you receive with respect to the ordinary shares will be taxed as qualified dividend income, because the ordinary shares are not themselves listed on a U.S. exchange. Furthermore, there can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. If we are treated as a “resident enterprise” for PRC tax purposes under the Enterprise Income Tax Law (see Item 3. Key Information—D. Risk Factors—Risks Related To Doing Business In China— We may be subject to PRC taxation on our worldwide income.”), we may be eligible for the benefits of the income tax treaty between the United States and the PRC. If we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would be subject to the reduced rates of taxation. You should consult your tax advisors regarding the availability of the lower capital gains rate applicable to qualified dividend income for any dividends paid with respect to our ADSs or ordinary shares.

 

Any dividends we pay generally will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation will in general be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, any dividends distributed by us with respect to the ADSs or ordinary shares will generally constitute “passive category income” but could, in the case of certain U.S. Holders, constitute “general category income.”

 

If PRC withholding taxes apply to any dividends paid to you with respect to our ADSs or ordinary shares (see “Item 3. Key Information—D. Risk Factors—Risks Related To Doing Business In China— Dividends we receive from our PRC subsidiaries, dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.”), the amount of the dividends would include the withheld PRC taxes and, subject to certain conditions and limitations (including a minimum holding period requirement), such PRC withholding taxes generally will be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the foreign tax credit are complex and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances, including the effects of any applicable income tax penalties.

 

Taxation of Disposition of ADSs or Ordinary Shares

 

Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized for the ADS or ordinary share and your tax basis in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you may be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.

 

Any gain or loss that you recognize on a disposition of ADSs or ordinary shares will generally be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, if we are treated as a “resident enterprise” for PRC tax purposes, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares (see “Item 3. Key Information—D. Risk Factors—Risks Related To Doing Business In China— Dividends we receive from our PRC subsidiaries, dividends payable by us to our foreign investors and gain on the sale of our shares may become subject to PRC withholding taxes under PRC tax laws.”), a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit purposes. If we are not eligible for the tax treaty, then you may not be able to use the foreign tax credit arising from any PRC tax imposed on the disposition of our ADSs or ordinary shares unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances, including the effects of any applicable income tax treaties.

 

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Passive Foreign Investment Company

 

Based on the market price of our ADSs, the current and anticipated value of our assets, including goodwill, and composition of our income and assets, we do not believe we were a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2013. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that we will not be a PFIC for any taxable year or that the U.S. Internal Revenue Service will not take a contrary position.

  

A non-U.S. corporation will be a PFIC for U.S. federal income tax purposes for any taxable year if, applying certain look-through rules, either:

 

·at least 75% of its gross income for such year is passive income; or

 

·at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income.

 

Passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person).

 

For this purpose, we will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% (by value) of the stock. In applying this rule, while it is not clear, we believe that the contractual arrangements between us and our affiliated entities should be treated as ownership of stock.

 

A separate determination must be made after the close of each taxable year as to whether we were a PFIC for that year. Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2014, or any future taxable year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or ordinary shares, fluctuations in the market price of the ADSs or ordinary shares may cause us to become a PFIC. In addition, changes in the composition of our income or assets may cause us to become a PFIC.

 

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares. If such election is timely made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value on the last day of the last taxable year in which were a PFIC and any gain from such deemed sale would be subject to the consequences described in the following two paragraphs. In addition, a new holding period would be deemed to begin for the ADSs or ordinary shares for purposes of the PFIC rules. After the deemed sale election, your ADSs or ordinary shares with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.

 

For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you recognize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

 

·the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary shares;

 

·the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and

 

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·the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

In addition, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us (as described above under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares”) if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.

 

The tax liability for amounts allocated to taxable years prior to the year of disposition or excess distribution cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale or other disposition of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

 

If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our subsidiaries are also PFICs or we make direct or indirect equity investments in other entities that are PFICs, you may be deemed to own shares in such lower-tier PFICs that are directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary shares you own bears to the value of all of our ADSs or ordinary shares, and you may be subject to the adverse tax consequences described in the preceding two paragraphs with respect to the shares of such lower-tier PFICs that you would be deemed to own. You should consult your tax advisors regarding the application of the PFIC rules to any of our subsidiaries.

 

A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock to elect out of the PFIC rules described above regarding excess distributions and recognized gains. If you make a mark-to-market election for the ADSs or ordinary shares, you will include in income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or other disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election, any distributions that we make would generally be subject to the tax rules discussed above under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares,” except that the lower rate applicable to qualified dividend income would not apply.

 

The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. We expect that our ADSs will be listed on the New York Stock Exchange, which is a qualified exchange or other market for these purposes. Consequently, if the ADSs are listed on New York Stock Exchange and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available to you if we were to become a PFIC. It should also be noted that only the ADSs and not our ordinary shares are expected to be listed on the New York Stock Exchange. Consequently, if you are a holder of ordinary shares that are not represented by ADSs, it is not entirely clear whether you will be eligible to make a mark-to-market election if we are or become a PFIC. In addition, because a mark-to-market election cannot be made for equity interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC rules with respect to its indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests in any lower-tier PFICs.

 

Alternatively, if a non-U.S. corporation is a PFIC, a holder of shares in that corporation may avoid taxation under the PFIC rules described above regarding excess distributions and recognized gains by making a “qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.

 

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Unless otherwise provided by the U.S. Treasury, each U.S. Holder of a PFIC is required to file an annual report containing such information as the U.S. Treasury may require. If we are or become a PFIC, you should consult your tax advisor regarding any reporting requirements that may apply to you.

 

You should consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares and the elections discussed above.

 

Information reporting and backup withholding

 

Any dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number and makes any other required certification or that is otherwise exempt from backup withholding. U.S. Holders that are required to establish their exempt status generally must provide such certification on U.S. Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

 

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service and furnishing any required information in a timely manner.

 

Certain U.S. Holders who are individuals may be required to report information relating to an interest in our ADSs or ordinary shares, subject to certain exceptions (including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions). U.S. Holders should consult their tax advisors regarding the effect, if any, of these rules on their ownership and disposition of the ADSs or ordinary shares.

 

U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

We have previously filed with the Commission our registration statements on Form F-1 (File Number 333-172816), as amended.

 

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year for fiscal years ending on or after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at Judiciary Plaza, 100 F Street, N.E., Washington, D.C. 20549, and at the regional office of the Securities and Exchange Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

 

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We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

 

In accordance with the New York Stock Exchange Rules 203.01, we will post this annual report on Form 20-F on our website http://www.360.cn. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.

 

I.Subsidiary Information

 

For a listing of our subsidiaries, see “Item 4. Information on the Company — C. Organizational Structure”.

 

Item 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Inflation

 

Inflation in China has not materially impacted our results of operations. However, China has recently experienced a significant increase in inflation levels, which may materially impact our results of operations. According to the National Bureau of Statistics of China, the consumer price index in China increased by 2.6%, 2.6% and 2.0% year-over-year for the years ended December 31, 2012, 2013 and 2014.

 

Foreign Exchange Risk

 

Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of preferred shares through private placement transactions and proceeds from our initial public offering. We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although we believe our exposure to foreign exchange risks is limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.

 

The value of the RMB against the U.S. dollar and other currencies may fluctuate depending on many factors, including changes in China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the revised policy, the RMB may fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar.

 

There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the RMB against foreign currencies. On June 20, 2010, the People’s Bank of China announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. Between June 20, 2010 and December 31, 2014, the RMB appreciated by approximately 8.7% against the U.S. dollar.

 

To the extent that we need to convert U.S. dollars we receive from our initial public offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would adversely affect the RMB amount we receive from the conversion. Our U.S. dollar denominated cash balance was $122.6 million, $339.7 million and $968.6 million as of December 31, 2012, 2013 and 2014, respectively. A 1.0% increase in the value of the RMB against the U.S. dollar would have decreased this U.S. dollar denominated cash balance by RMB7.6 million, RMB20.6 million and RMB60.1 million as of December 31, 2012, 2013, and 2014, respectively.

 

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Interest Rate Risk

 

Our exposure to interest rate risk primarily relates to the interest income generated by cash in bank deposits. We have not used any derivative financial instruments to manage our interest risk exposure. Interest earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. An increase in interest rates, however, may raise the cost of any debt we incur in the future. In addition, our future interest income may be lower than expected due to changes in market interest rates.

 

A 1.0% decrease in interest rates would have decreased our interest income for the year ended December 31, 2014 from $25.6 million to $17.4 million.

 

Item 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.Debt Securities

 

Not applicable.

 

B.Warrants and Rights

 

Not applicable.

 

C.Other Securities

 

Not applicable.

 

D.American Depositary Shares

 

According to our Deposit Agreement with our ADS depositary, The Bank of New York Mellon, the depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

 

Persons depositing or withdrawing Class A ordinary
shares or ADS holders must pay:		   For:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)   · Issuance of ADSs, including issuances resulting from a distribution of ordinary shares or rights or other property
    · Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
$.05 (or less) per ADS   · Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities distributed to you had been Class A ordinary shares and the Class A ordinary shares had been deposited for issuance of ADSs   · Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders
$.05 (or less) per ADSs per calendar year   · Depositary services
Registration or transfer fees   · Transfer and registration of Class A ordinary shares on our ordinary share register to or from the name of the depositary or its agent when you deposit or withdraw Class A ordinary shares
Expenses of the depositary   · Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
    · converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or Class A ordinary share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes   · As necessary
       
Any charges incurred by the depositary or its agents for servicing the deposited securities   · As necessary

 

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The fees described above may be amended from time to time.

 

The depositary has agreed to reimburse us for expenses we incur that are related to establishment and maintenance of the ADR program, including investor relations expenses and stock exchange application and listing fees. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects from investors. In 2014, we received reimbursements from the depositary of nil.

 

PART II

 

Item 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

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

 

See “Item 10. Additional Information” for a description of the rights of securities holders, which remain unchanged.

 

Use of Proceeds

 

The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File Number 333-172816) for our initial public offering of 13,927,420 ADSs, representing 20,891,130 Class A ordinary shares, which registration statement was declared effective by the SEC on March 29, 2011.

 

For the period from the effective date of our registration statement to December 31, 2014, we estimate that our expenses incurred and paid to others in connection with the issuance and distribution of the ADSs totaled $20.4 million, which included $17.6 million for underwriting discounts and commissions and $2.8 million for other expenses. We received net proceeds of approximately $231.5 million from our initial public offering.

 

For the period from the effective date our registration statement to December 31, 2014, we used, from the proceeds of our initial public offering, approximately $190.0 million for the enhancement of our R&D capabilities to further develop technologies and the development of new Internet and mobile security products and services.

 

Item 15.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officers, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.

 

Based upon that evaluation, our management has concluded that, as of December 31, 2014, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officers, to allow timely decisions regarding required disclosure.

 

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Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act, for our company.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 using criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our management has excluded from its assessment of internal control over financial reporting that of MV Holding Company Limited and its subsidiaries (collectively, “MediaV”) and Legendsec Information Technology (Beijing) Co. Ltd. and its subsidiary (collectively, “Legendsec”), which were acquired, respectively, in May 2014 and October 2014, as the time between the dates of acquisition and December 31, 2014 was inadequate to complete an effective assessment of the internal control of these companies as well as insufficient to effectively implement and roll out any meaningful changes. Management has also concluded that any potential risk of adverse impact on our group with internal control over financial reporting is not material.

 

The aggregated total assets (including goodwill and intangible assets acquired), net assets (including goodwill and intangible assets acquired), net revenues and net loss of MediaV and Legendsec represented approximately 3.5% of our total assets, 5.7% of our net assets, 3.2% of our net revenues and 0.2% of our net income, respectively, on a consolidated basis, as of and for the year ended December 31, 2014.

 

Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2014 based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our independent registered public accounting firm, Deloitte Touche Tohmatsu Certified Public Accountants LLP, who audited the financial statements included in this annual report on Form 20-F, has issued an attestation report on our internal control over financial reporting.

 

Changes in Internal Control Over Financial Reporting

 

Management has evaluated whether any changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, management has concluded that no such changes occurred during the period covered by this annual report on Form 20-F.

 

102
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Qihoo 360 Technology Co. Ltd.

 

We have audited the internal control over financial reporting of Qihoo 360 Technology Co. Ltd. (the "Company"), and its subsidiaries, its variable interest entities ("VIEs") and VIEs' subsidiaries (collectively, the "Group") as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at MV Holding Company Limited and its subsidiaries (collectively, “MediaV”) and Legendsec Information Technology (Beijing) Co. Ltd. and its subsidiary (collectively, “Legendsec”), which were acquired, respectively in May 2014 and October 2014, whose aggregated financial statements constitute 3.5% of total assets, 5.7% of net assets, 3.2% of net revenues, and 0.2% of net income of the Group’s consolidated financial statement amounts as of and for the year ended December 31, 2014. Accordingly, our audit did not include the internal control over financial reporting at MediaV and Legendsec. The Group's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2014 of the Group and our report dated April 27, 2015 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

 

Deloitte Touche Tohmatsu Certified Public Accountants LLP

 

Beijing, the People's Republic of China

 

April 27, 2015

 

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Item 16A.AUDIT COMMITTEE FINANCIAL EXPERT

 

All the members of our audit committee, namely, Dr. Eric Chen, Mr. Ming Huang and Dr. Jianwen Liao, satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 under the Exchange Act. Mr. Ming Huang, Dr. Jianwen Liao and Dr. Eric Chen qualify as “audit committee financial expert” as defined in Item 16A of Form 20-F.

 

Item 16B.CODE OF ETHICS

 

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-172816) filed with the Securities and Exchange Commission on March 29, 2011 and posted the code on our website http://www.360.cn. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.

 

Item 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated.

 

   2013   2014 
Audit fees (1)  $1,600,000   $2,140,000 
Audit-related fees (2)  $339,000   $756,000 
Tax fees (3)  $118,000   $169,000 

 

(1)             “Audit fees” means the aggregate fees billed for each of the fiscal years for professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.

 

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

 

(3)             “Tax fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for tax compliance, tax advice, and tax planning.

 

The policy of our audit committee is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP, including audit services, audit-related services, tax services and other services as described above.

 

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

 

Not applicable.

 

 

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

 

In January 2012, our board of directors and shareholders approved a share repurchase program, which provided authorization to purchase up to $50 million worth of our outstanding ADSs.  This program expired in January 2013. In October 2014, our board of directors and shareholders approved another share repurchase program, which provided authorization to purchase up to $200 million worth of our outstanding ADSs.  This program was completed in February 2015. The following table sets forth the number of ADSs we purchased, as well as the aggregate consideration for the purchase (including transaction fees), through open-market transactions during the course of the two share repurchase programs.

 

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Issuer Purchases of Equity Securities
Period  Total Number of
ADSs Purchased		   Average Price
Paid per ADS		   Total Number of
ADSs Purchased
as Part of the
Publicly
Announced
Programs		   Approximate
Dollar Value of
Shares that May
Yet be
Purchased
Under the
Program		 
July 2012   900   $14.50    900   $49,986,951 
August 2012   8,796   $14.31    9,696   $49,861,073 
December 2014   1,812,750   $59.69    1,812,750   $91,799,141 
January 2015   1,204,430   $58.11    3,017,180   $21,812,186 
February 2015   373,767   $58.36    3,390,947   $23 

 

Item 16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

Item 16G.CORPORATE GOVERNANCE

 

We intend to follow the applicable corporate governance standards under the New York Stock Exchange Listed Company Manual.

 

NYSE Listed Company Manual Section 302.00 requires each issuer to hold an annual meeting of shareholders during each fiscal year. However, NYSE Listed Company Manual permits foreign private issuers like us to follow “home country practice” in certain corporate governance matters. Our Cayman Islands counsel has provided a letter to the NYSE certifying that under Cayman Islands law, we are not required to hold annual shareholder meetings every year. We follow home country practice with respect to annual meetings and did not hold an annual meeting of shareholders in 2014. We may, however, hold annual shareholder meetings in the future if there are significant issues that require shareholders’ approvals.

 

Other than the annual meeting practice described above, there are no significant differences between our corporate governance practices and those followed by U.S. domestic companies under NYSE Listed Company Manual.

 

PART III

 

Item 17.FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

Item 18.FINANCIAL STATEMENTS

 

The consolidated financial statements of Qihoo 360, its subsidiaries, its VIEs and the VIEs’ subsidiaries are included at the end of this annual report.

 

Item 19.EXHIBITS

 

1.1   Amended and Restated Memorandum and Articles of Association of Qihoo 360 Technology Co. Ltd., as currently in effect (incorporated by reference to Exhibit 3.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

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2.1   Specimen American Depositary Receipt of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
2.2   Specimen Certificate for Class A ordinary shares of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
2.3   Form of Deposit Agreement, among Qihoo 360 Technology Co. Ltd., the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.1   2006 Employee Share Option Scheme (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.2   2006 Employee Share Vesting Scheme (incorporated by reference to Exhibit 10.2 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.3   Form of Employment Agreement (incorporated by reference to Exhibit 10.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.4   Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.5   Share Subscription Agreement dated December 22, 2009 by and among Qihoo 360 Technology Co. Ltd., Qizhi Software (Beijing) Co., Ltd., Beijing 3G3W Science & Technology Co., Ltd., Beijing Qibu Tianxia Technology Co., Ltd., Beijing Qihu Technology Company Limited, Qihoo 360 Software (Beijing) Company Limited, Shanghai Qitai Technology Company Limited, Beijing Star World Technology Company Limited, Chengdu Qiying Technology Company Limited and the investors named in schedule I thereto (incorporated by reference to Exhibit 10.5 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.6   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.6 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.7   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.7 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.8   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.8 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.9   Acknowledgement and Agreement of Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.9 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.10   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.10 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

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4.11   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.11 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.12   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.12 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.13   Acknowledgement and Agreement of Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.13 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.14   Joinder Agreement to the Share Subscription Agreement, Shareholders’ Agreement, Registration Rights Agreement and Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and IDG Technology Venture Investment IV, LP dated April 26, 2010 (incorporated by reference to Exhibit 10.14 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.15   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.15 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.16   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.16 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.17   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.17 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.18   Acknowledgement and Agreement of Sequoia Capital China Principals Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.18 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.19   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.19 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.20   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.20 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.21   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1, 2008 (incorporated by reference to Exhibit 10.32 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

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4.22   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated October 20, 2008 (incorporated by reference to Exhibit 10.33 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.23   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated March 15, 2009 (incorporated by reference to Exhibit 10.34 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.24   English translation of Loan Agreement among Qihoo Technology Company Limited and Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.35 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.25   English translation of Loan Agreement among Qihoo Technology Company Limited and Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.36 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.26   English translation of Loan Agreement among Qihoo Technology Company Limited and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.37 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.27   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.38 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.28   English translation of Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong, Xiaohong Shi and Beijing Qihu Technology Company Limited dated October 18, 2010 (incorporated by reference to Exhibit 10.39 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.29   English translation of Business Operation Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Qihu Technology Company Limited, Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.40 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.30   English translation of Supplementary Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated June 1, 2010 (incorporated by reference to Exhibit 10.45 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.31   English translation of Supplementary Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated September 1, 2010 (incorporated by reference to Exhibit 10.46 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.32   English translation of Confirmation Letter between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated November 1, 2010 (incorporated by reference to Exhibit 10.47 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.33   English translation of Power of Attorney issued by Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.48 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

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4.34   English translation of Power of Attorney issued by Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.49 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.35   English translation of Power of Attorney issued by Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.50 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.36   Supplementary Subscription, Amendment and Adherence Agreement relating to Qihoo Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.54 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.37   Adherence and Amendment to the Shareholders Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.55 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.38   Adherence and Amendment to the Registration Rights Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.56 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.39   Adherence and Amendment to the Share Incentive Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.57 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.40   Share Subscription Agreement dated March 14, 2011 (incorporated by reference to Exhibit 10.58 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.41   Registration Rights Agreement dated March 14, 2011 (incorporated by reference to Exhibit 10.59 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.42   2011 Share Incentive Plan (incorporated by reference to Exhibit 10.60 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.43   Termination Agreement dated November 2, 2012 between Beijing Qihu Technology Co., Ltd. and Google Ireland Limited (incorporated by reference to Exhibit 4.54 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.44   Purchase Agreement for Floors One to Four of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd. (incorporated by reference to Exhibit 4.55 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.45   Purchase Agreement for Floors Five to Nineteen of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qifei Xiangyi (Beijing) Software Co., Ltd. (incorporated by reference to Exhibit 4.56 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.46   Purchase Agreement for Ground Floor of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd. (incorporated by reference to Exhibit 4.57 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)

 

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4.47    Purchase Agreement for Floors Two to Seventeen of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qizhi Software (Beijing) Co., Ltd. (incorporated by reference to Exhibit 4.58 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013) 
     
4.48   English translation of Supplementary Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011 (incorporated by reference to Exhibit 4.59 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.49   English translation of Supplementary Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011 (incorporated by reference to Exhibit 4.60 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.50   English translation of Business Operation Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhenyu Xie, Jianming Dong and Zhengyu Chen dated December 17, 2009 (incorporated by reference to Exhibit 4.61 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.51   English translation of Exclusive Technology Consultancy and Service Agreement among Qizhi Software (Beijing) Co., Ltd. and Beijing Star World Technology Co., Ltd dated October 12, 2009 (incorporated by reference to Exhibit 4.62 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.52   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012 (incorporated by reference to Exhibit 4.63 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.53   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.64 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.54   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012 (incorporated by reference to Exhibit 4.65 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.55   English translation of Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhengyu Xie, Jianming Dong and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.66 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.56   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012 (incorporated by reference to Exhibit 4.67 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.57   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.68 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.58   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012 (incorporated by reference to Exhibit 4.69 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.59   English translation of Power of Attorney issued by Jianming Dong to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.70 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)

 

110
 

 

4.60   English translation of Power of Attorney issued by Zhengyu Chen to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.71 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.61   English translation of Power of Attorney issued by Zhenyu Xie to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.72 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.62   English translation of Spousal Consent Letter issued by Chunxia He dated October 18, 2010 (incorporated by reference to Exhibit 4.73 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.63   English translation of Spousal Consent Letter issued by Xun Guo dated October 18, 2010 (incorporated by reference to Exhibit 4.74 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.64   English translation of Spousal Consent Letter issued by Jianxin Gao dated October 18, 2010 (incorporated by reference to Exhibit 4.75 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.65   English translation of Spousal Consent Letter issued by Chunxia He dated April 26, 2012 (incorporated by reference to Exhibit 4.76 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.66   English translation of Spousal Consent Letter issued by Lie Deng dated April 26, 2012 (incorporated by reference to Exhibit 4.77 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.67   English translation of Spousal Consent Letter issued by Chunchao Zheng dated April 26, 2012 (incorporated by reference to Exhibit 4.78 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.68   Indenture dated September 5, 2013, constituting $600 million 2.5% convertible senior notes due September 15, 2018 (incorporated by reference to Exhibit 4.79 to our annual report on Form 20-F, initially filed with the Commission on April 25, 2014)
     
4.69*   Indenture dated August 6, 2014, constituting $450 million 0.50% convertible senior notes due August 15, 2020
     
4.70*   Indenture dated August 6, 2014, constituting $450 million 1.75% convertible senior notes due August 15, 2021
     
4.71*  

Share Subscription Agreement dated December 16, 2014, by and among Tech Time Development, Coolpad E-commerce Inc. and Coolpad Group Limited.

 

 8.1*   Significant Subsidiaries of the Registrant
     
11.1   Amended and Restated Code of Business Conduct and Ethics of Qihoo 360 Technology Company Limited (incorporated by reference to Exhibit 11.1 to our annual report on Form 20-F, initially filed with the Commission on April 25, 2014)
     
12.1*   CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
12.2*   CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
12.3*   Co-CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
13.1*   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
13.2*   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  

111
 

 

13.3*   Co-CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  
       
15.1*   Consent of Commerce & Finance Law Offices  
       
15.2*   Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP  
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

  

 

 * Filed with this annual report on Form 20-F.

 

112
 

 

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

    Qihoo 360 Technology Co. Ltd.
     
    /s/ Hongyi Zhou
    Name: Hongyi Zhou
    Title: Chairman and Chief Executive Officer
     
Date: April 27, 2015    

 

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EXHIBIT INDEX

 

1.1   Amended and Restated Memorandum and Articles of Association of Qihoo 360 Technology Co. Ltd., as currently in effect (incorporated by reference to Exhibit 3.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
2.1   Specimen American Depositary Receipt of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
2.2   Specimen Certificate for Class A ordinary shares of Qihoo 360 Technology Co. Ltd. (incorporated by reference to Exhibit 4.2 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
2.3   Form of Deposit Agreement, among Qihoo 360 Technology Co. Ltd., the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.1   2006 Employee Share Option Scheme (incorporated by reference to Exhibit 10.1 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.2   2006 Employee Share Vesting Scheme (incorporated by reference to Exhibit 10.2 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.3   Form of Employment Agreement (incorporated by reference to Exhibit 10.3 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.4   Form of Indemnification Agreement (incorporated by reference to Exhibit 10.4 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.5   Share Subscription Agreement dated December 22, 2009 by and among Qihoo 360 Technology Co. Ltd., Qizhi Software (Beijing) Co., Ltd., Beijing 3G3W Science & Technology Co., Ltd., Beijing Qibu Tianxia Technology Co., Ltd., Beijing Qihu Technology Company Limited, Qihoo 360 Software (Beijing) Company Limited, Shanghai Qitai Technology Company Limited, Beijing Star World Technology Company Limited, Chengdu Qiying Technology Company Limited and the investors named in schedule I thereto (incorporated by reference to Exhibit 10.5 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.6   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.6 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.7   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.7 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.8   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.8 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

114
 

  

4.9   Acknowledgement and Agreement of Ceyuan Ventures II, L.P. dated April 26, 2010 (incorporated by reference to Exhibit 10.9 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.10   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.10 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.11   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.11 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.12   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.12 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.13   Acknowledgement and Agreement of Ceyuan Advisors Fund II, LLC dated April 26, 2010 (incorporated by reference to Exhibit 10.13 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.14   Joinder Agreement to the Share Subscription Agreement, Shareholders’ Agreement, Registration Rights Agreement and Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., GMO Venture Partners Investment Limited Partnership and IDG Technology Venture Investment IV, LP dated April 26, 2010 (incorporated by reference to Exhibit 10.14 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.15   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.15 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.16   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.16 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.17   Joinder Agreement to the Share Incentive Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.17 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.18   Acknowledgement and Agreement of Sequoia Capital China Principals Fund I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.18 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.19   Joinder Agreement to the Share Subscription Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.19 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.20   Joinder Agreement to the Registration Rights Agreement among Qihoo 360 Technology Co. Ltd., Sequoia Capital China Partners Fund I, L.P. and Sequoia Capital China I, L.P. dated January 29, 2010 (incorporated by reference to Exhibit 10.20 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

115
 

 

4.21   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated May 1, 2008 (incorporated by reference to Exhibit 10.32 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.22   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated October 20, 2008 (incorporated by reference to Exhibit 10.33 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.23   English translation of Technology Development Agreement among Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated March 15, 2009 (incorporated by reference to Exhibit 10.34 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.24   English translation of Loan Agreement among Qihoo Technology Company Limited and Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.35 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.25   English translation of Loan Agreement among Qihoo Technology Company Limited and Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.36 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.26   English translation of Loan Agreement among Qihoo Technology Company Limited and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.37 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.27   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.38 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.28   English translation of Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Xiangdong Qi, Jianming Dong, Xiaohong Shi and Beijing Qihu Technology Company Limited dated October 18, 2010 (incorporated by reference to Exhibit 10.39 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.29   English translation of Business Operation Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Qihu Technology Company Limited, Xiangdong Qi, Jianming Dong and Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.40 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.30   English translation of Supplementary Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated June 1, 2010 (incorporated by reference to Exhibit 10.45 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.31   English translation of Supplementary Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated September 1, 2010 (incorporated by reference to Exhibit 10.46 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)

 

116
 

 

4.32   English translation of Confirmation Letter between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated November 1, 2010 (incorporated by reference to Exhibit 10.47 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.33   English translation of Power of Attorney issued by Xiangdong Qi dated October 18, 2010 (incorporated by reference to Exhibit 10.48 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.34   English translation of Power of Attorney issued by Jianming Dong dated October 18, 2010 (incorporated by reference to Exhibit 10.49 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.35   English translation of Power of Attorney issued by Xiaohong Shi dated October 18, 2010 (incorporated by reference to Exhibit 10.50 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.36   Supplementary Subscription, Amendment and Adherence Agreement relating to Qihoo Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.54 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.37   Adherence and Amendment to the Shareholders Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.55 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.38   Adherence and Amendment to the Registration Rights Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.56 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.39   Adherence and Amendment to the Share Incentive Agreement relating to Qihoo 360 Technology Company Limited dated January 1, 2011 (incorporated by reference to Exhibit 10.57 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.40   Share Subscription Agreement dated March 14, 2011 (incorporated by reference to Exhibit 10.58 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.41   Registration Rights Agreement dated March 14, 2011 (incorporated by reference to Exhibit 10.59 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.42   2011 Share Incentive Plan (incorporated by reference to Exhibit 10.60 from our F-1 registration statement (File No. 333-172816), as amended, initially filed with the Commission on March 14, 2011)
     
4.43   Termination Agreement dated November 2, 2012 between Beijing Qihu Technology Co., Ltd. and Google Ireland Limited (incorporated by reference to Exhibit 4.54 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.44   Purchase Agreement for Floors One to Four of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd. (incorporated by reference to Exhibit 4.55 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)

 

117
 

 

4.45   Purchase Agreement for Floors Five to Nineteen of Tower A of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qifei Xiangyi (Beijing) Software Co., Ltd. (incorporated by reference to Exhibit 4.56 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.46   Purchase Agreement for Ground Floor of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Beijing Qichuang Yousheng Keji Co., Ltd. (incorporated by reference to Exhibit 4.57 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.47   Purchase Agreement for Floors Two to Seventeen of Tower B of International Electronic Headquarters of the Electronic Zone dated August 31, 2012 between Beijing Electronic Zone Co., Ltd. and Qizhi Software (Beijing) Co., Ltd. (incorporated by reference to Exhibit 4.58 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.48   English translation of Supplementary Agreement to the Technology Development Agreement with respect to the Advertisement Union Agency Management Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011 (incorporated by reference to Exhibit 4.59 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.49   English translation of Supplementary Agreement to the Technology Development Agreement with respect to Qihu Online Shops Information System between Beijing Qihu Technology Company Limited and Qizhi Software (Beijing) Co., Ltd. dated January 1, 2011 (incorporated by reference to Exhibit 4.60 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.50   English translation of Business Operation Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhenyu Xie, Jianming Dong and Zhengyu Chen dated December 17, 2009 (incorporated by reference to Exhibit 4.61 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.51   English translation of Exclusive Technology Consultancy and Service Agreement among Qizhi Software (Beijing) Co., Ltd. and Beijing Star World Technology Co., Ltd dated October 12, 2009 (incorporated by reference to Exhibit 4.62 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.52   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012 (incorporated by reference to Exhibit 4.63 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.53   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.64 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.54   English translation of Equity Pledge Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012 (incorporated by reference to Exhibit 4.65 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.55   English translation of Equity Disposition Agreement among Qizhi Software (Beijing) Co., Ltd., Beijing Star World Technology Co., Ltd, Zhengyu Xie, Jianming Dong and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.66 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.56   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Jianming Dong dated April 26, 2012 (incorporated by reference to Exhibit 4.67 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.57   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhengyu Chen dated April 26, 2012 (incorporated by reference to Exhibit 4.68 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)  

  

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4.58   English translation of Loan Agreement among Qizhi Software (Beijing) Co., Ltd. and Zhenyu Xie dated April 26, 2012 (incorporated by reference to Exhibit 4.69 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.59   English translation of Power of Attorney issued by Jianming Dong to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.70 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.60   English translation of Power of Attorney issued by Zhengyu Chen to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.71 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.61   English translation of Power of Attorney issued by Zhenyu Xie to Qizhi Software (Beijing) Co. Ltd. dated December 17, 2009 (incorporated by reference to Exhibit 4.72 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.62   English translation of Spousal Consent Letter issued by Chunxia He dated October 18, 2010 (incorporated by reference to Exhibit 4.73 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.63   English translation of Spousal Consent Letter issued by Xun Guo dated October 18, 2010 (incorporated by reference to Exhibit 4.74 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.64   English translation of Spousal Consent Letter issued by Jianxin Gao dated October 18, 2010 (incorporated by reference to Exhibit 4.75 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.65   English translation of Spousal Consent Letter issued by Chunxia He dated April 26, 2012 (incorporated by reference to Exhibit 4.76 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.66   English translation of Spousal Consent Letter issued by Lie Deng dated April 26, 2012 (incorporated by reference to Exhibit 4.77 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.67   English translation of Spousal Consent Letter issued by Chunchao Zheng dated April 26, 2012 (incorporated by reference to Exhibit 4.78 to our annual report on Form 20-F, as amended, initially filed with the Commission on April 19, 2013)
     
4.68   Indenture dated September 5, 2013, constituting $600 million 2.5% convertible senior notes due September 15, 2018 (incorporated by reference to Exhibit 4.79 to our annual report on Form 20-F, initially filed with the Commission on April 25, 2014)
     
4.69*   Indenture dated August 6, 2014, constituting $450 million 0.50% convertible senior notes due August 15, 2020
     
4.70*   Indenture dated August 6, 2014, constituting $450 million 1.75% convertible senior notes due August 15, 2021
     
4.71*   Share Subscription Agreement dated December 16, 2014, by and among Tech Time Development, Coolpad E-commerce Inc. and Coolpad Group Limited
     
 8.1*   Significant Subsidiaries of the Registrant
     
11.1   Amended and Restated Code of Business Conduct and Ethics of Qihoo 360 Technology Company Limited (incorporated by reference to Exhibit 11.1 to our annual report on Form 20-F, initially filed with the Commission on April 25, 2014)
     
12.1*   CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  

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12.2*   CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
12.3*   Co-CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
13.1*   CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
13.2*   CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
13.3*   Co-CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
15.1*   Consent of Commerce & Finance Law Offices
     
15.2*   Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 * Filed with this annual report on Form 20-F. 

 

120
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

Consolidated Financial Statements and

Report of Independent Registered Public Accounting Firm

For the years ended December 31, 2012, 2013 and 2014

 

 
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS    
     
CONTENTS   PAGE(S)
     
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   F-2
     
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2014   F-3 - F-4
     

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

   F-5
     

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

   F-6
     

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

   F-7 - F-8
     

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

   F-9 - F-10
   

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

   F-11 - F-80
     
ADDITIONAL INFORMATION - FINANCAL STATEMENT SCHEDULE I   F-81 - F-86

 

 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

QIHOO 360 TECHNOLOGY CO. LTD.

 

We have audited the accompanying consolidated balance sheets of Qihoo 360 Technology Co. Ltd. (the "Company"), and its subsidiaries, its variable interest entities ("VIEs") and VIEs' subsidiaries (collectively, the "Group") as of December 31, 2013 and 2014 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2014, and related financial statement schedule included in Schedule I. These consolidated financial statements and financial statement schedule are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2013 and 2014, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects, the information set forth therein.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 27, 2015 expressed an unqualified opinion on the Group's internal control over financial reporting.

 

Deloitte Touche Tohmatsu Certified Public Accountants LLP

Beijing, the People's Republic of China

April 27, 2015

 

F-2
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in thousands, except for shares and per share data)

 

   December 31, 
   2013   2014 
ASSETS          
Current assets:          
Cash and cash equivalents  $1,013,465   $1,645,234 
Restricted cash   2,368    2,053 
Short-term investments   748    58,736 
Accounts receivable (net of allowance for doubtful accounts of $145 and $2,410 as of December 31, 2013 and 2014, respectively)   54,598    154,287 
Prepaid expenses and other current assets   80,538    221,196 
Amounts due from related parties   2,871    9,799 
Deferred tax assets - current   3,129    4,844 
           
Total current assets   1,157,717    2,096,149 
           
Property and equipment, net   163,864    272,026 
Land use rights, net   75,698    139,107 
Acquired intangible assets, net   17,248    51,289 
Goodwill   29,509    344,630 
Long-term investments   84,293    314,979 
Other noncurrent assets   39,621    97,025 
Deferred tax assets - noncurrent   946    16,365 
           
TOTAL ASSETS  $1,568,896   $3,331,570 
           
LIABILITIES          
Current liabilities (including amounts of the consolidated VIEs without recourse to          
Qihoo 360 Technology Co. Ltd. of $137,611 and $367,837 as of December 31, 2013 and 2014, respectively):          
Short-term loans  $1,322   $- 
Accounts payable   25,030    121,115 
Accrued expenses and other current liabilities   120,418    298,831 
Deferred revenue-current   46,632    72,890 
Amounts due to related parties   517    1,089 
Income tax payable   14,679    46,304 
           
Total current liabilities   208,598    540,229 
           
Non-current liabilities (including amounts of the consolidated VIEs without recourse to          
Qihoo 360 Technology Co. Ltd. of $2,235 and $9,611 as of December 31, 2013 and 2014, respectively):          
Deferred tax liabilities   2,676    8,516 
Deferred revenue-noncurrent   3,544    2,281 
Long-term debt   600,000    1,635,000 
Other non-current liabilities   -    3,276 
           
TOTAL LIABILITIES  $814,818   $2,189,302 

 

F-3
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED BALANCE SHEETS - continued

(U.S. dollars in thousands, except for shares and per share data)

 

   December 31, 
   2013   2014 
Commitments and contingencies (Note 20)          
           
EQUITY          
Qihoo 360 Technology Co. Ltd. shareholders' equity          
Class A ordinary shares ($0.001 par value; 378,000,000 and 378,000,000 shares authorized as of December 31, 2013 and 2014, respectively; 134,123,218 and 147,485,168 shares issued and outstanding as of December 31, 2013 and 2014, respectively)   134    147 
Class B ordinary shares ($0.001 par value; 122,000,000 and 122,000,000 shares authorized as of December 31, 2013 and 2014, respectively; 54,767,703 and 45,931,163 shares issued and outstanding as of December 31, 2013 and 2014, respectively)   55    46 
Treasury stock   (139)   (139)
Additional paid-in capital   568,675    669,760 
Statutory reserves   28,149    49,433 
Accumulated other comprehensive income (loss)   20,380    (11,772)
Retained earnings   119,639    321,123 
           
Total Qihoo 360 Technology Co. Ltd. shareholders' equity   736,893    1,028,598 
Noncontrolling interest   17,185    113,670 
           
TOTAL EQUITY   754,078    1,142,268 
           
TOTAL LIABILITIES AND EQUITY  $1,568,896   $3,331,570 

 

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

 

F-4
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
Revenues:               
Internet services  $328,882   $671,088   $1,370,695 
Others   150    -    19,965 
                
Total revenues   329,032    671,088    1,390,660 
                
Cost of revenues:               
Internet services   32,762    87,838    297,645 
Others   40    -    7,817 
                
Total cost of revenues   32,802    87,838    305,462 
                
Subsidy income   2,570    2,349    8,506 
                
Operating expenses:               
Selling and marketing   58,178    110,104    333,701 
General and administrative   35,643    117,148    94,260 
Product development   156,269    255,248    406,250 
                
Total operating expenses   250,090    482,500    834,211 
                
Income from operations   48,710    103,099    259,493 
                
Interest income   6,715    10,398    25,605 
Interest expense   -    (5,572)   (25,518)
Other income   1,243    590    1,803 
Exchange gain (loss)   49    5,105    (11,899)
(Loss) gain in connection with short-term investments   (52)   327    10,230 
Gain in connection with long-term investments   2,464    11,216    26,780 
Gain (loss) on disposal of subsidiaries   3,566    (1,144)   - 
                
Income before income tax expense and loss from equity method investments   62,695    124,019    286,494 
Income tax expense   (11,379)   (23,423)   (51,425)
Loss from equity method investments   (4,845)   (2,747)   (18,906)
                
Net income   46,471    97,849    216,163 
Add: Net loss attributable to noncontrolling interest   275    1,803    6,605 
                
Net income attributable to Qihoo 360 Technology Co. Ltd.   46,746    99,652    222,768 
                
Net income per ordinary share-basic  $0.26   $0.55   $1.20 
Net income per ordinary share-diluted  $0.25   $0.52   $1.13 
                
Weighted average shares used in calculating net income per ordinary share-basic   176,442,866    180,476,681    185,107,216 
Weighted average shares used in calculating net income per ordinary share-diluted   183,623,235    193,036,850    197,491,372 
                
Share-based compensation expense included in:               
Cost of revenues  $4   $-   $- 
Selling and marketing  $21,260   $15,389   $15,571 
General and administrative  $8,365   $69,101   $16,891 
Product development  $20,976   $36,597   $62,594 

 

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

 

F-5
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
             
Net income  $46,471   $97,849   $216,163 
                
Other comprehensive income (loss), net of tax:               
Foreign currency translation adjustments   2,849    11,104    (17,210)
Unrealized loss on available-for-sale investments   -    -    (15,876)
                
Other comprehensive income (loss)   2,849    11,104    (33,086)
                
Comprehensive income   49,320    108,953    183,077 
Add: Comprehensive loss attributable to noncontrolling interest   277    1,965    7,539 
                
Comprehensive income attributable to Qihoo 360 Technology Co. Ltd  $49,597   $110,918   $190,616 

 

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

 

F-6
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

                               Total         
                               Qihoo 360         
                       Accumulated   (Accumulated   Technology         
               Additional       other   deficit)   Co. Ltd.         
   Ordinary shares   Treasury   paid-in   Statutory   comprehensive   retained   shareholders'   Noncotrolling   Total 
   Shares   Amount   stock   capital   reserves   income (loss)   earnings   equity   interest   equity 
                                         
Balance as of January 1, 2012   179,029,251   $179   $   $363,021   $5,667   $6,263   $(4,277)  $370,853   $639   $371,492 
Issuance of ordinary shares in connection with sharebased compensation arrangements   3,512,394    3        -    -    -    -    3    -    3 
Share-based compensation   -    -         50,605    -    -    -    50,605    -    50,605 
Issuance of ordinary shares in connection with exercise of options   1,615,452    2         6,963    -    -    -    6,965    -    6,965 
Provision for statutory reserves   -    -         -    10,408    -    (10,408)   -    -    - 
Noncontrolling interest for establishments of subsidiaries   -    -         -    -    -    -    -    422    422 
Disposal of noncontrolling interest in subsidiaries   -    -         73    -    -    -    73    (617)   (544)
Net income   -    -         -    -    -    46,746    46,746    (275)   46,471 
Other comprehensive income (loss)   -    -         -    -    2,851    -    2,851    (2)   2,849 
                                                   
Balance as of December 31, 2012   184,157,097    184    -    420,662    16,075    9,114    32,061    478,096    167    478,263 
Issuance of ordinary shares in connection with share-based compensation arrangements   561,517    1    -    -    -    -    -    1    -    1 
Share repurchase   (14,544)   -    (139)   -    -    -    -    (139)   -    (139)
Share-based compensation   -    -    -    121,087    -    -    -    121,087    -    121,087 
Issuance of ordinary shares in connection with exercise of options   3,982,385    4    -    19,067    -    -    -    19,071    -    19,071 
Issuance of ordinary shares in connection with business acquisitions   204,466    -    -    7,864    -    -    -    7,864    -    7,864 
Provision for statutory reserves   -    -    -    -    12,074    -    (12,074)   -    -    - 
Addition of noncontrolling interest in connection with business acquisitions   -    -    -    -    -    -    -    -    18,868    18,868 
Capital injection of non-controlling interest holders to a subsidiary   -    -    -    -    -    -    -    -    654    654 
Disposal of noncontrolling interest in subsidiaries   -    -    -    (5)   -    -    -    (5)   (539)   (544)
Net income   -    -    -    -    -    -    99,652    99,652    (1,803)   97,849 
Other comprehensive income (loss)   -    -    -    -    -    11,266    -    11,266    (162)   11,104 

 

F-7
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - continued

(U.S. dollars in thousands, except share data and per share data, or otherwise noted) 

 

                               Total         
                               Qihoo 360         
                       Accumulated   (Accumulated   Technology         
               Additional       other   deficit)   Co. Ltd.         
   Ordinary shares   Treasury   paid-in   Statutory   comprehensive   retained   shareholders'   Noncotrolling   Total 
   Shares   Amount   stock   capital   reserves   income (loss)   earnings   equity   interest   equity 
                                         
Balance as of December 31, 2013   188,890,921   $189   $(139)  $568,675   $28,149   $20,380   $119,639   $736,893   $17,185   $754,078 
Issuance of ordinary shares in connection with share-based compensation arrangements   2,691,753    2    -    -    -    -    -    2    -    2 
Share-based compensation   -    -    -    90,392    -    -    -    90,392    -    90,392 
Issuance of ordinary shares in connection with exercise of options   1,833,657    2    -    15,064    -    -    -    15,066    -    15,066 
Provision for statutory reserves   -    -    -    -    21,284    -    (21,284)   -    -    - 
Addition of noncontrolling interest in connection with business acquisitions   -    -    -    -    -    -    -    -    97,400    97,400 
Capital injection of non-controlling interest holders to subsidiaries   -    -    -    -    -    -    -    -    3,200    3,200 
Acquisition of additional equity interests in subsidiaries   -    -    -    (4,371)   -    -    -    (4,371)   3,424    (947)
Net income   -    -    -    -    -    -    222,768    222,768    (6,605)   216,163 
Other comprehensive loss   -    -    -    -    -    (32,152)   -    (32,152)   (934)   (33,086)
                                                   
Balance as of December 31, 2014   193,416,331   $193   $(139)  $669,760   $49,433   $(11,772)  $321,123   $1,028,598   $113,670   $1,142,268 

 

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

 

F-8
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
Cash flows from operating activities:               
Net income   46,471    97,849    216,163 
Adjustments to reconcile net income to net cash provided by operating activities:               
Share-based compensation   50,605    121,087    95,056 
Depreciation and amortization   16,457    42,629    82,531 
(Gain) loss on disposal of property and equipment   (838)   213    1,088 
Amortization of land use rights   140    1,714    2,256 
Loss from impairment of intangible assets   1,348    948    - 
Provision of allowance for doubtful accounts   454    157    214 
Loss (gain) in connection with short-term investments   52    (327)   (10,230)
Loss on equity method investments   4,845    2,747    18,906 
Gain in connection with long-term investments   (2,464)   (11,216)   (26,780)
(Gain) loss on disposal of subsidiaries   (3,566)   1,144    - 
Changes in operating assets and liabilities:               
Accounts receivable   (6,765)   (30,789)   (88,957)
Prepaid expenses and other current assets   (8,404)   (40,271)   (19,681)
Amount due from related parties   -    (1,645)   (1,428)
Payment for land use rights   (14,102)   (72,888)   (55,103)
Deferred taxes   (1,204)   837    (15,157)
Other noncurrent assets   392    (3,010)   184 
Accounts payable   1,164    18,796    83,219 
Accrued expenses and other current liabilities   23,274    53,605    67,416 
Deferred revenue   10,354    20,466    5,784 
Amount due to related parties   83    366    232 
Income tax payable   (508)   7,814    24,586 
                
Net cash provided by operating activities   117,788    210,226    380,299 
                
Cash flows from investing activities:               
(Increase) decrease in restricted cash   (1,902)   (431)   1,604 
Purchase of property and equipment   (68,796)   (118,334)   (170,162)
Proceeds from disposal of property and equipment   2,126    1    112 
Purchase of intangible assets   (5,073)   (3,068)   (676)
Purchase of other assets   (459)   -    - 
Purchase of short-term investments   -    (997)   (82,934)
Proceeds from disposal of short-term investments   -    762    41,798 
Capital contribution for long-term investments   (24,241)   (80,967)   (325,000)
Cash collected from disposal of long-term investments and a subsidiary   13,847    18,880    22,635 
Dividends received from a cost method investee   313    413    - 
Net cash (paid for) acquired from business acquisitions   258    (9,827)   (148,871)
Deconsolidation of a subsidiary   -    (3,306)   - 
                
Net cash used in investing activities   (83,927)   (196,874)   (661,494)
                
Cash flows from financing activities:               
Repayment for short-term loans   -    -    (13,907)
Proceeds from short-term loans   -    1,314    4,523 
Proceeds from issuance of Convertible Senior Notes (net of issuance costs of $12,150 and $18,630  in 2013 and 2014, respectively)   -    587,850    1,016,370 
Proceeds from exercise of share options   2,089    23,678    15,947 
Cash received from capital contribution by noncontrolling interest shareholders to subsidiaries   36    656    1,632 
Cash paid to acquire additional equity interest in a subsidiary   -    -    (650)
Payment for share repurchase   (139)   -    (104,201)
                
Net cash provided by financing activities   1,986    613,498    919,714 
                
Effect of exchange rate on cash and cash equivalents   1,086    5,951    (6,750)

 

F-9
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
             
Net increase in cash and cash equivalents   36,933    632,801    631,769 
Cash and cash equivalents at beginning of year   343,731    380,664    1,013,465 
                
Cash and cash equivalents at end of year   380,664    1,013,465    1,645,234 
                
Supplemental disclosure of cash flow information:               
Income tax paid   12,578    13,961    44,810 
Interest expense paid   -    -    15,853 
                
Supplemental schedule of non-cash activities:               
                
Payable for interests of Convertible Senior Notes   -    4,808    10,062 
Payable for purchasing land use rights, plant, property and equipment and intangible assets   125,760    20,861    15,507 
Consideration payable in connection with business acquisitions   -    358    67,665 
Issuance of ordinary shares for business acquisition   -    7,864    - 

 

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

 

F-10
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Qihoo 360 Technology Co. Ltd. (the "Company" or "Qihoo 360", formerly known as Qihoo Technology Company Limited), incorporated in the Cayman Islands in June 2005, with its consolidated subsidiaries, variable interest entities ("VIEs") and VIEs' subsidiaries (collectively referred to the "Group") is primarily involved in the operations of internet services in the People's Republic of China (the "PRC").

 

As of December 31, 2014, the Company has wholly-owned and majority-owned subsidiaries incorporated in countries and jurisdictions including PRC, Hong Kong, U.S.A, Singapore and Japan. The Company's major subsidiaries are as follows:

 

·Qiji International Development Limited ("Qiji International")
·Qifei International Development Co. Limited ("Qifei International")
·360 International Development Co. Limited ("360 International")
·Qizhi Software (Beijing) Co., Ltd. ("Qizhi Software")
·Tianjin Qisi Technology Co., Ltd. ("Tianjin Qisi")
·Qifei Xiangyi (Beijing) Software Co., Ltd. ("Qifei Xiangyi")

 

As of December 31, 2014, the Company also effectively controls VIEs under contractual arrangements. The major VIEs are as follows:

 

·Beijing Qihu Technology Co., Ltd. ("Beijing Qihu")
·Beijing Star World Technology Co., Ltd. ("Beijing Star World")

 

F-11
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements

 

PRC regulations currently limit direct foreign ownership of business entities providing internet services in the PRC where certain licenses are required for the provision of such services. To comply with these PRC regulations, the Company conducts substantially the majority of its business through the VIEs and their subsidiaries. To provide the Company the expected residual returns of the VIEs and their subsidiaries, Qizhi Software has entered into the following contractual arrangements with the VIEs and their shareholders that enable the Company to (1) have power to direct the activities that most significantly affect the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs' financial results of operations, assets and liabilities in the Company's consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company's rights under the terms of the equity disposition agreements provide it with a substantive kick out right. More specifically, the Company believes the terms of the equity disposition agreements are valid, binding and enforceable under PRC laws and regulations currently in effect. A simple majority vote of the Company's board of directors is required to pass a resolution to exercise the Company's rights under the exclusive option agreement, for which the consent from the shareholders of the VIEs is not required. The Company's rights under the equity disposition agreements give the Company the power to control the shareholders of the VIEs and thus the power to direct the activities that most significantly impact the VIEs' economic performance. In addition, the Company's rights under the powers of attorney also reinforce the Company's abilities to direct the activities that most significantly impact the VIEs' economic performance. The Company also believes that this ability to exercise control ensures that the VIEs will continue to execute and renew service agreements and pay service fees to the Company. By charging service fees in whatever amounts the Company deems fit, and by ensuring that service agreements are executed and renewed indefinitely, the Company has the rights to receive substantially all of the economic benefits from the VIEs.

 

The series of contractual arrangements are summarized as follows:

 

Business operation agreements

 

Under the Business Operation Agreements, the registered shareholders of VIEs and the VIEs may not enter into any transaction that could materially affect the assets, liabilities, interests or operations of the VIEs, without Qizhi Software's prior written consent. In addition, directors, general managers, financial controllers or other senior managers of VIEs must be Qizhi Software's nominees appointed by the registered shareholders of the VIEs. Each business operation agreement has a term of ten years and is renewable at Qizhi Software's sole discretion.

 

F-12
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Technology consulting and services agreements

 

Under the Technology Consulting and Services Agreements, Qizhi Software agreed to provide the VIEs with technology support and consulting services. VIEs agreed to pay certain percentage of its revenue as service fees to Qizhi Software. The service fees are subject to adjustment by Qizhi Software. The agreements have a term of three to ten years unless terminated upon both parties' agreement. The agreement may be renewed upon Qizhi Software's approval and the renewed term will be based on agreement of both parties.

 

Equity disposition agreements

 

The agreements granted Qizhi Software or its designated person exclusive options to purchase, when and to the extent permitted under PRC law, any part or all of the equity interests in the VIEs. The exercise price for the options to purchase all of the equity interests is the minimum amount of consideration permissible under the then applicable PRC law. The agreements have an initial term of ten years and are renewable at Qizhi Software's sole discretion. Under the equity disposition agreements, the registered shareholders of the VIEs may sell the pledged shares to the Company at a nominal price to pay off the loans. The Company absorbs losses of the VIEs, and is exposed to the risk of losses from the operation of the VIEs.

 

Loan agreements

 

Under Loan Agreements between the Company and the registered shareholders of VIEs, the Company extended loans to the registered shareholders of VIEs for contributing registered capital to the VIEs in order to hold 100% of the equity interest in the VIEs. Each loan agreement has a term of ten years and is renewable upon both parties' agreement.

 

Equity pledge agreements

 

Under Qizhi Software's Equity Pledge Agreements with the VIEs and their respective registered shareholders, the registered shareholders of the VIEs pledged all of their respective equity interests in favor of Qizhi Software to secure VIEs' obligations under the Equity Disposition Agreements and Business Operation Agreements described above. If any of the VIEs breaches any of their respective contractual obligations under these agreements seriously, Qizhi Software, as pledgee, will be entitled to dispose the pledged equity interests. The registered shareholders of VIEs agreed not to dispose of, or otherwise create any new encumbrance on their respective equity interests in the VIEs, and not to approve the VIEs to merge with other entities or reorganize in any other forms, without Qizhi Software's prior written consent. Unless terminated at Qizhi Software's sole discretion, each equity pledge agreement has a term of ten years and is renewable at Qizhi Software's sole discretion, similar to the term of EquityDisposition Agreements and Business Operation Agreements.

 

F-13
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Power of attorney

 

Each registered shareholder of VIEs, has executed a power of attorney appointing Qizhi Software to be his or her attorneys, and irrevocably authorizing Qizhi Software to vote on his or her behalf on all of the matters concerning the VIEs, that may require shareholders' approval. The term of power of attorney is ten years. The Power of Attorney can be renewed at Qizhi Software's sole discretion.

 

Spousal consent

 

Under the Spousal Consent letters, the spouse of each married registered shareholder of VIEs has signed a spousal consent letter, whereby the spouse agrees that (i) the equity interests of the VIEs owned by such shareholder will be disposed of only in accordance with the applicable EquityDisposition Agreement, Equity Pledge Agreement, Loan Agreement and other related agreements executed by the shareholder, (ii) such equity interests do not constitute communal property with such shareholder and (iii) the spouse irrevocably and unconditionally waives all rights and benefits with respect to such equity interests, including the right to sue in any court and under all applicable laws.

 

As a result of the contractual arrangements described above, Qizhi Software has the power to direct the activities of the VIEs that most significantly affect the entity's economic performance, bears the economic risks and receives the economic benefits of the VIEs, and is the primary beneficiary of the VIEs. Therefore, the Company has consolidated the financial results of the VIEs and their subsidiaries in its consolidated financial statements since the later of the date of acquisition and incorporation.

 

Risks in relation to the VIE structure

 

The Company believes that Qizhi Software's contractual arrangements with the VIEs are in compliance with PRC law and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company's ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

 

·revoke the Group's business and operating licenses
·require the Group to discontinue or restrict the Group's operations
·restrict the Group's right to collect revenues,
·block the Group's websites,
·require the Group to restructure the Group's operations,
·impose additional conditions or requirements with which the Group may not be able to comply
·impose restrictions on the Group's business operations or on the Group's customers or take other regulatory or enforcement actions against the Group that could be harmful to the Group's business.

 

F-14
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Risks in relation to the VIE structure - continued

 

The Company's ability to conduct its business may be negatively affected if the PRC government were to carry out of any of the aforementioned actions. In addition, if any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of its assets and the Company’s ability to operate its business may be negatively affected. As a result of aforementioned risks and uncertainties, the Company may not be able to consolidate the VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their shareholders, and it may lose the ability to receive economic benefits from the VIEs.

 

The shareholders of the VIEs are directors or officers of the Company. Most of them are also shareholders of the Company. Therefore they have no current interest in seeking to act contrary to the contractual arrangements. The interests of the VIEs' shareholders may differ from the interests of the Company as a whole. The Company cannot assure that when conflicts of interest arise, the shareholders will act in the best interests of the Company or that conflicts of interests will be resolved in the Company's favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest the shareholders of the VIEs may encounter in their capacity as the beneficial owners and directors or officers of the VIEs, on the one hand, and as beneficial owners and directors or officers of the Company, on the other hand. The Company believes the shareholders of the VIEs will not act contrary to any of the contractual arrangements and the equity disposition agreements provide the Company with a mechanism to remove the shareholders as the beneficial shareholders of the VIEs should they act to the detriment of the Company. The Company relies on the VIEs' shareholders, as directors and officers of the Company, to fulfill their fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and the VIEs' shareholders, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.

 

To further protect the investors' interest from any risk that the shareholders of the VIEs may act contrary to the contractual arrangements, the Company, through Qizhi Software, entered into irrevocable powers of attorney with the registered shareholders of the VIEs. Through these powers of attorney, the shareholders of the VIEs entrusted Qizhi Software as its proxy to exercise its rights as the shareholders of the VIEs with respect to an aggregate of 100% of the equity interests in the VIEs. The term of power of attorney is ten years. The power of attorney can be renewed at Qizhi Software's sole discretion.

 

F-15
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Risks in relation to the VIE structure - continued

 

The following consolidated financial statement balances and amounts of the Group's VIEs and their subsidiaries were included in the accompanying consolidated financial statements after the elimination of intercompany balances and transactions between the offshore companies, WFOEs, VIEs and VIEs' subsidiaries in the Group:

 

   December 31, 
   2013   2014 
         
Cash and cash equivalents  $116,575   $239,903 
Restricted cash   2,068    2,053 
Accounts receivable and other current assets   61,177    242,388 
           
Total current assets   179,820    484,344 
           
Property and equipment, net   91,861    138,345 
Acquired intangible assets, net   9,681    32,292 
Other noncurrent assets   37,778    301,070 
           
Total noncurrent assets   139,320    471,707 
           
Total assets   319,140    956,051 
           
Deferred revenue-current   30,717    44,869 
Accounts payable and other current liabilities   106,894    322,968 
           
Total current liabilities   137,611    367,837 
Total noncurrent liabilities   2,235    9,611 
           
Total liabilities  $139,846   $377,448 

 

   Year ended December 31, 
   2012   2013   2014 
             
Revenues  $303,200   $527,646   $1,069,308 
Net income  $150,408   $263,514   $451,191 

 

F-16
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Risks in relation to the VIE structure - continued

 

   Year ended December 31, 
   2012   2013   2014 
             
Net cash provided by operating activities  $75,983   $129,175   $439,351 
Net cash used in investing activities   (50,951)   (72,678)   (305,996)
Net cash provided by (used in) financing activities   36    1,970    (10,028)
                
   $25,068   $58,467   $123,327 

 

As of December 31, 2012, 2013 and 2014, the balance of the amount payable by the VIEs and their subsidiaries to WOFEs related to the service fees was US$2.3 million, US$0.1 million and US$3.3 million, respectively and was eliminated upon consolidation.

 

The Group conducted substantially all of its Internet business through VIEs and the VIEs contributed an aggregate of 92.1%, 78.6% and 76.9% of the consolidated revenues for the years ended December 31, 2012, 2013 and 2014, respectively. The Group's operations not conducted through contractual arrangements with the VIEs primarily consist of its advertisement agency service and technology support service. As of December 31, 2013 and 2014, the VIEs accounted for an aggregate of 20.3% and 28.7%, respectively, of the consolidated total assets, and 17.2% and 17.2%, respectively, of the consolidated total liabilities. The assets not associated with the VIEs primarily consist of cash and cash equivalent, account receivables, property and equipment, and land use rights. The recognized and unrecognized revenue-producing assets that are held by the VIEs are primarily the following:

 

·Property and equipment
·Acquired intangible assets, such as domain names, licenses, trademarks, source code and non-compete agreements
·Other noncurrent assets, which mainly include long term royalty fees and license fees, long term rental deposits
·Self-developed intangible assets such as patents which are un-recognized at consolidated balance sheets

 

F-17
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

1.ORGANIZATION AND PRINCIPAL ACTIVITIES - continued

 

The VIE arrangements - continued

 

Risks in relation to the VIE structure - continued

 

As of December 31, 2014, approximately 51.2% of the Group's employees that provide the Group's services are hired by the VIEs and their subsidiaries. The nominee shareholders of the VIEs and their subsidiaries have in the past received loans from the Company or WFOEs for capital contribution. There are no consolidated VIEs' assets that are collateral for the VIEs' obligations and can only be used to settle the VIEs' obligations. There are no creditors (or beneficial interest holders) of the VIEs that have recourse to the general credit of the Company or any of its consolidated subsidiaries. There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs. However, if the VIEs ever need financial support, the Company or its subsidiaries may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholder of the VIEs or entrustment loans to the VIEs.

 

Relevant PRC laws and regulations restrict the VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 23 for disclosure of restricted net assets.

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP").

 

Basis of consolidation

 

The consolidated financial statements of the Group include the financial statements of the Company, its wholly owned subsidiaries and VIEs and their subsidiaries. All inter-company transactions and balances have been eliminated upon consolidation.

 

F-18
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Use of estimates

 

The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group's consolidated financial statements include allowance for doubtful accounts, purchase price allocation for business acquisitions, share-based compensation, valuation allowances for deferred tax assets, impairment assessment of long-term investments, impairment assessment of long-lived assets, useful lives of definite-lived intangible assets and other long-lived assets and impairment assessment of goodwill.

 

Fair value measurements

 

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determine the fair value measurement for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principle or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

 

·Level 1-inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

 

·Level 2-inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·Level 3-inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

F-19
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

The Group measures certain assets, including long-term investments and intangible assets, at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation techniques using the best information available, and may include management judgments, future performance projections, etc. An impairment charge to the long-term investments is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other than-temporary, and impairment charge to the intangible assets is recorded when their carrying amounts may not be recoverable.

 

F-20
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Business combination

 

Business combinations are recorded using the acquisition method of accounting. The consideration transferred is measured as the aggregate of the acquisition date fair values of the assets transferred, liabilities incurred, and equity instruments issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets and liabilities acquired or assumed are measured separately at their fair values as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total costs of acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of operations.

 

In a business combination achieved in stages, the Company re-measures the previously held equity interest in the acquiree immediately before obtaining control at its acquisition-date fair value and the re-measurement gain or loss, if any, is recognized in the consolidated statements of operations.

 

Cash and cash equivalents

 

Cash and cash equivalents consist of cash on hand and term deposits, which are unrestricted as to withdrawal or use.

 

Restricted cash

 

Restricted cash mainly consists of the cash deposit used to secure for bank's acceptance bills in relation to payment for the construction of a building and for daily operation purchase, the cash balances deposits used to secure for application of an operation right, and cash deposits placed in certain escrow accounts for registration of new VIEs' wholly owned subsidiaries.

 

Short-term investments

 

All highly liquid investments with original maturities of greater than three months, but less than 12 months, are classified as short-term investments. Investments that are expected to be realized in cash during the next 12 months are also included in short-term investments. The Group’s short term investments are comprised of trading securities and available-for-sale investments.

 

Trading securities

 

The securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Unrealized holding gains and losses for trading securities are included in the consolidated statements of operations.

 

F-21
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Available-for-sale investments

 

Investments not classified as either trading or as held-to-maturity are classified as available-for-sale investments. Available-for-sale investment is reported at fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss) as a component of shareholders’ equity. Realized gains and losses and provision for decline in value judged to be other than temporary, if any, are recognized in the consolidated statements of operations.

 

Accounts receivable and allowance for doubtful accounts

 

Accounts receivable represents those receivables derived in the ordinary course of business. Allowance for doubtful accounts reflect the Group's best estimate of probable losses inherent in the accounts receivable balances. The Group regularly review allowances by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a customer's ability to pay.

 

Fair value of financial instruments

 

Financial instruments primarily consist of cash and cash equivalents, restricted cash, trading securities, short-term and long-term available-for-sale investments, accounts receivable, amounts due from related parties and accounts payable, amounts due to related parties, short-term loans and long-term debt. The carrying amounts of these financial instruments, except for long-term debt and long-term available-for-sale investments, approximate their fair values because of their generally short maturities.

 

Property and equipment, net

 

Property and equipment is carried at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straightline basis over the following estimated useful lives:

 

Computer equipment and application software   3 – 6 years
Building   44 – 60 years
Office building related facility and machines   10 – 15 years
Furniture and vehicles   3 – 10 years
Leasehold improvements   lesser of the lease term or the
    estimated useful life of the assets

 

Property and equipment that are purchased or constructed which require a period of time before the assets are ready for their intended use are accounted for as construction-in-progress. All the construction-in-progress has been converted into property and equipment during 2014 and there is nil construction-in-progress as of December 31, 2014. Construction-in-progress is recorded at acquisition cost, including installation costs. Construction-in-progress is transferred to specific property and equipment accounts and commences depreciation when these assets are ready for their intended use.

F-22
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Land use rights, net

 

All land in the PRC is owned by the PRC government, which, according to the relevant PRC law, may grant the right to use the land for a specified period of time. Payment for acquiring land use rights are stated at cost less accumulated amortization and any recognized impairment loss. Amortization is provided on a straight-line basis over the term of the land use rights.

 

Goodwill

 

Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in business combinations. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that it might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In the qualitative assessment, the Company considers primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. Based on the qualitative assessment, if it is more likely than not that the fair value of each reporting unit is less than the carrying amount, the quantitative impairment test is performed.

  

In performing the two-step quantitative impairment test, the first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. This allocation process is only performed for the purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. Application of a goodwill impairment test requires significant management judgment, including the identification of reporting units, assigning assets, liabilities and goodwill to reporting units, and determining the fair value of each reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Group's business, estimation of the useful life over which cash flows will occur, and determination of the Group's weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

 

In 2014, the Group assessed the qualitative factors to determine it is not " more likely than not" that the fair value of each reporting unit is less than its respective carrying amount. The Group did not incur any impairment loss on goodwill for the years ended December 31, 2012, 2013 and 2014.

 

F-23
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Acquired intangible assets, net

 

Acquired intangible assets are estimated by management based on the fair value of assets acquired. Identifiable intangible assets are carried at cost less accumulated amortization. Amortization of definite-lived intangible assets is computed using the straight-line method over the following estimated useful lives, which are as follows:

 

Domain names   3 - 10 years
Source code   5 - 8 years
Technology   2 - 10 years
Non-compete agreement   1 - 6 years
Operating license   5 - 30 years
Trademarks   3 - 10 years
User base   0.5 - 1 year
Customer relationship   3 years
Distributor relationship   5 years
Backlog   3 years

 

Intangible assets with an indefinite useful life are not amortized and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Such impairment test is to compare the fair values of assets with their carrying amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates or market price. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Market prices are based on potential purchase quote from third party, if any.

 

Impairment of long-lived assets other than goodwill

 

The Company reviews long-lived assets with finite lives including identifiable intangible assets with determinable useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is estimated based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Group to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

 

F-24
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Long-term investments

 

The Group’s long-term investments consist of cost method investments, equity method investments and available-for-sale investments.

 

Cost-method investments

 

For equity investments that are not considered as equity securities that have readily determinable fair values and over which the Group neither has significant influence nor control through investment in common stock or in-substance common stock, the cost method is used. Investments in limited partnerships over whose operating and financing policies the Group has virtually no influence and with investment less than 5 percent are accounted for using the cost method.

 

Under the cost method, the Company carries the investment at cost and recognizes income to the extent of dividends received from the distribution of the equity investee’s post-acquisition profits.

 

Equity method investments

 

The Group applies the equity method to account for an equity investment, in common stock or in-substance common stock over which it has significant influence but does not own a majority equity interest or otherwise control. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between 20% and 50%, and other factors, such as representation on the investee's board of directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate.

 

Under the equity method, the Group initially records its investment at cost and subsequently adjusts the carrying amount of the investment to recognize the Group’s proportionate share of each equity investee’s net income or loss into earnings after the date of investment. The Group records its share of the results of certain equity investees on a one quarter in arrears basis.

 

Available-for-sale investments

 

Available-for-sale investments represent investments in equity investees which are not intended to be realized in cash during the next 12 months are classified as long-term investments. They are measured with the same manner as short-term available-for-sale investments.

 

The Group continually reviews its investments in equity investees to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Group considers in its determination are the length of time that the fair value of the investment is below the Group’s carrying value; the financial condition, operating performance and the prospects of the equity investee; and other Group specific information such as recent financing rounds. If the decline in fair value is deemed to be other than temporary, the carrying value of the equity investee is written down to fair value. The Group estimated the fair value of these investee companies based on discounted cash flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long term growth rate of a company's business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital.

 

F-25
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

  

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition

 

The Group generates its revenue mainly through internet services. The Group recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

 

Internet services revenue

 

Internet services revenue mainly includes online advertising and internet value-added services.

 

(1)Online advertising

 

The Group offer marketing opportunities to customers by providing comprehensive online advertising service solutions, such as sponsored services (advertising services), on both of its PC and mobile platform products, such as 360 Personal Start-up Page, 360 Search and 360 Mobile Assistant. The Group charges fees to customers based on the effectiveness of its comprehensive advertising services, which is typically measured by active users, clicks, transactions and other actions originated from its platform products.  Additionally, fees are also affected by, among other factors, (i) the competitiveness of bidding for sponsored services and keywords by customers, with more intensive bidding typically leading to higher pricing and (ii) the vertical industries that customers operate in, which may result in different effectiveness and benefits of the Group's online advertising services to customers.

 

The Group generally collect fee of advertising services for customers on a cost over time period model or cost for performance model. For advertising contracts that are charged on the cost over a time period, the Group recognizes revenue ratably over the period the advertising is provided. For contracts that are charged on the cost for performance, the revenue is estimated by the Group based on its internal data, which is confirmed with the respective customers.

 

F-26
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition-continued

 

(1)Online advertising – continued

 

The Group engages in nonmonetary transactions such as to allow certain third parties to provide traffic on the non-monetization location of its platform products to show their brand or products in exchange for its brand promotion or more downloads of its platform or security products, and to allow certain third parties to bundle the Group's platform or security products with third parties' software products in exchange for more downloads of its platform or security products. The Group recognizes revenues and expenses at fair value from a nonmonetary transaction only if the fair value of the services exchanged in the transaction is determinable based on the entity's own historical practice of receiving cash, trading securities, or other consideration that is readily convertible to a known amount of cash for similar services from customers unrelated to the counterparty in the nonmonetary transaction. No such transactions were recognized in 2012, 2013 and 2014.

 

(2)Internet value-added services

 

The Group's internet value-added services include offering games developed by third parties and providing other internet value-added services on the Group's platforms.

 

Games. The Group provides game services and generates revenues from selling in-game currency, which will later be used by game players to purchase in-game virtual items. The Group's game portfolio includes web games and mobile games. All of the games are developed by third-party game developers and can be accessed and played by game players directly through the Group's platform products. The Group primarily views the game developers to be its customers and considers its responsibility under its agreements with the game developers to be promotion of the game developers' games or assisting game developers to enhance game-playing experience. Sometimes, the Group gets exclusive rights in a certain region, that is, other platforms cannot provide the game without the Group’s permission.

 

F-27
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition - continued

 

Internet services revenue - continued

 

(2)Internet value-added services-continued

 

The Group generally collects payments from game players in connection with the sale of in-game currencies and remits certain agreed-upon percentages of the proceeds to the game developers and records revenue net of remittances. Revenue from the sale of in-game currency is primarily recorded net of remittances to game developers and deferred until the estimated consumption date (i.e., the estimated date in-game currencies are consumed within the game if the Group only provides game promotion services, or the estimated date that virtual items are consumed if game enhancement service is also delivered). The in-game currencies are consumed typically within a short period of time after purchase which ranges from a few days to a few weeks depending on the game. Length of the consumption period is impacted by the Group’s portfolio mix of games and the monetization policy and marketing activity of each individual game as determined by game developers. The virtual items mainly consist of instant items and durable items. The life of instant items is less than one day, and the life of durable items is within months. An insignificant amount of revenue is recognized from durable items.

 

Purchases of in-game currency or virtual items are not refundable after they have been sold unless there is unused in-game currency at the time a game is discontinued. Typically, a game will only be discontinued when the monthly revenue generated by a game is insignificant. To date, the Group has never been required to pay cash refunds to game players or game developers as a result of the discontinuation of a game.

 

Other internet value-added services. The Group provides online lottery purchase services and serves as an agent for providing online distribution services and payment collection services on behalf of third-parties, such as collection payment for mobile charges, e-books and etc. The Group provides payment collection services mainly through third-party professional payment and settlement institutions. The Group generally charges commission as a percentage of the gross proceeds or collection amount, and the revenue is estimated by the Group based on its internal system, which is confirmed with the respective cooperators.

 

F-28
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Revenue recognition - continued

 

Other services

 

The Group offers enterprise information security products and related services to customers, such as firewalls, gateways and internet security monitoring system. Most of the Group’s revenue arrangements with customers is the sale of hardware products, bundled with software that is essential to the functionality of the hardware. The Group recognizes revenue for the sale of such hardware products after a sales agreement is signed, the price is fixed or determinable, products are delivered to customers, and collection of the resulting receivables is assured. Product is considered delivered to the customers once it has been shipped and title, risk of loss and rewards of ownership have been transferred.

 

Deferred revenue

 

Deferred revenue primarily includes cash received in advance from customers or end users and unrecognized license fee related to a license granted under a nonmonetary transaction, and deferred subsidy income. The unused cash balances remaining in customers or users' accounts are recorded as a liability. Deferred revenues related to prepayments from third party customers or end users will be recognized as revenue when all of the revenue recognition criteria are met, and deferred revenue related to license fee will be recognized as revenue based on the contract term.

 

Costs of revenues

 

Cost of revenues primarily consists of business tax, value added tax ("VAT") and related surcharges, payment collection costs, traffic acquisition costs, salaries and benefits, bandwidth costs, depreciation of equipment, cost of inventories, and revenue sharing to third party partners.

 

In July 2012, the Ministry of Finance and the State Administration of Taxation jointly issued a circular regarding the pilot collection of VAT in lieu of business tax in certain areas and industries in the PRC. Such VAT pilot program was to be phased in Beijing and Tianjin in September and December 2012, respectively. Starting from September 1, 2012, certain subsidiaries and VIEs of the Group became subject to VAT and related surcharges by various Chinese local tax authorities at rates ranging from 3.21% to 19.04% on revenue generated from providing services and enterprise information security products which were previously subject to business tax.

 

Business tax and VAT included in revenues and cost of revenues for the years ended December 31, 2012, 2013 and 2014 were $18,434, $39,909 and $80,514, respectively.

 

F-29
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Product development expenses

 

The product development expenses primarily consist of costs associated with new product development and enhancement for existing products, such as salaries and benefits, including share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation of equipment and amortization of acquired intangible assets.

 

Advertising costs

 

Advertising costs are expensed as incurred. The Group incurred advertising costs of $21,082, $62,301 and $231,198 for the years ended December 31, 2012, 2013 and 2014, respectively, which were recorded as a component of selling and marketing expenses in the accompanying consolidated statements of operations.

 

Operating leases

 

Leases where the rewards and risks of ownership of assets primarily remain with the lessor are accounted for as operating leases. The Group recognizes the operating lease expenses on a straight-line basis over the lease periods.

 

Subsidy income

 

Government subsidy is recorded as a liability in deferred revenue when received, and recognized as subsidy income Company complies with the conditions required for the subsidy. The Group recognized subsidy income of $2,570, $2,349 and $8,506 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

Income taxes

 

The Group follows the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax basis of assets and liabilities using enacted tax rates that will be in effect for the period in which the differences are expected to reverse. The Group records a valuation allowance against the amount of deferred tax assets that it determines is not more-likely-than-not of being realized. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date.

 

F-30
 

  

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Income taxes - continued

 

The impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

 

Share-based compensation

 

Share-based compensation with employees is measured based on the grant date fair value of the equity instrument. The Group recognizes the compensation costs net of an estimated forfeiture rate using the straight-line method, over the requisite service period of the award, which is generally the vesting period of the award. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of share-based compensation expense to be recognized in future periods.

 

Share awards issued to nonemployees are measured at fair value at the earlier of the commitment date or the date the services is completed and recognized over the period the service is provided or as goods is received.

 

The Group uses the Black-Scholes or Binomial-Model option pricing model to measure the value of options granted to employees and nonemployees at each grant date or measurement date.

 

Net income per share

 

Basic net income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year excluding any outstanding ordinary shares that are contingently refundable subject to the satisfaction of both the service and performance condition on the nonvested shares. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares.

 

The Company computes earnings per Class A and Class B ordinary shares using the two-class method. The unvested portions of nonvested shares are participating securities as all outstanding nonvested shares are entitled to nonforfeitable dividends that participate in undistributed earnings with ordinary shares. Since the nonvested shares are considered participating securities, the nonvested shares issued by the Company are required to apply the two-class method when computing basic earnings per share.

 

F-31
 

   

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Net income per share - continued

 

The Group has share options, nonvested shares and convertible senior notes which could potentially dilute basic earnings per share in the future. To calculate the number of shares for diluted net income per share, the effect of the share options is computed using the treasury stock method. The dilutive effect of the convertible senior notes is computed using as-if converted method.

 

Foreign currency translation

 

The functional and reporting currency of the Company and its subsidiaries located in HK is the United States dollar ("U.S. dollar"). The financial records of the Company's subsidiaries, VIEs and VIEs' subsidiaries located in the PRC are maintained in its local currency, the Renminbi ("RMB") which is the functional currency of these entities.

 

Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the consolidated statements of operations.

 

The Group's entities with functional currency of RMB translate their operating results and financial position into the U.S. dollar, the Company's reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income in the consolidated statements of changes in equity and comprehensive income.

 

Comprehensive income

 

Comprehensive income of the Group includes the cumulative foreign currency translation adjustments, unrealized gains (losses) on available-for-sale investments and net income for the year. Comprehensive income is reported in the statements of comprehensive income.

 

F-32
 

   

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Risks and uncertainties

 

The Group participates in a dynamic industry with rapid changes in regulations, technology trends, customer demand and competition and believes that changes in any of the following areas could have a material adverse effect on the Group's future financial position, results of operations, or cash flows: advances and trends in new technologies and industry standards; changes in certain strategic relationships or customer relationships; regulatory or other PRC related factors; risks associated with the Group's ability to attract and retain certain necessary employees to support its growth; risks associated with the Group's ability to keep and increase the user base; risks associated with the Group's growth strategies; risks associated with the Group’s ability to maintain and enhance brand and reputation and general risks associated with the internet security industry, and risks surrounding pending litigations.

 

Concentration of credit risk

 

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and accounts receivable. The Group places its cash with financial institutions with high-credit ratings and quality. The Group conducts credit evaluations of customers and generally does not require collateral or other security from their customers. The Group maintains reserves for potential credit losses.

 

Details of the customers that account for 10% or more of total revenues are as follow:

 

   Year ended December 31, 
   2012   2013   2014 
             
Customer               
  A   5%   *-    *- 
  B   10%   *-    *- 

 

Details of the customers accounting for 10% or more of accounts receivable are as follows:

 

   December 31, 
   2013   2014 
         
Customer          
  B   32%   *- 
  C   *-    14%

 

“*” means less than 10%

 

F-33
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recently issued accounting standards adopted

 

In July 2013, the FASB issued an Accounting Standard Update ("ASU") which provides guidance on financial statement presentation of an unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The FASB's objective in issuing this ASU is to eliminate diversity in practice resulting from a lack of guidance on this topic in current U.S. GAAP. The amendments in this ASU state that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. The adoption of this guidance did not have a significant effect on the Company's consolidated financial statements.

 

F-34
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements not yet adopted

 

In April 2014, the FASB issued a new pronouncement which amends to change the criteria for reporting discontinued operations while enhancing disclosures in this area. It also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance in U.S. GAAP.

 

Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization's operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment.

 

In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations.

 

The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. This disclosure will provide users with information about the ongoing trends in a reporting organization's results from continuing operations. The amendments in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted. The Group is in the process of evaluating the impact of this pronouncement to its consolidated financial statements.

 

F-35
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements not yet adopted - continued

 

In May 2014, the FASB issued a new pronouncement which affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this ASU.

 

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

 

An entity should apply the amendments in this ASU using one of the following two methods:

 

1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients:

 

·For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.

 

·For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.

 

·For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

 

F-36
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements not yet adopted - continued

 

2. Retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of:

 

The amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change.

An explanation of the reasons for significant changes.

 

The Group is in the process of evaluating the impact of this pronouncement to its consolidated financial statements.

 

In June 2014, the FASB issued a new pronouncement which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved.

 

The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.

 

Entities may apply the amendments in this ASU either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The adoption of this pronouncement will not have a significant impact on the Group’s consolidated financial statements.

 

F-37
 

    

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

 

Recent accounting pronouncements not yet adopted - continued

 

The FASB has issued ASU 2015-03 which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The ASU specifies that “debt issuance costs related to a note shall be reported in the balance sheet as a direct deduction from the face amount of that note” and that “amortization of debt issuance costs also shall be reported as interest expense.” The ASU’s Basis for Conclusions observes that in practice, debt issuance costs incurred before the associated funding is received (i.e., before the issuance of the debt liability) are deferred on the balance sheet until that debt liability amount is recorded.

 

The amendments do not affect the current guidance on the recognition and measurement of debt issuance costs. For example, the costs of issuing convertible debt would not change the calculation of the intrinsic value of an embedded conversion option that represents a beneficial conversion feature under ASC 470-20-30-13. Thus, entities may still need to track debt issuance costs separately from a debt discount.


For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued.

The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability).

The Group is in the process of evaluating the impact of this pronouncement to its consolidated financial statements.

 

F-38
 

   

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS

 

(1)Acquisition of internet service business

 

In January 2014, the Group acquired 100% equity interest of a game platform company with consideration of $66,146. The acquisition provided synergies with the existing business.

 

The aggregate acquisition consideration consisted of (i) an initial consideration of $47,363 in cash, which was paid in 2014; and (ii) a contingent consideration of $20,000 in cash, subject to whether the amount of gross charges generated from the game platforms for the year ended December 31, 2014 meets specific targets stated in the acquisition agreement. The fair value of the contingent consideration was determined to be $18,783 at the acquisition date based on an estimation of the achievement of the operation goal. Fair value change in contingent consideration amounted $1,217 was recognized in consolidated statement of operations for the year ended December 31, 2014.

 

The acquisition was recorded using the acquisition method of accounting and, accordingly, the acquired assets and liabilities were recorded at their fair market value at the date of acquisition. The total purchase price was allocated at the acquisition date as follows:

 

     
   US$ 
     
Cash  $14,730 
Other net liabilities acquired, excluding intangible assets and related deferred tax liabilities   (18,238)
Intangible assets     
Non-compete agreement   5,438 
Domain name   3,008 
Technology   2,314 
User base   1,296 
Goodwill   60,612 
Deferred tax liability   (3,014)
Total  $66,146 

The intangible assets valuations for the acquisitions described above were based on valuation analysis prepared by the management with the assistance of an independent third party valuation firm. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approaches. The Group has incorporated certain assumptions which include projected cash flows and replacement costs.

 

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.

 

F-39
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS – continued

 

The operating results of this acquired business have been included in the Group's consolidated financial statements since the date of acquisition. It contributed net revenue of $138,919, and net loss of $7,504 to the Group's consolidated statement of operations for the year ended December 31, 2014.

 

In July 2014, the Group sold a portion of this acquired business to one of its former shareholder for a total consideration of $12,000. The net carrying value of the disposed game platform business was $12,000 including goodwill of $9,951 allocated to the disposed business based on the relative fair values of the disposed business and the retained business at the disposal date. No gain or loss was recognized for this disposal.

 

(2)Acquisition of internet service business

 

In May 2014, the Group acquired 60% equity interest of an internet service company with consideration of $134,332 to expand its service scope in online advertising services. Among the total purchase consideration, $124,332 was paid upon the consummation of the acquisition and $10,000 was held back to satisfy losses, if any, for which the Group is entitled to indemnification from the selling shareholders. The holdback amount will be paid to the selling shareholders upon the first anniversary of the consummation of the acquisition.

 

The acquisition was recorded using the acquisition method of accounting and, accordingly, the acquired assets and liabilities were recorded at their fair market value at the date of acquisition. The total purchase price was allocated at the acquisition date as follows:

     
   US$ 
     
Cash  $49,564 
Other net liabilities acquired, excluding intangible assets and the related deferred tax liabilities   (10,372)
Intangible assets     
  Technology   9,377 
  Non-compete agreement   3,259 
  Customer relationship   1,204 
Goodwill   148,751 
Deferred tax liability   (2,076)
Non-controlling interest   (65,375)
Total  $134,332 

 

F-40
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS – continued

 

The intangible assets valuations for the acquisitions described above were based on valuation analysis prepared by the management with the assistance of an independent third party valuation firm. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approaches. The Group has incorporated certain assumptions which include projected cash flows and replacement costs.

 

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.

 

The operating results of this acquired business have been included in the Group's consolidated financial statements since the date of acquisition. It contributed net revenue of $25,946, and net loss of $5,829 to the Group's consolidated statement of operations for the years ended December 31, 2014.

 

(3)Acquisition of enterprise information security business

 

In October 2014, the Group acquired 75.1% equity interest of an enterprise information security company with a total consideration of $126,065 to expand its service offerings. The acquisition provided synergies with the existing business.

 

The aggregate acquisition consideration consisted of (i) an initial consideration of $123,897 in cash, $89,938 was paid upon the consummation of the acquisition in 2014; and (ii) a contingent consideration of $2,168 in cash, subject to the net income generated from the enterprise information security business for the year ended December 31, 2018, December 31, 2019 and December 31, 2020 meeting certain specified targets stated in the acquisition agreement. The Group determines no fair value change in contingent consideration for the year ended December 31, 2014.

 

The acquisition was recorded using the acquisition method of accounting and, accordingly, the acquired assets and liabilities were recorded at their fair market value at the date of acquisition. The total purchase price was allocated at the acquisition date as follows:

 

F-41
 

  

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS - continued

 

(3)Acquisition of enterprise information security business - continued

 

   US$ 
     
Cash  $ 50,292 
Other net liabilities acquired, excluding intangible assets and related deferred tax liabilities   (22,324)
Intangible assets     
  Distributor relationships   7,006 
  Technology   3,436 
  Operating license   1,808 
  Customer relationships   1,303 
  Backlog   1,254 
  Trademarks   880 
Goodwill   115,757 
Deferred tax liability   (2,353)
Non-controlling interest   (30,994)
Total  $126,065 

 

The intangible assets valuations for the acquisitions described above were based on valuation analysis prepared by the management with the assistance of an independent third party valuation firm. The valuation analysis utilizes and considers generally accepted valuation methodologies such as the income, market and cost approaches. The Group has incorporated certain assumptions which include projected cash flows and replacement costs.

 

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP and comprise (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of the synergy resulting from the acquisition.

 

The operating results of this acquired business have been included in the Group's consolidated financial statements since the date of acquisition. It contributed net revenue of $18,934, and net gain of $5,426 to the Group's consolidated statement of operations for the years ended December 31, 2014.

 

F-42
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS - continued

 

Pro forma

 

The following summarized unaudited pro forma results of operations for the year ended December 31, 2013 and 2014 assuming that all material acquisitions as stated in (1), (2) and (3) of this note during the two-year period ended December 31, 2014 occurred as of January 1, 2013. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the significant acquisitions occurred as of January 1, 2013, nor is it indicative of future operating results.

 

   Year ended December 31, 
   2013   2014 
   (Unaudited)   (Unaudited) 
   US$    US$  
Pro forma revenue   841,573    1,415,532 
Pro forma net income (loss)   106,846    212,558 
Pro forma earnings (loss) per ordinary share-basic   0.59    1.15 
Pro forma earnings (loss) per ordinary share-diluted   0.55    1.08 

 

(4)Other acquisitions

 

Year 2014

 

(i)In May, 2014, the Group acquired 60% equity interest of an internet security business with a cash consideration of $1,092, which was fully paid in 2014. Goodwill of $122 was recognized from this acquisition.

  

F-43
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS - continued

 

(ii)In October, 2014, the Group acquired 100% equity interest of an internet security business with a cash consideration of $684, which was fully paid in 2014. Goodwill of $289 was recognized from this acquisition.

 

(iii)In November, 2014, the Group acquired 100% equity interest of an internet service business with a cash consideration of $1,302, which has not been paid as of December 31, 2014. Goodwill of $912 was recognized from this acquisition.

 

Year 2013

 

(i)In May, 2013, the Group acquired an internet service business with a cash consideration of $1,790, which was fully paid in 2013. Goodwill of $1,248 was recognized from this acquisition;

 

(ii)In May, 2013, the Group acquired 51% equity interest of a data center business with a cash consideration of $3,257, which was fully paid in 2013. Goodwill of $317 was recognized from this acquisition;

 

(iii)In July 2013, the Group acquired 51% equity interest of an overseas internet service company with consideration of $7,864 which was settled in the form of 204,466 ordinary shares of the Company, based upon the closing price of the Company's ADSs at the acquisition date, goodwill of $8,319 was recognized from this acquisition. One of the selling shareholders is the Chairman and Chief Executive Officer of the Company. The Company settled the consideration of $1,989 for 28.53% equity interest from the Chairman and Chief Executive Officer by issuance of 51,722 ordinary shares, equivalent to 34,481 ADSs, based upon the closing price of the Company's ADSs at the acquisition date.;

 

(iv)In September 2013, the Group acquired another 60% equity interest from the third-party shareholders for a cash consideration of $7,966, fully paid in 2013 and goodwill of $8,762 was resulted from the acquisition; and

 

(v)In November 2013, the Group acquired 51% equity interest of an internet service company by contributing $10,000 as registered capital to the acquiree, fully paid in 2013 and goodwill of $6,346 was resulted from the acquisition.

 

F-44
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

3.ACQUISITIONS - continued

 

Pro forma

 

The following summarized unaudited pro forma results of operations for the year ended December 31, 2012 and 2013 assuming that all material acquisitions as stated in (4) of this note during the two-year period ended December 31, 2013 occurred as of January 1, 2012. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the significant acquisitions occurred as of January 1, 2012, nor is it indicative of future operating results.

 

   Year ended December 31, 
   2012   2013 
   (Unaudited)   (Unaudited) 
    US$    US$ 
Pro forma revenue   336,774    676,414 
Pro forma net income   43,857    95,937 
Pro forma earnings (loss) per ordinary share-basic   0.25    0.53 
Pro forma earnings (loss) per ordinary share-diluted   0.24    0.50 

 

Year 2012

 

In September 2012, the Group acquired the remaining 65% equity interest in one of its equity method investees, a software development business with cash consideration of $312. $185 cash consideration was paid during 2012 and the remaining $127 was paid in 2013.

F-45
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

4.ACCOUNTS RECEIVABLE

 

Accounts receivable consists of the following:

 

   December 31, 
   2013   2014 
         
Accounts receivable  $54,743    156,697 
Allowance for doubtful accounts   (145)   (2,410)
           
Accounts receivable, net  $54,598   $154,287 

 

Movement of allowance for doubtful accounts is as follows:

 

   December 31, 
   2012   2013   2014 
             
Balance at beginning of year  $68   $213   $145 
Addition in connection with business acquisition    -    -    2,020 
Charge to expense   154    157    349 
Write offs during the year   (10)   (229)   (74)
Exchange rate differences   1    4    (30)
                
Balance at end of year  $213   $145   $2,410 

 

F-46
 

 

 QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

5.PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

   December 31, 
   2013   2014 
         
Prepayment for share repurchase (i)  $-   $104,201 
Prepaid expenses and other receivables   19,921    46,266 
Advance to suppliers   15,577    34,238 
Prepayment related to investments (ii)   12,325    29,704 
Interest receivable   3,219    5,314 
Receivables related to share options (iii)   29,496    1,473 
           
Prepaid expenses and other current assets  $80,538   $221,196 

 

(i)The board of directors of the Group approved a $200 million share repurchase program in October 2014. As of December 31, 2014, the Company prepaid $104 million for the repurchase of shares. The Company completed the share repurchase program in February 2015.

 

(ii)The Group made several payments to establish new companies with other independent third parties. The prepayments will be recorded as long-term investments when the investees are legally established.

 

(iii)Amount represents the exercise cost to be received by the Group from a trading institution after the Group's employees exercised their stock options through such institution.

 

6.INVESTMENTS

 

Short-term investments

 

The Group’s short-term investments consist of trading securities and available-for-sale investments. The carrying amount and fair value of the Group’s trading securities and short-term available-for-sale investments as of December 31, 2013 and 2014 were as follows:

 

F-47
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

6.INVESTMENTS-continued

 

   As of December 31, 2013 
   Original
cost		   Gross
unrealized
gains		   Gross
unrealized
losses		   Provision
for
decline
in value		   Fair
value		 
Short-term investment:                         
Trading securities   179    168    (94)   -    253 
Available-for-sale securities:                         
Others   495    -    -    -    495 
                          
Short-term investment   674    168    (94)   -    748 

 

   As of December 31, 2014 
   Original
cost		   Gross
unrealized
gains		   Gross
 unrealized
losses		   Provision
for
decline
in value		   Fair
value		 
Short-term investment:                         
Trading securities   253    92    (172)   -    173 
Available-for-sale securities:                         
Listed equity securities   51,747    1,667    (9,856)   —    43,558 
Bank financial products   14,505    —    —    —    14,505 
Others   500    —    —    —    500 
Short-term investment   67,005    1,759    (10,028)   —    58,736 

 

The management of the Group determined that there was no impairment on such investment during the years ended December 31, 2012, 2013 and 2014.

 

Long-term investments

 

The Group’s long-term investments consist of cost method investments, equity method investments and available-for-sale investments.

 

Cost-method investments

 

The carrying amount of Company’s all cost method investments was $46,012 and $137,134 as of December 31, 2013 and 2014, respectively. The Group held less than 20% equity interest in its cost method investments except for the below investment:

 

F-48
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

6.INVESTMENTS-continued

 

In July 2012, the Group invested $482 in an entity engaged in internet service company, to purchase 26.51% of its equity interest. In January 2014, the Group made an additional investment for consideration of $17,445. As of December 31, 2014, the Group held 38.11% equity interest. The Group used the cost method to account for this investment though the Group held over 20% of its voting stock since the Group did not have the ability to exercise significant influence over the operating and financing activities of the investee.

 

The total impairment losses on cost method investments were $761, $867 and $578 during the years ended December 31, 2012, 2013 and 2014, respectively.

 

Equity-method investments

 

The carrying amount of Company’s equity method investments was $38,281 and $130,201 as of December 31, 2013 and 2014, respectively, with voting interests ranging from 10% to 65%. Details of the significant investments are as follows:

 

(i)In November 2011, the Group acquired 30% equity interest of an internet security company through a nonmonetary transaction. In June 2012, the Group made an additional investment for an aggregate price of $2,140 in cash to avoid diluting in its series B financing. In December 2013, the Group made another additional investment for an aggregate price of $25,000 in cash in its series C financing. In December 2014, the Group made another additional investment for an aggregate price of $9,360 in cash in its series D financing. As of December 31, 2014, the Group held 40.8% equity interest with a carrying amount is $22,276.

 

(ii)In December 2014, the Group purchased 40% of a hardware develop company’s equity interest for purchase price of $17,568.

 

The Group shared loss of $4,845, $2,747 and $18,906 from its equity method investments during the years end December 31, 2012, 2013 and 2014, respectively.

 

The total impairment losses on equity method investments were $1,541, $4,137 and $1,943 during the years ended December 31, 2012, 2013 and 2014, respectively.

 

F-49
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

6.INVESTMENTS - continued

 

Available-for-sale investments

 

The carrying amount and fair value of the Group’s available-for-sale investments were $nil and $47,644 as follows as of December 31, 2013 and 2014.

 

   As of December 31, 2014 
   Original
 cost		   Gross
unrealized
gains		   Gross
unrealized
losses		   Provision
for
decline
in value		   Fair
value		 
Long-term investment:                         
Available-for-sale securities:                         
Listed equity securities   57,335    9,988    (19,679)   —    47,644 

 

The Group reviews its available-for-sale investments regularly to determine if an investment is other-than-temporarily impaired due to changes in quoted market price or other impairment indicators such as market condition for the investees’ industry and products and services. No impairment loss on available-for-sale investments was recognized for the years end December 31, 2012, 2013 and 2014.

 

F-50
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

7.FAIR VALUE MEASUREMENTS

 

Measured on recurring basis

 

The Group measured its financial assets including cash equivalents, trading securities and available-for-sale investment at fair value on a recurring basis as of December 31, 2013 and 2014.

 

Cash equivalents represented term deposits that can be withdrawn at any time and are stated at fair value. Trading securities and available-for-sale equity investments included listed equity securities that are traded publicly in the open market. The Group classified such financial assets as investments within Level 1 of the fair value hierarchy because they are valued based on the quoted market price in an active market.

 

Bank financial products are measured at costs which approximate their fair values in the consolidated balance sheets. The Group benchmarks the costs against fair values of comparable investments as of balance sheet date, and categorized all fair value measures of bank financial products as Level 2 of the fair value hierarchy because they are valued using directly or indirectly observable inputs in the market place.

 

The contingent consideration related to business acquisition was classified within Level 3 of the fair value hierarchy because it is measured using significant unobservable inputs when determining its fair value by applying the income approach. The significant unobservable input was the discount rate of 13% and 14% which approximated to the industry weighted average cost of capital.

 

The following table shows the fair value of the Group's financial assets and liabilities measured at recurring basis as of December 31, 2013 and 2014:

 

   As of December 31, 2013   As of December 31, 2014 
   Fair Value Measurements at the Reporting Date Using   Fair Value Measurements at the Reporting Date Using 
   Quoted prices in   Significant           Quoted prices in   Significant         
   active markets   other   Significant       active markets   other   Significant     
   for identical   observable   unobservable       for identical   observable   unobservable     
   instruments   inputs   inputs   Total   instruments   inputs   inputs   Total 
   (level 1)   (level 2)   (level 3)   balance   (level 1)   (level 2)   (level 3)   balance 
                                 
Cash equivalents-term deposits  $683,994   $-   $-   $683,994   $1,129,833   $-   $-   $1,129,833 
Short-term investments:                                        
Trading securities   253    -    -    253    173    -    -    173 
Available-for-sale investments                                        
Listed equity securities   -    -    -    -    43,558    -    -    43,558 
Bank financial products   -    -    -    -    -    14,505    -    14,505 
Others   -    495    -    495    -    500    -    500 
Long-term investments                                        
 Listed equity securities   -    -    -    -    47,644    -    -    47,644 
Contingent consideration   -    -    -    -    -    -    (22,168)   (22,168)
                                         
Total  $684,247   $495   $-   $684,742   $1,221,208   $15,005   $(22,168)  $1,214,045 

 

F-51
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

 

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

7.FAIR VALUEMEASUREMENTS - continued

 

Measured on recurring basis - continued

 

The following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the years ended December 31, 2014, which only contains contingent consideration:

 

   Total 
Balance at December 31, 2013  - 
      
Addition in connection with business acquisition (Note 3(1)&(3))   20,951 
Increase in fair value   1,217 
      
Balance at December 31, 2014   22,168 

 

There was no such assets and liabilities existed during the years ended December 31, 2013.

 

Measured on nonrecurring basis

 

Long-term investments, goodwill and other intangible assets are measured at fair value on a nonrecurring basis and they are recorded at fair value only when impairment is recognized.

 

The Group measured the fair value of the purchased intangible assets using the "cost," "income approach-excess earnings" and "with & without" valuation method.

 

The Group measured the fair value of long term investments and acquired intangible assets using income approach based on which to recognize the impairment loss in respective years. These assets are considered as Level 3 assets because the Group used unobservable inputs to determine their fair values. The Group estimated the fair value of these investee companies and acquired intangible assets based on discounted cash flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long term growth rate of a company’s business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital.

 

F-52
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

8.PROPERTY AND EQUIPMENT, NET

 

   December 31, 
   2013   2014 
         
Computer equipment and application software  $149,877   $276,078 
Building   46,471    88,036 
Office building related facility and machines   14,022    27,988 
Furniture and vehicles   4,672    8,656 
Leasehold improvements   1,354    6,092 
Construction in Progress   5,469    - 
           
    221,865    406,850 
Less: Accumulated depreciation and amortization   58,001    134,824 
           
Property and equipment, net  $163,864   $272,026 

 

Depreciation and amortization expenses for the years ended December 31, 2012, 2013 and 2014 were $14,768, $38,453 and $71,906, respectively.

 

9.LAND USE RIGHTS, NET

 

   December 31, 
   2013   2014 
         
Land use rights  $77,590   $143,194 
Less: accumulated depreciation and amortization   1,892    4,087 
           
Land use rights, net  $75,698   $139,107 

 

Amortization expenses for land use rights totaled $140, $1,714 and $2,256 for the years ended December 31, 2012, 2013 and 2014.

 

Future amortization expense will be $3,278 per year for each of the next five years through December 31, 2019.

 

F-53
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

10.GOODWILL

 

   2013   2014 
         
Beginning balance  $4,628   $29,509 
Goodwill acquired in acquisitions of business   24,992    316,492 
Exchange rate differences   (111)   (1,371)
           
Ending balance  $29,509   $344,630 

 

The Group assessed the qualitative factors to determine it is not more likely than not that the fair value of each reporting unit is less than its respective carrying amount. There was no impairment of goodwill during the years ended December 31, 2012, 2013 and 2014.

 

11.ACQUIRED INTANGIBLE ASSETS, NET

 

The gross carrying amount, accumulated amortization and net carrying amount of the acquired intangible assets are as follows:

 

Definite-lived intangible assets

 

   December 31, 
   2013   2014 
         
Definite-lived          
Domain names  $2,482   $5,140 
Technology   12,013    28,043 
Non-compete agreement   3,985    13,026 
Customer relationship   2,973    5,110 
Distributor relationship   -    6,930 
Others   3,666    8,926 
           
Total acquired definite-lived intangible assets   25,119    67,175 
Less: Accumulated amortization          
Domain names   (859)   (1,252)
Technology   (3,450)   (7,627)
Non-compete agreement   (1,584)   (4,426)
Customer relationship   (507)   (1,552)
Distributor relationship   -    (347)
Others   (1,322)   (3,225)
Less: Impairment loss          
Domain names   (424)   (413)
Technology   (887)   (859)
Others   (72)   (70)
           
Acquired definite-lived intangible assets, net  $16,014   $47,404 

 

F-54
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

11.ACQUIRED INTANGIBLE ASSETS, NET - continued

 

Definite-lived intangible assets - continued

 

Amortization expenses for the years ended December 31, 2012, 2013 and 2014 were $1,689, $4,176 and $10,625 respectively. Amortization expenses for the years ending December 31, 2015, 2016, 2017, 2018 and 2019 and after are expected to be $12,571, $8,692, $7,688, $6,680 and $11,613 respectively.

 

The Group performed impairment analysis and recognized an impairment loss of $1,151, $107 and $nil for the year ended December 31, 2012, 2013 and 2014, respectively for intangible assets with determinable useful lives.

 

Indefinite-lived intangible assets

 

   December 31, 
   2013   2014 
         
Indefinite-lived          
Domain names  $371   $2,937 
Trademarks and others   2,200    2,253 
           
Total acquired indefinite-lived intangible assets   2,571    5,190 
Less: Accumulated impairment loss          
Domain names   (288)   (282)
Trademarks and others   (1,049)   (1,023)
           
Accumulated impairment loss   (1,337)   (1,305)
           
Acquired indefinite-lived intangible assets, net  $1,234   $3,885 

 

On December 31 of each year, the Group evaluated the remaining useful lives of the intangible assets with indefinite lives to determine whether events and circumstances continue to support an indefinite useful life. Based on impairment assessment, the Group recognized an impairment loss of $197, $841 and $nil for the years ended December 31, 2012, 2013 and 2014, respectively.

 

F-55
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

12.ACCRUED EXPENSES AND OTHER CURRENT LIBILITIES

 

   December 31, 
   2013   2014 
         
Payable related to investment and acquisition  $365   $64,545 
Payable for third-party service fee   30,017    56,772 
Accrued agent rebates   16,891    53,090 
Accrued payroll   19,217    37,540 
Other tax payable   12,094    21,097 
Deposits from advertising customers   10,060    19,747 
Payable for purchasing long-term assets   20,861    15,507 
Accrued interest expenses of convertible senior notes (see note 14)   4,808    10,062 
Other current liabilities   6,105    20,471 
           
Total  $120,418   $298,831 

 

13.DEFERRED REVENUE

 

Deferred revenue primarily consists of customer advance and deferred income. Customer advance represents service fees prepaid by customers for which the relevant services have not been provided. Deferred income mainly includes deferred subsidy income and deferred reimbursement of ADS depositary service.

 

   December 31, 
   2013   2014 
         
Deferred revenue - current          
Customers advance  $33,979   $52,548 
Deferred income   12,653    20,342 
           
Total deferred revenue - current  $46,632   $72,890 
           
Deferred revenue - noncurrent          
Customers advance  $1,612   $1,606 
Deferred income   1,932    675 
           
Total deferred revenue - noncurrent  $3,544   $2,281 

 

F-56
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

14.LONG-TERM DEBT

 

On September 5, 2013, the Company issued and sold publicly a tranche of unsecured senior notes with an aggregate principal amount of US$600 million which will mature on September 15, 2018 (the “2018 Notes”) at par.

 

On August 6, 2014, the Company issued and sold publicly two tranches of unsecured senior notes:

(i)an aggregate principal amount of US$517.50 million which will mature on August 15, 2020 (the “2020 Notes”); and
(ii)an aggregate principal amount of US$517.50 million which will mature on August 15, 2021 (the “2021 Notes”).

 

The 2018 Notes , 2020 Notes and 2021 Notes are collectively referred as “Notes”. The Notes will be the Company’s senior unsecured obligations and will rank (1) senior in right of payment to any of the Group's existing and future indebtedness that is expressly subordinated in right of payment to the Notes, (2) equal in right of payment to any of the Group's existing and future unsecured indebtedness that is not so subordinated, (3) junior in right of payment to any of the Group's secured indebtedness to the extent of the value of the assets securing such indebtedness and (4) structurally junior to all existing and future indebtedness and other obligations (including trade payables and lease obligations) incurred by the Group's subsidiaries.

 

The Company has accounted for the Notes in accordance with ASC 470, as a single instrument as a long-term debt. The value of the Notes is measured by the cash received. As of December 31, 2014, $1,635,000 was accounted as the value of the Notes in long-term debt.

 

Debt issuance costs were $ 30,780 and were recorded as deferred issuance costs, which were included in other noncurrent assets, are being amortized as interest expense, using the effective interest method, over the term of the Notes pursuant to ASC 835-30-35-2. The net proceeds the Company received from the issuance of the Notes were $587,850 and $1,016,370 for the year ended December 31, 2013 and 2014, respectively.

 

The 2018 Notes bear interest at the rate of 2.50% per annum. Interests are payable semi-annually in arrears on and of each year, beginning on March 15, 2014. The 2020 Notes bear interest at the rate of 0.5% per annum and the 2021 Notes bear interest at the rate of 1.75% per annum. Interests are payable semi-annually in arrears on and of each year, beginning on February 15, 2015. At maturity, the Notes are payable at their principal amount plus accrued and unpaid interest thereon.

 

F-57
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

14.LONG-TERM DEBT - continued

 

The interest expense included in the consolidated statements of operations for the years ended December 31, 2014 and 2013, respectively, is as follows:

 

   For the year ended 
   December 31, 2014 
     
Interest expense at an annual rate of 2.50%  $15,981 
Interest expense at an annual rate of 0.50%  $1,042 
Interest expense at an annual rate of 1.75%  $3,614 
Amortization of debt issuance costs  $3,373 
      
Total interest expense  $24,010 

 

   For the year ended 
   December 31, 2013 
     
Interest expense at an annual rate of 2.50%  $4,808 
Amortization of debt issuance costs  $743 
      
Total interest expense  $5,551 

 

The main terms of the Notes are summarized as follows:

 

Redemption

 

The 2018 Notes, 2020 Notes and 2021 Notes are not redeemable prior to the maturity date of September 15, 2018, August 15, 2020, and August 15, 2021, respectively, except as described below.

 

(1)Non-contingent redemption option at the option of the holder

 

The holders of the Notes (the "Holders") have an option to require the Company to repurchase for cash all or any portion of their 2018 Notes on September 15, 2016, 2020 Notes on August 15, 2017, and 2021 Notes on August 15, 2019. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

 

F-58
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

14.LONG-TERM DEBT - continued

 

(2)Contingent redemption option at the option of the holder

 

If a fundamental change as stipulated in the Indenture dated September 5, 2013 in connection with the 2018 Notes, August 6, 2014 in connection with the 2020 Notes and 2021 Notes, occurs at any time prior to the maturity, the Holders have the option to require the Company to purchase for cash all or any portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

 

The Company believes that the likelihood of occurrence of events considered as a fundamental change is remote.

 

F-59
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

14.LONG-TERM DEBT - continued

 

Redemption - continued

 

(3)Redemption option at the option of the Company

 

On or after September 15, 2016, August 15, 2017 and August 15, 2019, the Company may redeem any or all of the 2018 Notes, 2020 Notes, and 2021 Notes, respectively, in cash at the redemption price, provided that the last reported sale price of the Company's ADSs for 20 or more trading days in a period of 30 consecutive trading days ending within 10 trading days immediately prior to the date of the redemption notice exceeds 130% of the applicable conversion price in effect on each such trading day. The redemption price will equal 100% of the principal amount of the notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. Any notes redeemed by the Company will be paid for in cash.

 

These embedded redemption features are considered clearly and closely related to the debt host pursuant to ASC 815-15-25 and does not meet the requirements for bifurcation.

 

Conversion

 

The Holders may convert their 2018 Notes, 2020 Notes, and 2021 Notes in integral multiples of $1 principle amount at an initial conversion rate of $110.96, $ 125.33, and $ 120.77 per ADS, respectively, at any time prior to the maturity date. Upon conversion of the Notes, the Company will deliver shares of the Company's ADS. The conversion rate is subject to adjustment in certain events, such as distribution of dividends and stock splits. In addition, upon a make-whole fundamental change as stipulated in the Indenture dated September 5, 2013 in connection with this 2018 Note, August 6, 2014 in connection with the 2020 Notes and 2021 Notes, the Company will, under certain circumstances, increase the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

 

The conversion option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the conversion option is considered indexed to the entity's own stock and classified in stockholders' equity.

 

There was no beneficial conversion feature attribute to the Notes as the set conversion price for the Notes was greater than the fair value of the ordinary share price at date of issuance.

 

The Holders have the option to convert upon a fundamental change, if Holders decide to convert in connection with a fundamental change; the number of shares issuable upon conversion will be increased. The Company will have to assess for the contingent beneficial conversion feature using a measurement date upon issuance of the Notes, upon occurrence of such adjustment.

 

F-60
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

15.INCOME TAXES

 

Cayman

 

The Company is a tax-exempted company incorporated in the Cayman Islands.

 

Hong Kong

 

The Company's wholly-owned subsidiaries in Hong Kong are subject to the unified tax rate of 16.5% in Hong Kong for the years ended December 31, 2012, 2013 and 2014. Under the Hong Kong tax laws, these subsidiaries are exempted from income tax on its foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends.

 

Singapore

 

The Company's wholly-owned subsidiary in Singapore, incorporated in 2013, is subject to the unified tax rate of 17% in Singapore for the year ended December 31, 2013 and 2014. There are no withholding taxes in Singapore on remittance of dividends.

 

Japan

 

The Company's majority-owned subsidiary in Japan, acquired in 2013, is subject to the unified tax rate of 25.5% plus 2.55% surcharge in Japan for the year ended December 31, 2013 and 2014. The company also needs to pay fixed amount local income tax to the local tax authorities on monthly basis, on the employee headcount and capital amount. The normal withholding tax rate is 20.42% in Japan on remittance of dividends and could be reduced to 10% under the tax treaty between Hong Kong and Japan.

 

United States of America ("USA")

 

The Company's wholly-owned subsidiary in USA, incorporated in 2013, is subject to the progressive tax rate from 15% to 39% for the federal income tax in the USA and 8.7% for the state income tax in Delaware for the year ended December 31, 2013 and 2014. The normal withholding tax rate is 30% in the USA on remittance of dividends.

 

F-61
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

15.INCOME TAXES - continued

 

PRC

 

The Group's PRC entities are subject to Enterprise Income Tax ("EIT") on the taxable income in accordance with the relevant PRC income tax laws.

 

The Enterprise Income Tax Law ("the New EIT Law") became effective on January 1, 2008. The New EIT Law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises except for certain entities that enjoy preferential tax rates, which are lower than the statutory rates, as described below.

 

Under the New EIT Law and its implementing rules, an enterprise which qualifies as a "high and new technology enterprise" ("HNTE") is entitled to a tax rate of 15%. An enterprise which qualifies as a "Software Enterprise" can enjoy an income tax exemption for two years beginning with its first profitable year and a 50% tax reduction to a rate of 12.5% for the subsequent three years. An enterprise which is approved to adopt the "deemed-profit method" can file its income tax by calculating as 2.5% of the gross revenues.

 

Qizhi Software, Beijing Qihu and Beijing Star World were recognized as HNTE by relevant PRC government authorities, and were entitled to a reduced EIT rate of 15% for 2012, 2013 and 2014.

 

Tianjin Qisi was recognized as Software Enterprise by relevant PRC government authorities in March 2011 and entitled to the preferential tax treatment of "2-year exemption plus 3-year half rate" commencing from its first profit-making year for EIT purposes. For the year ended December 31, 2012 and 2013, Tianjin Qisi enjoys the 2-year tax exemption. Tianjin Qisi was entitled to a preferential tax rate of 12.5% for the year ended December 31, 2014.

 

Qifei Xiangyi was recognized as Software Enterprise by relevant PRC government authorities on Nov 11, 2013 and entitled to the preferential tax treatment of "2-year exemption plus 3-year half rate" commencing from its first profit-making year for EIT purposes. As a consequence, for the year ended December 31, 2013 and 2014, Qifei Xiangyi enjoys the 2-year tax exemption.

 

Certain other PRC subsidiaries and VIEs are not subject to the unified tax rate of 25% as a result of adopting the "deemed-profit method" or the recognition as a qualified "Software Enterprise" or “HNTE”. And the other VIEs and VIEs' subsidiaries are all subject to the unified tax rate of 25%.

 

F-62
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

15.INCOME TAXES - continued

 

PRC - continued

 

Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group's overall operations, and more specifically, with regard to tax residency status. The New EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for Chinese Income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the New EIT Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be treated as residents for EIT law purposes. If the PRC tax authorities subsequently determine that the Company, its subsidiaries, VIEs and VIEs' subsidiaries registered outside the PRC should be deemed a resident enterprise, the Company and its subsidiaries, VIEs and VIEs' subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%.

 

If the Company were to be non-resident for PRC tax purpose, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax would be 10%. Distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax. The Company's PRC entities historically have not declared or paid any dividends.

 

Aggregate undistributed earnings of the Company's subsidiaries, VIEs and VIEs' subsidiaries located in the PRC that are available for distribution to the Company of $651,006 at December 31, 2014 are considered to be indefinitely reinvested, and accordingly, no provision has been made for the Chinese dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. The Chinese tax authorities have also clarified that distributions made out of pre January 1, 2008 retained earnings will not be subject to the withholding tax.

 

Detailed information about income tax of the Group's subsidiaries and VIEs is as below:

 

The current and deferred portion of income tax expense included in the consolidated statements of operations is as follows:

 

   For the year ended December 31, 
   2012   2013   2014 
             
Current income tax expense  $12,062   $22,382   $69,693 
Deferred income tax (benefit) expense   (683)   1,041    (18,268)
                
Total income tax expense  $11,379   $23,423   $51,425 

 

F-63
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

15.INCOME TAXES - continued

 

PRC - continued

 

The principal components of the deferred tax assets and liabilities are as follows:

 

   December 31, 
   2013   2014 
         
Current deferred tax assets          
Accrued payroll  $2,889   $5,141 
Provision of allowance for doubtful accounts   92    478 
Deferred revenue-current   306    660 
Less: Valuation allowance   (158)   (1,435)
           
Current deferred tax assets, net   3,129    4,844 
           
Noncurrent deferred tax assets          
Deferred revenue-noncurrent   383    339 
Intangible assets   266    953 
Fixed assets   66    100 
Subsidy income   231    270 
Net operating loss carry forwards   4,592    9,193 
Promotion fee   -    13,894 
Unrealized loss on available-for-sale investments   -    2,462 
Less: Valuation allowance   (4,592)   (10,846)
           
Noncurrent deferred tax assets, net   946    16,365 
           
Noncurrent deferred tax liabilities          
Acquired intangible assets   2,676    8,159 
Unrealized gain on available-for-sale investments   -    357 
           
Noncurrent deferred tax liabilities  $2,676   $8,516 

 

The Company operates through its subsidiaries and VIEs and the valuation allowance is considered on each individual subsidiary and VIE basis. The subsidiaries and VIEs registered in the PRC have total net operating loss carry forwards of $50,874 as of December 31, 2014 which will expire on various dates between December 31, 2015 and December 31, 2019.

 

F-64
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

15.INCOME TAXES - continued

 

PRC - continued

 

Reconciliation between the income tax expense computed by applying the PRC tax rate to income before income tax and the actual provision for income tax is as follows:

 

   For the year ended December 31, 
   2012   2013   2014 
             
Income before income tax expense  $62,695   $124,019   $286,494 
PRC statutory income tax rate   25%   25%   25%
Income tax expense at the statutory income tax rate   15,674    31,005    71,624 
Permanent differences   870    1,663    5,506 
Effect of different income tax calculation method required by tax bureau   67    48    (5)
Effect of tax exempt status in Cayman Islands and other jurisdictions   12,217    30,241    24,701 
Effect of different income tax rate in Hong Kong   (25)   168    273 
Effect of income tax holiday and preferential tax rates   (17,844)   (43,460)   (58,529)
Changes in valuation allowance   420    3,758    7,855 
                
Income tax expense  $11,379   $23,423   $51,425 

 

Certain consolidated entities of the Group enjoy tax holidays granted by the local tax authorities. Without the tax holidays, the Group's income tax expense would have increased by $17,844, $43,460 and $58,529 for the years ended December 31, 2012, 2013 and 2014, respectively. The impact of the tax holidays on basic net income per ordinary share was an increase of $0.10, $0.24 and $0.32 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

16.ORDINARY SHARES

 

The Company's Memorandum and Articles of Association, as amended, authorizes the Company to issue 500,000,000 ordinary shares with a par value of $0.001 each as of December 31, 2012, 2013 and 2014, respectively.

 

In January 2012, the Company's board of directors and shareholders approved a share repurchase program, which provided authorization to purchase up to $50 million worth of the Company's outstanding ADSs. In July 2012 and August 2012, the Company repurchased 900 and 8,796 ADSs, respectively, at a price of $14.50 and $14.31 through open-market transactions. In March 2013, the Company completed the legal process of registration for the repurchased stock.

 

In December 2013, the Company issued 51,722 ordinary shares to a related party of the Company and 76,372 and 76,372 ordinary shares to each of the two selling shareholders , in connection with the Company's acquisition of 51% equity interest in an overseas internet service company (see note 3 (4)).

 

F-65
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

16.ORDINARY SHARES - continued

 

In the years of 2012, 2013 and 2014, the Company issued 5,127,846, 4,543,902 and 4,525,410 ordinary shares for future delivery to the employees and nonemployees upon exercise of share options or grant of nonvested shares, respectively.

As of December 31, 2014, there are 147,485,168 Class A ordinary shares and 45,931,163 Class B ordinary shares outstanding, par value $0.001 per share.

 

The board of Company approved a $200 million share repurchase program in October 2014. As of December 31, 2014, the Company prepaid $104 million for repurchase of shares at market prices through open market transactions. The Company completed the share repurchase program in February 2015.

 

17.NET INCOME PER SHARE

 

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:

 

   2012   2013   2014 
             
Net income attributable to Qihoo 360 Technology Co. Ltd   46,746    99,652    222,768 
Undistributed earnings allocated to participating unvested shares (i)   2,049    3,175    3,848 
                
Net income attributable to Class A and Class B ordinary shareholders for computing basic net income per ordinary share   44,697    96,477    218,920 
                
Net income attributable to nonvested shareholders for computing basic net income per participating unvested shares (i)   2,049    3,175    3,848 
                
Weighted average ordinary shares outstanding used in computing basic net income per Class A and Class B ordinary share   168,709,221    174,727,288    181,909,716 
Weighted average shares used in calculating net income per participating unvested share-basic   7,733,645    5,749,393    3,197,500 
Effect of dilutive securities:               
Plus incremental weighted average ordinary shares from assumed exercise of stock options and nonvested shares using the treasury stock method   7,180,369    12,560,169    12,384,156 
Weighted average ordinary shares outstanding used in computing diluted net income per Class A and Class B ordinary share (i)   183,623,235    193,036,850    197,491,372 
                
Net income per Class A and Class B ordinary share-basic   0.26    0.55    1.20 
Net income per participating unvested share-basic   0.26    0.55    1.20 
Net income per Class A and Class B ordinary share-diluted   0.25    0.52    1.13 

 

(i)The net income attributable to Qihoo 360 Technology Co. Ltd. was allocated among Class A and Class B ordinary shares, and certain nonvested shares pro rata on the basis of their right to participate in dividends.

 

For the year 2012, 2013 and 2014, 4,990,513, 533,054 and 244,797 share options were excluded as their effect was anti-dilutive, respectively.

 

For the year 2012, 2013 and 2014, nil, 2,578,779 and 13,116,846 ordinary shares resulting from the assumed conversions of Convertible Senior Notes were excluded from the calculation of diluted net income per share as their effect was anti-dilutive.

 

F-66
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION

 

Share options

 

On January 25, 2006, the Company adopted the 2006 Employee Share Option Plan (the "2006 Plan") for the granting of share options to employees and nonemployees to reward them for services to the Company and to provide incentives for future service. The share options expire ten years from the date of grant.

 

On April 1, 2011, the Company adopted the 2011 Employee Share Incentive Plan (the "2011 Plan") for the granting of share options and nonvested shares (see note 18) to employees and nonemployees to reward them for services to the Company and to provide incentives for future service. The share options expire ten years from the date of grant.

 

Option exercise

 

The option shall be exercisable by giving notice in writing to the Company stating that the option is exercised and the number of shares in respect of which it is exercised. Any such notice must be accompanied by a remittance for the full amount of the exercise price for the shares in respect of which the notice is given.

 

Vesting of options

 

Under the 2006 Plan, the option will vest when the service conditions are met. In addition, according with the 2006 Plan, one of the exit events, described in "Termination of Option" below, shall happen. In accordance with the vesting schedules set out in the 2006 Plan, unless otherwise determined by the CEO of the Company, 1/4 of the options granted will be vested on each anniversary from the date of grant subject to the occurrence of one of the exit events.

 

Under the 2011 Plan, the Plan administrator (compensation committee) has the authority to determine the schedule for vesting. The vast majority of share options granted under the 2011 Plan shall vest (i) 20 per cent of the aggregate number of options 12 months after the start of vesting period; (ii) 20 per cent of the aggregate number of options 24 months after the start of vesting period; (iii) 30 per cent of the aggregate number of options 36 months after the start of vesting period; and (iv) 30 per cent of the aggregate number of options 48 months after the start of vesting period.

  

F-67
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION - continued

 

Share options - continued

 

Termination of option

 

Both under the 2006 and the 2011 Plan, the option may not be exercised until vested. Once vested, the option may be exercised in whole or any part, at any time. However, an option will be forfeited, if the grantee ceases to be an employee.

 

Furthermore, in accordance with the 2006 Plan, an option will be forfeited, if the grantee ceases to be an employee prior to an exit, then (i) the portion of the option which has been otherwise vested and not exercised, and (ii) the portion of the options which has not been vested, will automatically lapse and expire.

 

Exit means (i) a listing, (ii) a sale of all or substantially all of the issued share capital of the Company, (iii) a sale by the Company of all or substantially all of its assets, (iv) the passing of an effective resolution or the making of an order of a competent court for the winding up of the Company.

 

Based on the terms above, the options will not actually vest until one of the exit events happens and the service conditions are met.

 

Under the 2011 Plan, the Plan administrator (compensation committee) has the authority to terminate the option shall certain events happen.

 

The fair value of the options granted is estimated on the date of grant using the Black-Scholes or Binomial-Model option-pricing model with the following assumptions used.

 

    Year ended December 31,
    2012   2013   2014
Risk-free interest rate   2.83% - 3.35%   3.40% - 4.02%   3.96%~4.61%
Expected life (years)   6.35   6.35   5.85~6.35
Volatility   46.98% - 74%   46.04% - 46.68%   44.28%~46.02%
Dividend yield   -   -   -

 

(1)Volatility

 

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical share price volatility of comparable companies over a period comparable to the expected term of the options.

 

(2)Risk-free interest rate

 

Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options.

 

 

F-68
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION - continued

 

Share options - continued

 

(3)Expected term

 

For the options granted to employees, as the Group did not have sufficient historical share option exercise experience, it estimated the expected term average based on a consideration of factors including contractual term and vesting period.

 

(4)Dividend yield

 

The dividend yield was estimated by the Group based on its expected dividend policy over the expected term of the options.

 

The following table summarizes the option activity for the year ended December 31, 2014:

 

       Weighted average   Weighted average   Aggregate 
       exercise price   remaining contractual   intrinsic value 
   Number of options   per option   life (Years)   (in thousands) 
                 
Outstanding at December 31, 2013   11,482,513   $10.04    7.55    512,964 
Granted   258,500    45.35           
Exercised   (1,833,657)   7.96           
Expired   (3,000)   58.49           
Forfeited   (720,366)   20.23           
                     
Outstanding at December 31, 2014   9,183,990   $10.57    6.61    257,557 
                     
Vested and exercisable at December 31, 2014   4,913,833    7.00    6.09    153,647 
                     
Vested and expect to vest at December 31, 2014   16,690,231    8.32    6.28    502,394 

 

The weighted-average grant-date fair value per option granted for the years ended December 31, 2012, 2013 and 2014 was $6.77, $13.19 and $32.61, respectively.

 

The total intrinsic value of options exercised for the years ended December 31, 2012, 2013 and 2014 was $19,486, $138,364 and $98,112, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

 

The Group recognized $26,997, $21,921 and $16,702 share-based compensation expense for the years ended December 31, 2012, 2013 and 2014, respectively.

 

As of December 31, 2014, there was $18,875 unrecognized share-based compensation expense relating to share options. The expense is expected to be recognized over a weighted-average remaining vesting period of 0.73 years.

 

Certain subsidiaries also have equity incentive plans. Total share-based compensation expenses recognized and unrecognized from such plans were insignificant, both individually and in aggregate, for all years presented.

 

F-69
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION - continued

 

Nonvested shares

 

On January 19, 2006, the Company's shareholder, Young Vision, the Series A shareholder and certain other parties entered into the Share Incentive Agreement, pursuant to which, Young Vision allocated a total of 18,086,101 ordinary shares of the Company to an equity incentive pool designed to award employees and consultants of the Group in accordance with the Employee Share Vesting Scheme (the "2006 Share Plan"), of which 9,951,000 shares were granted before January 1, 2008. In addition, in January 2010, the Company issued 3,517,544 nonvested shares in connection with certain 2009 acquisitions.

 

In February 2011, Young Vision transferred 11,826,000 and 5,550,654 ordinary shares in the equity incentive pool to Sino Honor Limited ("Sino Honor") and Strengthen Goal Limited ("Strengthen Goal"), which are also companies owned by the Company's director and employee, respectively.

 

The nonvested shares granted or vested in accordance with the 2006 Share Plan will, be held by Young Vision, Sino Honor and Strengthen Goal, and all rights (including without limitation, the voting rights and the right to receive the share certificates) attached to such shares will be exercised byYoung Vision, Sino Honor and Strengthen Goal at their sole and absolute discretion, except that the grantee shall have the right to all the monetary benefits deriving from the shares vested when the shares are disposed of in accordance with the 2006 Share Plan. Since the unvested nonvested shares are entitled to the same rights (including nonforfeitable dividend rights) and obligations as ordinary shares, these shares are considered participating securities.

 

The nonvested shares granted under the 2006 Share Plan shall vest (i) 15 per cent of the aggregate number of shares 12 months after the start of vesting period; (ii) 20 per cent of the aggregate number of shares 24 months after the start of vesting period; (iii) 30 per cent of the aggregate number of shares so granted 36 months after the start of vesting period; and (iv) 35 per cent of the aggregate number of Shares 48 months after the start of vesting period.

 

F-70
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION - continued

 

Nonvested shares - continued

 

However, all nonvested shares to any grantee shall also be subject to the Company's rights to repurchase at an aggregate repurchase price of RMB1.00, if the grantee terminated his/her employment with the Group: (a) in all, on or before the second anniversary of the start of vesting period; (b) 50% of otherwise vested nonvested shares, after the second anniversary but before the fourth anniversary of the start of vesting period; or (c) no shares, after the fourth anniversary of the start of vesting period.

 

Under the 2011 Plan, the nonvested shares granted shall vest based on service, or any other criteria selected by the Compensation Committee. If the grantee terminated his/her service ("Termination of Service") with the Group, the Group shall have the right to repurchase the unvested nonvested shares.

 

Termination of Service means (i) As to a consultant, the time when she/he is terminated for any reason, (ii) As to a non-employee director, the time when non-employee director ceases to be a director for any reason, (iii) As to an employee, the time when the employee-employer relationship is terminated for any reason. However, all terminations shall exclude simultaneously commences or remains in employment or service with the Company, any subsidiaries or VIEs and VIEs' subsidiaries in others way.

 

The following table summarizes information regarding the nonvested shares granted:

 

       Weighted average 
       fair value per 
   Number of   nonvested share 
   nonvested shares   at the grant date 
         
Outstanding at December 31, 2013   10,070,794   $15.44 
Granted   2,734,139    56.27 
Vested   (3,086,753)   12.79 
Forfeited   (1,174,065)   33.32 
           
Outstanding at December 31, 2014   8,544,115   $26.85 
           
Vested and to be transferred to grantees at December 31, 2014   21,503,321      
           
Vested and expect to vest at December 31, 2014   31,574,115      

 

F-71
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

18.SHARE-BASED COMPENSATION - continued

 

Nonvested shares - continued

 

Included in the nonvested shares granted during 2013, there were 1,000,000 nonvested shares granted to the two co-founders of the Company to reward them for their outstanding performance in the past years. These nonvested shares vested immediately and the Company recognized $57,027 share based compensation expense as a result of such grant for the year ended December 31, 2013.

 

The fair value of the nonvested shares was determined by the closing sales price of the shares as quoted on the principal exchange or system. The total fair value of the nonvested shares vested for the years ended December 31, 2012, 2013 and 2014 was $8,361, $70,980 and $39,476, respectively.

 

The Group recognized $23,608, $99,166 and $77,364 share based compensation expense for the years ended December 31, 2012, 2013 and 2014 respectively.

 

As of December 31, 2014, total unrecognized compensation expense relating to the nonvested shares was $104,592. The expense is expected to be recognized over a weighted average period of 2.94 years using the graded vesting attribution method.

 

F-72
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

19.RELATED PARTY BALANCES AND TRANSACTIONS

 

The amounts due from related parties mainly represent borrowings provided by the Group to investees in which the Group did not hold controlling interests, and amounts in connection with services provided by the Group to such investees, which arose in the ordinary course of business.

 

The amounts due to related parties mainly represent unpaid revenue sharing in connection with game operation, which arose in the ordinary course of business.

 

The transactions between the Group and related parties were insignificant, both individually and in aggregate.

 

F-73
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

20.COMMITMENTS AND CONTINGENCIES

 

(1)Operating commitments

 

The Group has future rental commitments related to facilities and offices under non-cancelable operating lease agreements, advertising agreements and fees commitment related to obtain exclusive rights of operating games on the Group's platform.

 

Future minimum payments under those commitments as of December 31, 2014 were as follows:

 

2015   27,437 
2016   6,460 
2017   4,061 
2018   2,070 
2019 and after   4,641 
      
    44,669 

 

Rental expenses under operating leases for 2012, 2013 and 2014 were $5,967, $5,057 and $12,871, respectively.

 

(2)Other commitments

 

The Group has future commitment relates to interest payable in connection with the issuance of Notes (see Note 14).

 

Assuming all debt was held to maturity, future maximum payments under those commitments as of December 31, 2014 were as follows:

 

2015   26,644 
2016   26,644 
2017   26,644 
2018   22,269 
2019 and after   27,977 
      
    130,178 

 

F-74
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

20.COMMITMENTS AND CONTINGENCIES - continued

 

(3)Contingencies

 

In October 2012, two affiliates of Baidu brought an unfair competitive practices and copyright infringement claim against the Group in the First Intermediate People's Court of Beijing, alleging that the Group breached the Robots Exclusion Protocol to access Baidu's content without authorization and seeking $16.1 million (RMB100.0 million) in damages. The court heard the case in October 2013 and ruled that the Group’s actions constituted unfair competition and awarded $0.1 million (RMB500,000) as damage to Baidu in August 2014. $0.1 million was accrued by the Group for such contingency. Baidu appealed in the Higher People’s Court of Beijing in August 2014. This case is currently pending.

 

F-75
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

20.COMMITMENTS AND CONTINGENCIES - continued

 

(3)Contingencies - continued

 

In February 2013, the Group brought a defamation claim against Shanghai Jingwen Culture Communication Co., Ltd. or Shanghai Jingwen, in the Xuhui District People's Court of Shanghai, alleging that Shanghai Jingwen published and distributed a series of false articles and reports against the Group on its website and electronic newspapers by maliciously accusing the level of safety and security of its products. The Group sought retraction of the defamatory statements, an apology from Shanghai Jingwen and $8.1 million (RMB50.0 million) in damages. In September 2014, the court ruled that Shanghai Jingwen’s actions constituted defamation and awarded $0.2 million (RMB1.5 million) and public apology to the Group. Shanghai Jingwen appealed to the First Intermediate People’s Court of Shanghai, and this case is currently pending.

 

In October 2013, two affiliates of Sogou Inc. brought an unfair competitive practices claim against the Group in the Intermediate People’s Court of Xi’an, alleging that the Group used its software to change user default settings without their permission, including setting their default browser as 360 Safe Browser, which interfered with their use of Sogou’s browser. The claim sought cessation of the unfair competitive practices and $7.3 million (RMB45.5 million) in damages. This case was heard in July 2014 and is currently pending. In September 2013, the Group brought an unfair competitive practices claim against two affiliates of Sogou Inc., or Sogou, in the Second Intermediate People’s Court of Beijing, alleging that Sogou made defamatory statements on its public Weibo account and through online videos against the Group and seeking cessation of the unfair competitive practices, a retraction of the defamatory statements and $8.1 million (RMB50.0 million) in damages. This case was heard in May 2014 and the court ruled in December 2014 that the litigation shall be suspended, pending for the outcome of the unfair competition case brought by Sogou against the Group in Xi’an.

 

In October 2013, two affiliates of Sogou Inc. brought an unfair competitive practices claim against the Group in the Second Intermediate People’s Court of Beijing, alleging that the Group’s 360 Safe Guard issued blocking notifications for other types of software, which negatively impacted their ability to run their business. The claim sought cessation of the unfair competitive practices and $8.1 million (RMB50.0 million) in damages. In January 2015, the court ruled that the Group’s actions constituted unfair competition and awarded $0.8 million (RMB5.1 million) as damage to Sogou. The Group appealed to the Higher People’s Court of Beijing and the case is currently pending. $0.8 million was accrued by the Group for such contingency based on the ruling of the court.

 

F-76
 

  

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

20.COMMITMENTS AND CONTINGENCIES - continued

 

(3)Contingencies - continued

 

In December 2014, Baidu brought an unfair competitive practice claim against the Group in the Intellectual Property Court of Beijing, alleging that the Group’s 360 Safe Guard issued pop-up notifications to block Baidu’s security software and made defamatory comments against Baidu in user’s name. The claim sought cessation of the unfair competitive practices and $1.6 million (RMB10.1 million) in damages. This case is currently pending.

 

In December 2014, Baidu brought an unfair competitive practice claim against the Group in the Intellectual Property Court of Beijing, alleging that the Group’s search engine showed negative information when users are searching relevant key words to “Baidu” or “Li Yanhong”, which caused severe reputational damage to Baidu. The claim sought cessation of the unfair competitive practices and $1.6 million (RMB10.2 million) in damages. This case is currently pending.

 

In December 2014, Baidu brought an unfair competitive practice claim against the Group in the Intellectual Property Court of Beijing, alleging that the Group set 10 key words in the pull-down menu of the search results prompt box of Baidu’s search engine and by clicking those key words the users would be redirected to the search results pages of 360 search engine. The claim sought cessation of the unfair competitive practices and $1.6 million (RMB10.0 million) in damages. This case is currently pending.

 

Other than the aforementioned lawsuits, the Group is also a party to several legal proceedings or claims in China that the Group believes are immaterial.

 

Based on information currently available, the Group cannot reasonably estimate the loss that is reasonably possible at this stage except for two of above cases. Therefore, $nil, $0.9 million and $0.9 million contingency loss were recognized in the consolidated financial statements as of December 31, 2012, 2013 and 2014, respectively.

 

F-77
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

21.SEGMENT AND GEOGRAPHIC INFORMATION

 

The Group’s chief operating decision maker is the Chief Executive Officer and the President, who review consolidated results of operations prepared in accordance with U.S. GAAP when making decisions about allocating resources and assessing performance of the Group. The Group has operating segments: internet services and others. Others are insignificant.

 

The Group does not allocate any assets to its operating segments as management does not believe that allocating these assets is useful in evaluating these segments' performance. Accordingly, the Group has not made disclosure of total assets by reportable segment.

 

   For the years ended December 31, 
   2012   2013   2014 
Revenues:               
Internet services  $328,882   $671,088   $1,370,695 
Others   150    -    19,965 
    329,032    671,088    1,390,660 
Cost of revenues:               
Internet services   (32,762)   (87,838)   (297,645)
Others   (40)   -    (7,817)
    (32,802)   (87,838)   (305,462)
Gross profit:               
Internet services   296,120    583,250    1,073,050 
Others   110    -    12,148 
    296,230    583,250    1,085,198 
Operating expenses:               
Product development   (156,269)   (255,248)   (406,250)
Selling and marketing   (58,178)   (110,104)   (333,701)
General and administrative   (35,643)   (117,148)   (94,260)
Total operating expenses   (250,090)   (482,500)   (834,211)
Subsidy income   2,570    2,349    8,506 
Income from operations  $48,710   $103,099   $259,493 

 

Substantially all of the Group’s revenues for the three years ended December 31, 2012, 2013 and 2014 were generated from the PRC. Similarly, substantial all of the identifiable assets of the Group are located in the PRC. Accordingly, no geographical information is presented.

 

F-78
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

22.MAINLAND CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION

 

Full time employees of the Group in the mainland China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries. The total provisions for such employee benefits were $18,125, $31,441 and $54,926 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

PRC legal restrictions permit payments of dividends by the Group's PRC entities only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment Enterprises, the PRC entities must make appropriations from after-tax profit to non-distributable statutory reserve funds as determined by the Board of Directors of the Group. These reserve funds include the (1) general reserve, (2) enterprise expansion fund and (3) staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each year-end); the other two funds are at the Group's discretion. These reserve funds can only be used for specific purposes and are not distributable as cash dividends. The Group has made appropriation to these statutory reserve funds of $10,408, $12,074 and $21,284 for the years ended December 31, 2012, 2013 and 2014, respectively.

 

23.RESTRICTED NET ASSETS

 

Relevant PRC statutory laws and regulations permit the payment of dividends by the Group's PRC subsidiaries, VIEs and VIEs' subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-tax income be set aside as a reserve prior to the payment of dividends. As a result of these PRC laws and regulations, the Group's PRC subsidiaries, VIEs and VIEs' subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. The balance of restricted net assets was $261,895and $474,595, of which $89,243 and $246,880 was attributed to the paid in capital and statutory reserves of the VIEs and VIEs' subsidiaries and $172,652, and $227,715 was attributed to the paid in capital and statutory reserves of the Company's PRC subsidiaries, as of December 31, 2013 and 2014, respectively. The PRC subsidiaries' accumulated profits may be distributed as dividends to the Company without the consent of a third party. The VIEs' revenues and accumulated profits may be transferred to Qizhi Software through contractual arrangements without the consent of a third party.

 

F-79
 

  

QIHOO 360 TECHNOLOGY CO. LTD.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - continued

FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

24.SUBSEQUENT EVENTS

 

In December 2014, the Group entered into an agreement with Coolpad Group Limited, a leading smartphone manufacturer in China, to form a joint venture which will focus on designing, manufacturing, marketing and distributing smartphones and other mobile Internet devices. The Group acquired a 45% stake in the joint venture at a consideration of $409.05 million in cash. The transaction is expected to close in the second quarter of 2015.

 

In October 2014, the Group’s board of directors and shareholders approved another share repurchase program, which provided authorization to purchase up to $200 million worth of its outstanding ADSs.  This program was completed in February 2015.

 

In March 2015, the Group authorized the repurchase of up to additional US$200 million of the Company's American Depositary Shares. The share repurchases are currently expected to be made through open market purchases or privately negotiated transactions as market conditions warrant, at prices the Company deems appropriate, and in accordance with the Securities and Exchange Commission requirements.

 

F-80
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

BALANCE SHEETS

(U.S. dollars in thousands, except for shares and per share data)

 

   December 31, 
   2013   2014 
ASSETS          
Current assets:          
Cash and cash equivalents  $695,515   $1,242,129 
Restricted cash   300    - 
Short-term investments   253    6,839 
Prepaid expenses and other current assets   3,206    111,872 
Amounts due from subsidiaries and VIEs   167,395    459,303 
Deferred tax assets - current   306    412 
           
Total current assets   866,975    1,820,555 
           
Acquired intangible assets, net   2,449    1,205 
Investments in subsidiaries and VIEs   449,893    799,123 
Long-term investments   17,139    45,211 
Other noncurrent assets   11,707    26,964 
Deferred tax assets - noncurrent   383    103 
           
TOTAL ASSETS  $1,348,546   $2,693,161 
           
LIABILITIES          
Current liabilities:          
Accrued expenses and other current liabilities   6,760    12,455 
Deferred revenue-current   1,150    1,539 
Amounts due to subsidiaries and VIEs   2,306    15,184 
           
Total current liabilities   10,216    29,178 
           
Deferred revenue-noncurrent   1,437    385 
Long-term debt   600,000    1,635,000 
           
TOTAL LIABILITIES  $611,653   $1,664,563 
           
EQUITY          
Qihoo 360 Technology Co. Ltd. shareholders' equity          
Class A ordinary shares ($0.001 par value; 378,000,000 and 378,000,000 shares authorized as of December 31, 2013 and 2014, respectively; 134,123,218 and 147,485,168 shares issued and outstanding as of December 31, 2013 and 2014, respectively)   134    147 
Class B ordinary shares ($0.001 par value; 122,000,000 and 122,000,000 shares authorized as of December 31, 2013 and 2014, respectively; 54,767,703 and 45,931,163 shares issued and outstanding as of December 31, 2013 and 2014, respectively)   55    46 
Treasury stock   (139)   (139)
Additional paid-in capital   568,675    669,760 
Accumulated other comprehensive income (loss)   20,380    (11,772)
Retained earnings   147,788    370,556 
           
Total shareholders' equity   736,893    1,028,598 
           
TOTAL EQUITY   736,893    1,028,598 
           
TOTAL LIABILITIES AND EQUITY  $1,348,546   $2,693,161 

 

F-81
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

STATEMENTS OF OPERATIONS

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
             
Cost of revenues   4    -    - 
                
Operating expenses:               
Selling and marketing   21,289    15,519    15,666 
General and administrative   10,815    73,372    19,305 
Product development   21,782    38,211    59,375 
                
Total operating expenses   53,886    127,102    94,346 
                
Loss from operations   (53,890)   (127,102)   (94,346)
                
Interest income   4,702    6,341    20,264 
Interest expense   -    (5,551)   (24,010)
Other income   1,277    1,197    1,447 
Exchange gain (loss)   412    5,100    (11,520)
(Loss) gain in connection with short-term investments   (52)   327    10,230 
Gain in connection with long-term investments   -    413    - 
                
Loss before income tax expense and earnings from subsidiary and VIEs   (47,551)   (119,275)   (97,935)
Income in earnings of subsidiaries and VIEs   94,639    219,247    321,088 
                
Income before income tax expense   47,088    99,972    223,153 
Income tax expense   (342)   (320)   (385)
                
Net income attributable to Qihoo 360 Technology Co. Ltd.  $46,746   $99,652   $222,768 

 

F-82
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

STATEMENTS OF COMPREHENSIVE INCOME

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
             
Net income  $46,746   $99,652   $222,768 
                
Other comprehensive income (loss), net of tax:               
Foreign currency translation adjustments   2,851    11,266    (42,342)
Unrealized loss on available-for-sale investments   -    -    10,190 
                
Other comprehensive income (loss)   2,851    11,266    (32,152)
                
Comprehensive income   49,597    110,918    190,616 
                
Add: Comprehensive loss attributable to noncontrolling interest   -    -    - 
                
Comprehensive income attributable to Qihoo 360 Technology Co. Ltd.  $49,597   $110,918   $190,616 

 

F-83
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

STATEMENTS OF CHANGES IN EQUITY

(U.S. dollars in thousands, except share data and per share data, or otherwise noted)

 

                           Total 
                           Qihoo 360 
                   Accumulated   (Accumulated   Technology 
               Additional   other   deficit)   Co. Ltd. 
   Ordinary shares       paid-in   comprehensive   retained   shareholders' 
   Shares   Amount   Treasury Stock   capital   income (loss)   earnings   equity 
                             
Balance as of January 1, 2012   179,029,251   $179   $-   $363,021   $6,263   $1,390   $370,853 
Issuance of ordinary shares in connection with share-based compensation arrangements   3,512,394    3    -    -    -    -    3 
Share-based compensation   -    -    -    50,605    -    -    50,605 
Issuance of ordinary shares in connection with exercise of options   1,615,452    2    -    6,963    -    -    6,965 
Disposal of noncontrolling interest in subsidiaries   -    -    -    73    -    -    73 
Net income   -    -    -    -    -    46,746    46,746 
Other comprehensive income   -    -    -    -    2,851    -    2,851 
                                    
Balance as of December 31, 2012   184,157,097    184    -    420,662    9,114    48,136    478,096 
Issuance of ordinary shares in connection with share-based compensation arrangements   561,517    1    -    -    -    -    1 
Share repurchase   (14,544)   -    (139)   -    -    -    (139)
Share-based compensation   -    -    -    121,087    -    -    121,087 
Issuance of ordinary shares in connection with business acquisition   204,466    -    -    7,864    -    -    7,864 
Issuance of ordinary shares in connection with exercise of options   3,982,385    4    -    19,067    -    -    19,071 
Disposal of noncontrolling interest in subsidiaries   -    -    -    (5)   -    -    (5)
Net income   -    -    -    -    -    99,652    99,652 
Other comprehensive income   -    -    -    -    11,266    -    11,266 
                                    
Balance as of December 31, 2013   188,890,921    189    (139)   568,675    20,380    147,788    736,893 
Issuance of ordinary shares in connection with share-based compensation arrangements   2,691,753    2    -    -    -    -    2 
Share-based compensation   -    -    -    90,392    -    -    90,392 
Issuance of ordinary shares in connection with exercise of options   1,833,657    2    -    15,064    -    -    15,066 
Acquisition of additional equity interests in subsidiaries   -    -    -    (4,371)   -    -    (4,371)
Net income   -    -    -    -    -    222,768    222,768 
Other comprehensive loss   -    -    -    -    (32,152)   -    (32,152)
                                    
Balance as of December 31, 2014   193,416,331   $193   $(139)  $669,760   $(11,772)  $370,556   $1,028,598 

 

F-84
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

STATEMENTS OF CASH FLOW

(U.S. dollars in thousands, except for shares and per share data)

 

   For the years ended December 31, 
   2012   2013   2014 
             
Cash flows from operating activities               
Net income   46,746    99,652    222,768 
Adjustments to reconcile net income to net cash provided by operating activities               
Share-based compensation   50,605    121,087    89,686 
Gain from investments in subsidiaries and VIEs   (94,639)   (219,247)   (321,089)
Depreciation and amortization   582    1,476    1,243 
Loss (gain) in connection with short-term investments   52    (327)   (10,230)
Gain in connection with long-term investments   -    (413)   - 
Prepaid expenses and other current assets   (2,307)   463    (3,788)
Deferred taxes   (178)   (53)   174 
Other noncurrent assets   -    743    3,373 
Accrued expenses and other current liabilities   149    5,488    5,694 
Deferred revenue   700    215    (662)
Amount due from/to subsidiaries and VIEs   (21,816)   (128,738)   (280,582)
                
Net cash used in operating activities   (20,106)   (119,654)   (293,413)
                
Cash flows from investing activities               
(Increase) decrease in restricted cash   (300)   -    300 
Purchase of intangible assets   (1,500)   (1,500)   - 
Purchase of short-term investments   -    (510)   (30,025)
Proceeds from sale of short-term investments   -    762    35,335 
Capital contribution for long-term investments   (450)   (15,760)   (39,928)
Dividends received from a cost method investee   -    413    - 
Investment in subsidiaries   (1,200)   -    (53,771)
                
Net cash used in investing activities   (3,450)   (16,595)   (88,089)
                
Cash flows from financing activities               
Proceeds from issuance of Convertible Senior Notes (net of issuance costs of $12,150 and $18,630 in 2013 and 2014, respectively)   -    587,850    1,016,370 
Proceeds from exercise of share options   2,089    23,678    15,947 
Payment for share repurchase   (139)   -    (104,201)
                
Net cash provided by financing activities   1,950    611,528    928,116 
                
Net (decrease) increase in cash and cash equivalents   (21,606)   475,279    546,614 
Cash and cash equivalents at beginning of year   241,842    220,236    695,515 
                
Cash and cash equivalents at end of year   220,236    695,515    1,242,129 

 

F-85
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

ADDITIONAL INFORMATION - FINANCIAL STATEMENTS SCHEDULE I

FINANCIAL INFORMATION OF PARENT COMPANY

NOTES OF THE CONDENSED FINANCIAL STATEMENT

 

1.BASIS FOR PREPARATION

 

The condensed financial information of the Company has been prepared using the same accounting policies as set out in the Group's consolidated financial statements except that the Company has used the equity method to account for investments in its subsidiaries and VIEs.

 

2.INVESTMENTS IN SUBSIDIARIES AND VIEs

 

The Company and its subsidiaries and VIEs were included in the consolidated financial statements where the inter-company transactions and balances were eliminated upon consolidation. For purpose of the Company's stand-alone financial statements, its investments in subsidiaries and VIEs were reported using the equity method of accounting. The Company's share of income and losses from its subsidiaries and VIEs were reported as equity in earnings of subsidiaries and VIEs in the accompanying parent company financial statements.

 

F-86



 

EXHIBIT 4.69

 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

AND

 

CITICORP INTERNATIONAL LIMITED,

 

as Trustee

 

INDENTURE

 

Dated as of August 6, 2014

 

0.50% Convertible Senior Notes due 2020

 

 

 
 

 

TABLE OF CONTENTS

  Page
ARTICLE 1 DEFINITIONS 1
   
Section 1.01   Definitions. 1
Section 1.02   References to Interest. 10
Section 1.03   New York Office of Trustee, Conversion Agent, Note Registrar, Paying Agent and Transfer Agent. 11
   
ARTICLE 2 ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES 11
   
Section 2.01   Designation and Amount. 11
Section 2.02   Form of Notes. 11
Section 2.03   Date and Denomination of Notes; Payments of Interest and Defaulted Amounts. 12
Section 2.04   Execution, Authentication and Delivery of Notes. 13
Section 2.05   Exchange and Registration of Transfer of Notes; Restrictions on Transfer; Depositary. 14
Section 2.06   Transfer and Exchange. 21
Section 2.07   Mutilated, Destroyed, Lost or Stolen Notes. 25
Section 2.08   Temporary Notes. 26
Section 2.09   Cancellation of Notes Paid, Converted, Etc. 27
Section 2.10   CUSIP and ISIN Numbers. 27
Section 2.11   Additional Notes; Repurchases. 27
   
ARTICLE 3 SATISFACTION AND DISCHARGE 27
   
Section 3.01   Satisfaction and Discharge. 27
   
ARTICLE 4 PARTICULAR COVENANTS OF THE COMPANY 28
   
Section 4.01   Payment of Principal and Interest. 28
Section 4.02   Maintenance of Office or Agency. 28
Section 4.03   Appointments to Fill Vacancies in Trustee’s Office. 29
Section 4.04   Provisions as to Paying Agent. 29
Section 4.05   Existence. 30
Section 4.06   Rule 144A Information Requirement and Annual Reports. 30
Section 4.07   Payment of Additional Amounts 32
Section 4.08   Stay, Extension and Usury Laws. 34
Section 4.09   Compliance Certificate; Statements as to Defaults. 34
Section 4.10   Further Instruments and Acts. 34
   
ARTICLE 5 LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE 34
   
Section 5.01   Lists of Holders. 34
Section 5.02   Preservation and Disclosure of Lists. 35

 

i
 

   
ARTICLE 6 DEFAULTS AND REMEDIES 35
   
Section 6.01   Events of Default. 35
Section 6.02   Acceleration; Rescission and Annulment. 36
Section 6.03   Additional Interest. 37
Section 6.04   Payments of Notes on Default; Suit Therefor. 38
Section 6.05   Application of Monies Collected by Trustee. 39
Section 6.06   Proceedings by Holders. 40
Section 6.07   Proceedings by Trustee. 41
Section 6.08   Remedies Cumulative and Continuing. 41
Section 6.09   Direction of Proceedings and Waiver of Defaults by Majority of Holders 41
Section 6.10   Notice of Defaults. 42
Section 6.11   Undertaking to Pay Costs. 42
   
ARTICLE 7 CONCERNING THE TRUSTEE 43
   
Section 7.01   Duties and Responsibilities of Trustee. 43
Section 7.02   Reliance on Documents, Opinions, Etc. 44
Section 7.03   No Responsibility for Recitals, Etc. 45
Section 7.04   Individual Rights or the Trustee, Paying Agents, Conversion Agents or Note Registrar. 45
Section 7.05   Monies and ADSs to Be Held in Trust. 46
Section 7.06   Compensation and Expenses of Trustee, Payment Agents, Conversion Agents and Note Registrar. 46
Section 7.07   Officers’ Certificate as Evidence. 47
Section 7.08   Eligibility of Trustee. 47
Section 7.09   Resignation or Removal of Trustee. 47
Section 7.10   Acceptance by Successor Trustee. 48
Section 7.11   Succession by Merger, Etc. 48
Section 7.12   Trustee’s Application for Instructions from the Company. 49
   
ARTICLE 8 CONCERNING THE HOLDERS 49
   
Section 8.01   Action by Holders. 49
Section 8.02   Proof of Execution by Holders. 50
Section 8.03   Who Are Deemed Absolute Owners. 50
Section 8.04   Company-Owned Notes Disregarded. 50
Section 8.05   Revocation of Consents; Future Holders Bound. 51
   
ARTICLE 9 HOLDERS’ MEETINGS 51
   
Section 9.01   Purpose of Meetings. 51
Section 9.02   Call of Meetings by Trustee. 51
Section 9.03   Call of Meetings by Company or Holders. 52
Section 9.04   Qualifications for Voting. 52
Section 9.05   Regulations. 52
Section 9.06   Voting. 53
Section 9.07   No Delay of Rights by Meeting. 53

 

ii
 

   
ARTICLE 10 SUPPLEMENTAL INDENTURES 53
   
Section 10.01   Supplemental Indentures Without Consent of Holders. 53
Section 10.02   Supplemental Indentures with Consent of Holders. 54
Section 10.03   Effect of Supplemental Indentures. 55
Section 10.04   Notation on Notes. 55
Section 10.05   Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee. 55
   
ARTICLE 11 CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE 55
   
Section 11.01   Company May Consolidate, Etc. on Certain Terms. 55
Section 11.02   Successor Corporation to Be Substituted. 56
Section 11.03   Opinion of Counsel to Be Given to Trustee. 57
   
ARTICLE 12 IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 57
   
Section 12.01   Indenture and Notes Solely Corporate Obligations. 57
   
ARTICLE 13 INTENTIONALLY OMITTED 57
   
ARTICLE 14 CONVERSION OF NOTES 57
   
Section 14.01   Conversion Privilege. 57
Section 14.02   Conversion Procedure; Settlement Upon Conversion. 57
Section 14.03   Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection with Make-Whole Fundamental Changes or Tax Redemptions. 60
Section 14.04   Adjustment of Conversion Rate. 62
Section 14.05   Adjustments of Prices. 71
Section 14.06   Ordinary Shares to Be Fully Paid. 72
Section 14.07   Effect of Recapitalizations, Reclassifications and Changes of the Ordinary Shares. 72
Section 14.08   Certain Covenants. 73
Section 14.09   Responsibility of Trustee. 74
Section 14.10   Notice to Holders Prior to Certain Actions. 74
Section 14.11   Stockholder Rights Plans. 75
Section 14.12   Termination of Depositary Receipt Program. 75
   
ARTICLE 15 REPURCHASE OF NOTES AT OPTION OF HOLDERS 75
   
Section 15.01   Repurchase at Option of Holders. 75
Section 15.02   Repurchase at Option of Holders Upon a Fundamental Change. 77
Section 15.03   Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice. 80
Section 15.04   Deposit of Repurchase Price or Fundamental Change Repurchase Price. 80
Section 15.05   Covenant to Comply with Applicable Laws Upon Repurchase of Notes. 81

 

iii
 

   
ARTICLE 16 TAX REDEMPTION 81
   
Section 16.01   Redemption for Taxation Reasons 81
Section 16.02   Effect of Tax Redemption Notice 82
Section 16.03   Deposit and Payment of Tax Redemption Price 82
   

ARTICLE 17 MISCELLANEOUS PROVISIONS 

 83
   
Section 17.01   Provisions Binding on Company’s Successors. 83
Section 17.02   Official Acts by Successor Corporation. 83
Section 17.03   Addresses for Notices, Etc. 83
Section 17.04   Governing Law. 84
Section 17.05   Submission to Jurisdiction; Service of Process. 84
Section 17.06   Evidence of Compliance with Conditions Precedent; Certificates and Opinions of Counsel to Trustee. 84
Section 17.07   Legal Holidays. 85
Section 17.08   No Security Interest Created. 85
Section 17.09   Benefits of Indenture. 85
Section 17.10   Table of Contents, Headings, Etc. 85
Section 17.11   Authenticating Agent. 85
Section 17.12   Execution in Counterparts. 86
Section 17.13   Severability. 86
Section 17.14   Waiver of Jury Trial. 87
Section 17.15   Force Majeure. 87
Section 17.16   Calculations. 87
Section 17.17   Information Sharing. 87

 

EXHIBIT

 

Exhibit A  Form of Note  A-1
Exhibit B  Form of Certificate of Transfer  B-1
Exhibit C  Form of Certificate of Exchange  C-1

 

iv
 

 

INDENTURE dated as of August 6, 2014 between QIHOO 360 TECHNOLOGY CO. LTD., a Cayman Islands exempted limited liability company, as issuer (the “Company”, as more fully set forth in Section 1.01) and CITICORP INTERNATIONAL LIMITED., a banking corporation organized under the laws of Hong Kong, as trustee (the “Trustee”, as more fully set forth in Section 1.01).

 

WITNESSETH:

 

WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its 0.50% Convertible Senior Notes due 2020 (the “Notes”), initially in an aggregate principal amount not to exceed US$450,000,000, and in order to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and

 

WHEREAS, the Form of Note, the certificate of authentication to be borne by each Note, the Form of Notice of Conversion, the Form of Fundamental Change Repurchase Notice, the Form of Purchase Notice and the Form of Assignment to be borne by the Notes are to be substantially in the forms hereinafter provided; and

 

WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and this Indenture a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the Holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective Holders from time to time of the Notes (except as otherwise provided below), as follows:

 

ARTICLE 1
DEFINITIONS

 

Section 1.01              Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. The words “herein,” “hereof,” “hereunder,” and words of similar refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article include the plural as well as the singular.

 

“Additional ADSs” shall have the meaning specified in Section 14.03(a).

 

“Additional Amounts” shall have the meaning specified in Section 4.07(a).

 

“Additional Interest” means all amounts, if any, payable pursuant to Section 4.06(d), Section 4.06(e) and Section 6.03, as applicable.

 

1
 

 

“Adjustment Effective Date” means, with respect to any share split or share combination in respect of Ordinary Shares, the first date on which the ADSs trade on the applicable exchange or in the applicable market, regular way, reflecting such share split or share combination.

 

“ADR” means an American Depositary Receipt, evidencing one or more ADSs, issued pursuant to the Deposit Agreement.

 

“ADS” means an American Depositary Share, issued pursuant to the Deposit Agreement, each two representing three Class A Ordinary Shares of the Company as of the date of this Indenture and deposited with the ADS Custodian.

 

“ADS Custodian” means The Bank of New York Mellon, with respect to the ADSs issued pursuant to the Deposit Agreement, or any successor entity thereto.

 

“ADS Depositary” means The Bank of New York Mellon, as depositary for the ADSs.

 

“ADS Price” shall have the meaning specified in Section 14.03(c).

 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

“Agent Members” shall have the meaning specified in Section 2.05(c).

 

“Applicable Procedures” means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Clearstream that apply to such transfer or exchange.

 

“Authentication Order” shall have the meaning specified in Section 2.04.

 

“Board of Directors” means the board of directors of the Company or a committee of such board duly authorized to act for it hereunder.

 

“Board Resolution” means a copy of a resolution certified by a director of the Company to have been duly adopted by the Board of Directors, and to be in full force and effect on the date of such certification, and delivered to the Trustee.

 

“Business Day” means, with respect to any Note, any day other than a Saturday, a Sunday or a day on which commercial banks in New York are authorized or required by law or executive order to close or be closed.

 

“Capital Stock” means, for any entity, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that entity.

 

2
 

 

“Class A Ordinary Shares” means Class A ordinary shares of the Company, par value US$0.001 per share, at the date of this Indenture, subject to Section 14.07.

 

“Class B Ordinary Shares” means Class B ordinary shares of the Company, par value US$0.001 per share.

 

“Clause A Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clause B Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clause C Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clearstream” means Clearstream Banking, société anonyme (or any successor securities clearing agency).

 

“close of business” means 5:00 p.m. (New York City time).

 

“Commission” means the U.S. Securities and Exchange Commission.

 

“Common Equity” of any Person means ordinary share capital (including ADSs) of such Person that is generally entitled (a) to vote in the election of directors of such Person or (b) if such Person is not a corporation, to vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person.

 

“Company” shall have the meaning specified in the first paragraph of this Indenture, and subject to the provisions of Article 11, shall include its successors and assigns.

 

“Company Notice” shall have the meaning specified in Section 15.01(a).

 

“Company Order” means a written order of the Company, signed by two Officers, and to delivered to the Trustee.

 

“Continuing Entity” shall have the meaning specified in Section 11.01(a).

 

“Conversion Agent” shall have the meaning specified in Section 4.02.

 

“Conversion Date” shall have the meaning specified in Section 14.02(c).

 

“Conversion Obligation” shall have the meaning specified in Section 14.01.

 

“Conversion Rate” shall have the meaning specified in Section 14.01.

 

“Corporate Trust Office” means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 50th Floor, Citibank Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong, Attention: Agency and Trust, Fax No. +852-2323-0279 or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor trustee (or such other address as such successor trustee may designate from time to time by notice to the Holders and the Company).

 

3
 

 

“Custodian” means Citibank N.A., as custodian for The Depository Trust Company, with respect to the Global Notes, or any successor entity thereto.

 

“Default” means any event that is, or after notice or passage of time, or both, would be, an Event of Default.

 

“Defaulted Amounts” means any amounts on any Note (including, without limitation, the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date, the Fundamental Change Repurchase Price, principal and interest) that are payable but are not punctually paid or duly provided for.

 

“Deposit Agreement” means the deposit agreement, as amended and restated on or about May 19, 2014, among the Company, the ADS Depositary, and the owners and holders from time to time of the ADSs issued thereunder or, if amended or supplemented as provided therein, as so amended or supplemented.

 

“Depositary” means, with respect to each Global Note, the Person specified in Section 2.05(c) as the Depositary with respect to such Notes, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, “Depositary” shall mean or include such successor.

 

“Distributed Property” shall have the meaning specified in Section 14.04(c).

 

“Effective Date” shall have the meaning specified in Section 14.03(c).

 

“Euroclear” means Euroclear Bank S.A./N.V.

 

“Event of Default” shall have the meaning specified in Section 6.01.

 

“Ex-Dividend Date” means, with respect to any issuance, dividend or distribution to holders of Ordinary Shares, the first date on which the ADSs trade on the applicable exchange or in the applicable market, regular way, without the right to receive the corresponding issuance, dividend or distribution in question, from the ADS Depositary or, if applicable, from the seller of the ADSs on such exchange or market (in the form of due bills or otherwise) as determined by such exchange or market.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“Expiring Rights” shall have the meaning specified in Section 14.04.

 

“Form of Assignment” shall mean the “Form of Assignment” attached as Attachment 4 to the Form of Note attached hereto as Exhibit A.

 

“Form of Fundamental Change Repurchase Notice” shall mean the “Form of Fundamental Change Repurchase Notice” attached as Attachment 2 to the Form of Note attached hereto as Exhibit A.

 

“Form of Notice of Conversion” shall mean the “Form of Notice of Conversion” attached as Attachment 1 to the Form of Note attached hereto as Exhibit A.

 

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“Form of Repurchase Notice” shall mean the “Form of Repurchase Notice” attached as Attachment 3 to the Form of Note attached hereto as Exhibit A.

 

“Fundamental Change” shall be deemed to have occurred at the time after the Notes are originally issued that any of the following occurs:

 

(a) a “person” or “group” within the meaning of Section 13(d) of the Exchange Act, other than the Company, its Subsidiaries and the employee benefit plans of the Company and its Subsidiaries, has become the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s Common Equity representing more than 50% of the voting power of the Company’s Common Equity;

 

(b) consummation of (A) any recapitalization, reclassification or change of the Ordinary Shares or ADSs (other than changes resulting from a subdivision or combination and changes to the number of Class A Ordinary Shares represented by each ADS) as a result of which the Ordinary Shares or ADSs would be converted into, or exchanged for, shares, other securities, other property or assets, (B) any share exchange, consolidation or merger of the Company pursuant to which the Ordinary Shares or ADSs will be converted into cash, securities or other property, or (C) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its Subsidiaries, taken as a whole, to any Person other than one of the Company’s Subsidiaries; provided, however, that a transaction described in clause (B) in which the holders of all classes of the Company’s Common Equity immediately prior to such transaction (each such holder, a “Pre-Transaction Holder”) own, directly or indirectly, more than 50% of all classes of Common Equity of the continuing or surviving corporation or transferee immediately after such transaction shall not be a Fundamental Change pursuant to this clause (b), so long as the proportion of the respective ownership of each Pre-Transaction Holder remains substantially the same relative to all other Pre-Transaction Holders;

 

(c) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or

 

(d) the ADSs (or other common equity or ADSs underlying the Notes) cease to be listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors);

 

provided, however, that a transaction or transactions described in clause (b) above shall not constitute a Fundamental Change if at least 90% of the consideration received or to be received by the holders of the ADSs, excluding cash payments for fractional ADSs and cash payments made pursuant to dissenters’ appraisal rights, in connection with such transaction or transactions consists of shares of Publicly Traded Securities, and as a result of this transaction or transactions the Notes become convertible into such consideration, excluding cash payments for fractional ADSs.

 

“Fundamental Change Company Notice” shall have the meaning specified in Section 15.02(c).

 

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“Fundamental Change Repurchase Date” shall have the meaning specified in Section 15.02(a).

 

“Fundamental Change Repurchase Notice” shall have the meaning specified in Section 15.02(b)(i).

 

“Fundamental Change Repurchase Price” shall have the meaning specified in Section 15.02(a).

 

“Global Note” shall have the meaning specified in Section 2.05(b).

 

“Holder,” as applied to any Note, or other similar terms (but excluding the term “beneficial holder”), shall mean any person in whose name at the time a particular Note is registered on the Note Register.

 

“Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented.

 

“Initial Purchasers” means Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., China Renaissance Securities (Hong Kong) Limited and UBS Securities LLC.

 

“Interest Payment Date” means each February 15 and August 15 of each year, beginning on February 15, 2015.

 

“Last Reported Sale Price” of the ADSs on any date means the closing sale price per ADS (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the principal U.S. national or regional securities exchange on which the ADSs are traded. If the ADSs are not listed for trading on a U.S. national or regional securities exchange on the relevant date, the “Last Reported Sale Price” shall be the average of the last quoted bid and ask prices for the ADSs in the over-the-counter market on the relevant date as reported by OTC Markets Group Inc. or a similar organization. If the ADSs are not so quoted, the “Last Reported Sale Price” shall be the average of the mid-point of the last bid and ask prices for the ADSs on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Company for this purpose.

 

“Make-Whole Fundamental Change” means any transaction or event described in the definition of “Fundamental Change” (determined after giving effect to any exceptions to or exclusions from such definition, but without regard to the proviso in clause (b) of the definition thereof).

 

“Maturity Date” means August 15, 2020.

 

“Merger Event” shall have the meaning specified in Section 14.07(a).

 

“Note” or “Notes” shall have the meaning specified in the first paragraph of the recitals of this Indenture.

 

“Note Register” shall have the meaning specified in Section 2.05(a).

 

“Note Registrar” shall have the meaning specified in Section 2.05(a).

 

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“Notice of Conversion” shall have the meaning specified in Section 14.02(b).

 

“Offering Memorandum” means the preliminary offering memorandum dated July 30, 2014, as supplemented by the pricing term sheet dated July 31, 2014, relating to the offering and sale of the Notes.

 

“Officer” means, with respect to the Company, the chief executive officer, the president, the chief financial officer or a director.

 

“Officers’ Certificate,” when used with respect to the Company, means a certificate that is delivered to the Trustee and that is signed by two Officers of the Company. Each such certificate shall include the statements provided for in Section 17.06 if and to the extent required by the provisions of such Section. One of the Officers giving an Officers’ Certificate pursuant to Section 4.09 shall be the principal executive, financial or accounting officer of the Company.

 

“open of business” means 9:00 a.m. (New York City time).

 

“Opinion of Counsel” means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel, which opinion shall be acceptable to the Trustee, that is delivered to the Trustee. Each such opinion shall include the statements provided for in Section 17.06 if and to the extent required by the provisions of such Section 17.06.

 

“Ordinary Shares” means the ordinary shares of the of the Company, including Class A Ordinary Shares and/or Class B Ordinary Shares as the context requires.

 

“outstanding,” when used with reference to Notes, shall, subject to the provisions of Section 8.04, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except:

 

(a) Notes theretofore canceled by the Trustee or accepted by the Trustee for cancellation;

 

(b) Notes, or portions thereof, that have become due and payable and in respect of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent);

 

(c) Notes that have been paid pursuant to Section 2.07 or Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.07 unless proof satisfactory to the Trustee is presented that any such Notes are held by protected purchasers in due course;

 

(d) Notes converted pursuant to Article 14 and required to be cancelled pursuant to Section 2.09;

 

(e) Notes repurchased by the Company pursuant to the penultimate sentence of Section 2.11 or pursuant to Article 15 and required to be cancelled pursuant to Section 2.09; and

 

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(f) Notes redeemed pursuant to Article 16 and required to be cancelled pursuant to Section 2.09.

 

“Paying Agent” shall have the meaning specified in Section 4.02.

 

“Person” means an individual, a corporation, a limited liability company, an association, a partnership, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof.

 

“Physical Notes” means permanent certificated Notes in registered form issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof.

 

“Pre-Transaction Holder” shall have the meaning specified in clause (b) of the definition of “Fundamental Change.”

 

“Predecessor Note” of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.07 in lieu of or in exchange for a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note that it replaces.

 

“Publicly Traded Securities” means shares of common equity or ADSs that are listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors), or will be so listed or quoted when issued or exchanged, in each case, in connection with a Fundamental Change described in clause (b) of the definition thereof.

 

“Qualified Institutional Buyer” shall have the meaning specified in Rule 144A under the Securities Act.

 

“Purchase Agreement” means that certain Purchase Agreement, dated as of July 31, 2014, among the Company and the Initial Purchasers.

 

“Record Date” means, with respect to any issuance, dividend or distribution to holders of Ordinary Shares, the date fixed for determination of shareholders entitled to receive such issuance, dividend or distribution (whether such date is fixed by the Board of Directors, by statute, by contract or otherwise).

 

“Reference Property” shall have the meaning specified in Section 14.07(a).

 

“Regular Record Date,” with respect to any Interest Payment Date, shall mean the February 1 or August 1 (whether or not such day is a Business Day) immediately preceding the relevant Interest Payment Date.

 

“Regulation S” means Regulation S as promulgated under the Securities Act.

 

“Regulation S Global Notes” shall have the meaning specified in Section 2.05(b).

 

“Relevant Taxing Jurisdiction” shall have the meaning specified in Section 4.07(a).

 

“Repurchase Date” shall have the meaning specified in Section 15.01(a).

 

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“Repurchase Expiration Time” shall have the meaning specified in Section 15.01(a).

 

“Repurchase Notice” shall have the meaning specified in Section 15.01(a).

 

“Repurchase Price” shall have the meaning specified in Section 15.01(a).

 

“Resale Restriction Termination Date” shall have the meaning specified in Section 2.05(c).

 

“Responsible Officer” means, when used with respect to the Trustee, any officer within the Corporate Trust Office of the Trustee, including any director, vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.

 

“Restricted Global Notes” means Global Notes that are Restricted Securities.

 

“Restricted Physical Notes” means Physical Notes that are Restricted Securities.

 

“Restricted Securities” shall have the meaning specified in Section 2.05(c).

 

“Rule 144A” means Rule 144A as promulgated under the Securities Act.

 

“Rule 144A Global Notes” shall have the meaning specified in Section 2.05(b).

 

“Scheduled Trading Day” means a day that is scheduled to be a Trading Day on the principal U.S. national securities exchange or market on which the ADSs (or other relevant securities) are listed or admitted for trading. If the ADSs (or other relevant securities) are not so listed or admitted for trading, “Scheduled Trading Day” means a Business Day.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

“Securities Act Legend” shall have the meaning specified in Section 2.05(c).

 

“Significant Subsidiary” means a Subsidiary of the Company that meets the definition of “significant subsidiary” in Article 1, Rule 1-02 of Regulation S-X under the Exchange Act.

 

“Spin-Off” shall have the meaning specified in Section 14.04(c).

 

“Subsidiary” means, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.

 

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“Tax Redemption” shall have the meaning specified in Section 16.01.

 

“Tax Redemption Date”, when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

 

“Tax Redemption Notice” shall have the meaning specified in Section 16.01.

 

“Tax Redemption Price” shall have the meaning specified in Section 16.01.

 

“Trading Day” means a day (i) during which trading in the ADSs (or other relevant securities) generally occurs on The New York Stock Exchange or, if the ADSs (or other relevant securities) are not then listed on The New York Stock Exchange, on the other principal United States national or regional securities exchange on which the ADSs (or other relevant securities) are then listed or, if the ADSs (or other relevant securities) are not then listed on a United States national or regional securities exchange, on the other principal market on which the ADSs (or other relevant securities) are then listed or admitted for trading and (ii) on which the Last Reported Sale Price for the ADSs (or other relevant securities) is available on such securities exchange or market; provided that if the ADSs (or other relevant securities) are not so listed or admitted for trading, “Trading Day” means a Business Day.

 

“Transfer” shall have the meaning specified in Section 2.05(c).

 

“Trigger Event” shall have the meaning specified in Section 14.04(c).

 

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture; provided, however, that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term “Trust Indenture Act” shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939, as so amended.

 

“Trustee” means the Person named as the “Trustee” in the first paragraph of this Indenture until a successor trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder.

 

“unit of Reference Property” shall have the meaning specified in Section 14.07(a).

 

“Unrestricted Global Notes” means Global Notes that are not Restricted Securities.

 

“Unrestricted Physical Notes” means Physical Notes that are not Restricted Securities.

 

“Valuation Period” shall have the meaning specified in Section 14.04(c).

 

Section 1.02              References to Interest. Unless the context otherwise requires, any reference to interest on, or in respect of, any Note in this Indenture shall be deemed to include Additional Interest if, in such context, Additional Interest is, was or would be payable pursuant to any of Section 4.06(d), Section 4.06(e) and Section 6.03. Unless the context otherwise requires, any express mention of Additional Interest in any provision hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made.

 

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Section 1.03              New York Office of Trustee, Conversion Agent, Note Registrar, Paying Agent and Transfer Agent. For purposes of Physical Notes under this Indenture, unless an alternative address is subsequently designated after the date hereof in accordance with the terms of this Indenture, the corporate trust office of the Trustee, and the office of the Conversion Agent, Note Registrar, Paying Agent and transfer agent in the Borough of Manhattan, The City of New York, shall initially be located at c/o Citibank, N.A., 14th Floor, 388 Greenwich Street, New York, New York 10013, United States, Attention: Agency & Trust.

 

ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES

 

Section 2.01              Designation and Amount. The Notes shall be designated as the “0.50% Convertible Senior Notes due 2020.” The aggregate principal amount of Notes that may be authenticated and delivered under this Indenture is initially limited to US$450,000,000, subject to Section 2.11 and except for Notes authenticated and delivered upon registration or transfer of, or in exchange for, or in lieu of other Notes pursuant to Section 2.05, Section 2.06, Section 2.07, Section 10.04, Section 14.02 and Section 15.04.

 

Section 2.02              Form of Notes. The Notes and the Trustee’s certificate of authentication to be borne by such Notes shall be substantially in the respective forms set forth in Exhibit A, the terms and provisions of which shall constitute, and are hereby expressly incorporated in and made a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.

 

Any Global Note may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Custodian or the Depositary, or as may be required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange or automated quotation system upon which the Notes may be listed or traded or designated for issuance or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Notes are subject.

 

Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends or endorsements as the Officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, or to conform to usage or to indicate any special limitations or restrictions to which any particular Notes are subject.

 

Each Global Note shall represent such principal amount of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be increased or reduced to reflect redemptions, repurchases, cancellations, conversions, transfers or exchanges permitted hereby. Any endorsement of the Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the Holder of such Notes in accordance with this Indenture. Payment of principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Global Note shall be made to the Holder of such Note on the date of payment, unless a record date or other means of determining Holders eligible to receive payment is provided for herein.

 

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Each Note shall bear a legend in substantially the following form (unless otherwise agreed by the Company in writing, with notice thereof to the Trustee):

 

NO AFFILIATE (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT (‘‘RULE 144’’)) OF QIHOO 360 TECHNOLOGY CO. LTD. OR ANY PERSON THAT IS NOT AN AFFILIATE OF QIHOO 360 TECHNOLOGY CO. LTD., BUT WAS AN AFFILIATE (WITHIN THE MEANING OF RULE 144) OF QIHOO 360 TECHNOLOGY CO. LTD. DURING THE THREE IMMEDIATELY PRECEDING MONTHS, OTHER THAN QIHOO 360 TECHNOLOGY CO. LTD., OR ANY SUBSIDIARY OF QIHOO 360 TECHNOLOGY CO. LTD., MAY PURCHASE, OTHERWISE ACQUIRE OR OWN THE NOTES EVIDENCED HEREBY, THE AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION THEREOF OR THE CLASS A ORDINARY SHARES OF QIHOO 360 TECHNOLOGY CO. LTD. REPRESENTED BY SUCH AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION OF THESE NOTES OR A BENEFICIAL INTEREST THEREIN.

 

Section 2.03              Date and Denomination of Notes; Payments of Interest and Defaulted Amounts. (a) The Notes shall be issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof and shall be in registered form, without coupons. Each Note shall be dated the date of its authentication and shall bear interest from the date specified on the face of the form of Note attached as Exhibit A hereto. Accrued interest on the Notes shall be computed on the basis of a 360-day year composed of twelve 30-day months.

 

(b) The Person in whose name any Note (or its Predecessor Note) is registered on the Note Register at the close of business on any Regular Record Date with respect to any Interest Payment Date shall be entitled to receive the interest payable on such Interest Payment Date. Interest shall be payable at the office or agency of the Company maintained by the Company for such purposes in the Borough of Manhattan, The City of New York, which shall initially be the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York, or such address as the Trustee may designate from time to time by notice to the Holders and the Company. The Company shall pay interest (i) on any Physical Notes (A) to Holders holding Physical Notes having an aggregate principal amount of US$1,000,000 or less, by check mailed to the Holders of these Notes at their address as it appears in the Note Register and (B) to Holders holding Physical Notes having an aggregate principal amount of more than US$1,000,000, either by check mailed to such Holders or, upon application by such Holder to the Note Registrar not later than the relevant Regular Record Date, by wire transfer in immediately available funds to that Holder’s account within the United States, which application shall remain in effect until the Holder notifies, in writing, the Note Registrar to the contrary or (ii) on any Global Note by wire transfer of immediately available funds to the account of the Depositary or its nominee.

 

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(c) Any Defaulted Amounts shall forthwith cease to be payable to the Holder on the relevant payment date but shall accrue interest per annum at the rate borne by the Notes, plus one percent, subject to the enforceability thereof under applicable law, from, and including, such relevant payment date, and such Defaulted Amounts together with such interest thereon shall be paid by the Company, at its election in each case, as provided in clause (i) or (ii) below:

 

(i) The Company may elect to make payment of any Defaulted Amounts to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Amounts, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of the Defaulted Amounts proposed to be paid on each Note and the date of the proposed payment (which shall be not less than 25 days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Amounts or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Amounts as in this clause provided. Thereupon the Company shall fix a special record date for the payment of such Defaulted Amounts which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment, and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Company shall promptly notify the Trustee of such special record date and the Trustee, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Amounts and the special record date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Note Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Amounts and the special record date therefor having been so mailed, such Defaulted Amounts shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (ii) of this Section 2.03(c).

 

(ii) The Company may make payment of any Defaulted Amounts in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.

 

Section 2.04              Execution, Authentication and Delivery of Notes. The Notes shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its chief executive officer, president or chief financial officer.

 

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At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company to the Trustee for authentication, together with a written order of the Company signed by one Officer and delivered to the Trustee (the “Authentication Order”) for the authentication and delivery of such Notes, an Officers’ Certificate and an Opinion of Counsel, such Officers’ Certificate and Opinion of Counsel to cover such matters, in addition to those required by Section 17.06, as the Trustee shall reasonably request, and the Trustee in accordance with such Authentication Order shall authenticate and deliver such Notes, without any further action by the Company hereunder.

 

Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, executed manually or by facsimile by an authorized officer of the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 17.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture.

 

In case any Officer of the Company who shall have signed any of the Notes shall cease to be such Officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Notes had not ceased to be such Officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the Officers of the Company, although at the date of the execution of this Indenture any such Person was not such an Officer.

 

Section 2.05              Exchange and Registration of Transfer of Notes; Restrictions on Transfer; Depositary. (a) The Company shall cause to be kept at the office of the Note Registrar at 14th Floor, 388 Greenwich Street, New York, New York 10013, United States a register (the register maintained in such office or in any other office or agency of the Company designated pursuant to Section 4.02, the “Note Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. Such register shall be in written form or in any form capable of being converted into written form within a reasonable period of time. Citibank, N.A., is hereby initially appointed the “Note Registrar” for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint one or more co-Note Registrars in accordance with Section 4.02. The Company shall maintain an office or agency in the Borough of Manhattan, the City of New York, which shall initially be the office of the Note Registrar in New York, New York, where Physical Notes may be accepted for registration or transfers.

 

Upon surrender for registration of transfer of any Note to the Note Registrar or any co-Note Registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.05, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture.

 

Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency maintained by the Company pursuant to Section 4.02. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes that the Holder making the exchange is entitled to receive, bearing registration numbers not contemporaneously outstanding.

 

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All Notes presented or surrendered for registration of transfer or for exchange, repurchase, redemption or conversion shall (if so required by the Company, the Trustee, the Note Registrar or any co- Note Registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and duly executed, by the Holder thereof or its attorney-in-fact duly authorized in writing.

 

No service charge shall be imposed by the Company, the Trustee, the Note Registrar or any co-Note Registrar for any exchange or registration of transfer of Notes, but the Company or the Trustee may require a Holder to pay a sum sufficient to cover any transfer tax or similar governmental charge required by law or that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such exchange or transfer being different from the name of the Holder of the old Notes surrendered for such exchange or transfer.

 

None of the Company, the Trustee, the Note Registrar or any co-Note Registrar shall be required to exchange or register a transfer of (i) any Notes that have been surrendered for conversion or, if a portion of any Note that has been surrendered for conversion, such portion thereof surrendered for conversion or (ii) any Notes, or a portion of any Note, that have been surrendered for repurchase (and not withdrawn) in accordance with Article 15.

 

All Notes issued upon any registration of transfer or exchange of Notes in accordance with this Indenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture as the Notes surrendered upon such registration of transfer or exchange.

 

(b) So long as the Notes are eligible for book-entry settlement with the Depositary, unless otherwise required by law, subject to the fourth paragraph from the end of Section 2.05(c), all Notes shall be represented by one or more Notes in global form (each, a “Global Note”) registered in the name of the Depositary or the nominee of the Depositary. Notes offered and sold to qualified institutional buyers in reliance on Rule 144A shall be issued initially in the form of one or more permanent Global Notes (the “Rule 144A Global Notes”). Notes offered and sold in offshore transactions to non-U.S. persons in reliance on Regulation S shall be issued initially in the form of one or more Global Notes (the “Regulation S Global Notes”). The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, pursuant to transfers and exchanges in Section 2.05(c). The transfer and exchange of beneficial interests in a Global Note that does not involve the issuance of a Physical Note, shall be effected through the Depositary (but not the Trustee or the Custodian) in accordance with this Indenture (including the restrictions on transfer set forth in this Section 2.05 and procedures set forth in Section 2.06) and the procedures of the Depositary therefor.

 

(c) Every Note that bears or is required under this Section 2.05(c) to bear the legend set forth in this Section 2.05(c) (together with any ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of the Notes and required to bear the legend set forth in Section 2.05(d), collectively, the “Restricted Securities”) shall be subject to the restrictions on transfer set forth in this Section 2.05(c) (including the legend set forth below), unless such restrictions on transfer shall be eliminated or otherwise waived by written consent of the Company, and the Holder of each such Restricted Security, by such Holder’s acceptance thereof, agrees to be bound by all such restrictions on transfer. As used in this Section 2.05(c) and Section 2.05(d), the term “transfer” encompasses any sale, pledge, transfer or other disposition whatsoever of any Restricted Security.

 

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Until the date (the “Resale Restriction Termination Date”) that is the later of (1) the date that is one year after the last date of original issuance of the Notes, or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereto, and (2) such later date, if any, as may be required by applicable law, any certificate evidencing such Note (and all securities issued in exchange therefor or substitution thereof, other than ADSs (including any Class A Ordinary Shares represented thereby), if any, issued upon conversion thereof which shall bear the legend set forth in Section 2.05(d), if applicable) shall bear a legend (the “Securities Act Legend”) in substantially the following form (unless such Notes have been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or sold pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or unless otherwise agreed by the Company in writing, with notice thereof to the Trustee):

 

THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

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(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THIS SECURITY OR SUCH AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

 

No transfer of any Note prior to the Resale Restriction Termination Date will be registered by the Note Registrar unless the applicable box on the Form of Certificate of Transfer has been checked and any transfers shall follow the procedures set forth in Section 2.06.

 

Any Note (or security issued in exchange or substitution therefor) as to which such restrictions on transfer shall have expired in accordance with their terms may, upon surrender of such Note for exchange to the Note Registrar in accordance with the provisions of this Section 2.05, be exchanged for a new Note or Notes, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by this Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall be entitled to instruct the Custodian in writing to so surrender any Global Note as to which such restrictions on transfer shall have expired in accordance with their terms for exchange, and, upon such instruction, the Custodian shall so surrender such Global Note for exchange; and any new Global Note so exchanged therefor shall not bear the Securities Act Legend specified in this Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall promptly notify the Trustee upon the occurrence of the Resale Restriction Termination Date and promptly after a registration statement, if any, with respect to the Notes or any ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of the Notes has been declared effective under the Securities Act.

 

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The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to each Global Note (the “Depositary”). Initially, each Global Note shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Trustee as custodian for Cede & Co. Beneficial interests in the Regulation S Global Notes may be held by any member of, or participants in, the Depositary, including Euroclear and Clearstream (collectively, the “Agent Members”). Agent Members shall have no rights under this Indenture with respect to any Global Notes held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Notes, and the Depositary may be treated by the Company, the Trustee and any agent of either of them as the absolute owner of such Global Notes for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Trustee or any agent of either of them, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Global Notes.

 

Holders of Global Notes will be entitled to receive Physical Notes if (i) the Depositary (or any other clearing system as shall have been designated by the Company and approved by the Trustee on behalf of which the Notes evidenced by the Rule 144A Global Note or the Regulations S Global Note may be held) notifies the Company that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the Global Notes or ceases to be a “Clearing Agency” registered under the Exchange Act or is at any time no longer eligible to act as such and the Company is unable to locate a qualified successor within 60 days of receiving notice of such ineligibility on the part of the Depositary Trust Company (or, as the case may be, such other clearing system), (ii) there shall have occurred and be continuing an Event of Default, or (iii) instructions have been given for the transfer of an interest in the Notes evidenced by the Rule 144A Global Note to a Person who would otherwise take delivery thereof in the form of an interest in the Note evidenced by the Regulation S Global Note where the Regulation S Global Note has been exchanged for Physical Notes or vice versa, the Company shall execute, and the Trustee, upon receipt of an Officers’ Certificate and a Company Order for the authentication and delivery of Notes, shall authenticate and deliver (x) in the case of clause (ii) or (iii), a Physical Note to such beneficial owner in a principal amount equal to the principal amount of such Note corresponding to such beneficial owner’s beneficial interest and (y) in the case of clause (i), Physical Notes to each beneficial owner of the related Global Notes (or a portion thereof) in an aggregate principal amount equal to the aggregate principal amount of such Global Notes in exchange for such Global Notes, and upon delivery of the Global Notes to the Trustee such Global Notes shall be canceled.

 

In the case of Physical Notes, Holders of a Physical Note may transfer such Note by surrendering it to the Note Registrar. In the event of a partial transfer or a partial redemption of a holding of Physical Notes represented by one Physical Note, a Physical Note will be issued to the transferee in respect of the part transferred and a new Physical Note in respect of the balance of the holding not transferred or redeemed will be issued to the transferor or the Holder, as applicable; provided that no Physical Note in a denomination less than US$200,000 will be issued. The Company shall bear the cost of preparing, printing, packaging and delivering the Physical Notes.

 

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Physical Notes delivered in exchange for any Global Note or beneficial interest in Global Notes pursuant to this Section 2.05(c) shall be registered in such names and in such authorized denominations requested by or on behalf of the Depositary (in accordance with its customary procedures) and will bear the applicable legends specified in this Section 2.05, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Physical Notes to the Persons in whose names such Physical Notes are so registered. Physical Notes may be transferred and exchanged only after the transferor first delivers to the Trustee a written certification (in the form provided in this Indenture) to the effect that such transfer will comply with the transfer restrictions applicable to such Physical Notes.

 

Neither the Company, the Trustee nor any agent of the Company or the Trustee shall have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Note or maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

 

(d) Until the Resale Restriction Termination Date, any stock certificate representing ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of such Note shall bear a legend in substantially the following form (unless the Note or such ADSs or any Class A Ordinary Shares represented thereby has been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or such ADSs or such Class A Ordinary Shares represented thereby have been issued upon conversion of Notes that have been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or unless otherwise agreed by the Company with written notice thereof to the Trustee and any transfer agent for the ADSs):

 

THE AMERICAN DEPOSITARY SHARES EVIDENCED HEREBY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THE COMPANY’S 0.50% CONVERTIBLE SENIOR NOTES DUE 2020, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

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(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THE AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES REPRESENTED THEREBY;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

 

Any such ADSs as to which such restrictions on transfer shall have expired in accordance with their terms may, upon surrender of the certificates representing such ADSs for exchange in accordance with the procedures of the transfer agent for the ADSs, be exchanged for a new certificate or certificates for a like aggregate number of ADSs, which shall not bear the restrictive legend required by this Section 2.05(d).

 

(e) The Company (i) shall not resell and (ii) shall not permit any of its “affiliate” (as defined under Rule 144 under the Securities Act) or Person that has been an “affiliate” of the Company during the three immediately preceding months to purchase, otherwise acquire or own, in each case, any Notes or any beneficial interest therein.

 

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Section 2.06              Transfer and Exchange.

 

(a)                Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole or in part except (i) by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary and (ii) for transfers of portions of a Global Note in certificated form made upon request of a member of, or a participant in, the Depositary (for itself or on behalf of a beneficial owner) by written notice given to the Trustee by or on behalf of the Depositary in accordance with customary procedures of the Depositary and in compliance with Section 2.05(c).

 

(b)               Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes will be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes will be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also will require compliance with either subparagraph (1) or (2) below, as applicable, as well as one or more of the other following subparagraphs, as applicable:

 

(1)               Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Securities Act Legend. No written orders or instructions shall be required to be delivered to the Note Registrar to effect the transfers described in this Section 2.06(b)(1).

 

(2)               All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(1) above, the transferor of such beneficial interest must deliver to the Note Registrar either:

 

(A)              both:

 

(i)                 a written order from an Agent Member given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged; and

 

(ii)               instructions given in accordance with the Applicable Procedures containing information regarding the Agent Member account to be credited with such increase; or

 

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(B)              both:

 

(i)                 a written order from an Agent Member given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Physical Note in an amount equal to the beneficial interest to be transferred or exchanged; and

 

(ii)               instructions given by the Depositary to the Note Registrar containing information regarding the Person in whose name such Physical Note shall be registered to effect the transfer or exchange referred to in (1) above.

 

Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(e).

 

(3)               Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(2) above and the Note Registrar receives the following:

 

(A)              if the transferee will take delivery in the form of a beneficial interest in the Rule 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; and

 

(B)              if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof.

 

(c)                Transfer or Exchange of Beneficial Interests for Physical Notes.

 

(1)               Beneficial Interests in Restricted Global Notes to Restricted Physical Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Physical Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Physical Note, then, upon receipt by the Note Registrar of the following documentation:

 

(A)              if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Physical Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2) thereof;

 

(B)              if such beneficial interest is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof;

 

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(C)              if such beneficial interest is being transferred to a non-U.S. person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof;

 

(D)              if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof;

 

(E)               if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or

 

(F)               if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof,

 

the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(e) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Physical Note in the appropriate principal amount. Any Physical Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Note Registrar through instructions from the Depositary and the Agent Member. The Trustee shall deliver such Physical Notes to the Persons in whose names such Notes are so registered. Any Physical Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.07(c)(1) shall bear the Securities Act Legend and shall be subject to all restrictions on transfer contained therein.

 

(2)               Beneficial Interests in Restricted Global Notes to Unrestricted Physical Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Physical Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Physical Note only if the Note Registrar receives the following:

 

(A)              if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for an Unrestricted Physical Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or

 

(B)              if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of an Unrestricted Physical Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof;

 

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and, if the Note Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Securities Act Legend are no longer required in order to maintain compliance with the Securities Act.

 

(3)               Beneficial Interests in Unrestricted Global Notes to Unrestricted Physical Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Physical Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Physical Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(2) hereof, the Trustee will cause the aggregate principal amount of the applicable Unrestricted Global Note to be reduced accordingly pursuant to Section 2.06(e), and the Company will execute and the Trustee will authenticate and deliver to the Person designated in the instructions a Physical Note in the appropriate principal amount. Any Physical Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(3) will be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest requests through instructions to the Note Registrar from or through the Depositary and the Agent Member. The Trustee will deliver such Physical Notes to the Persons in whose names such Notes are so registered. Any Physical Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(3) will not bear the Securities Act Legend.

 

(d)               Transfer and Exchange of Physical Notes for Physical Notes. Upon request by a Holder of Physical Notes and such Holder’s compliance with the provisions of this Section 2.06(d), the Note Registrar will register the transfer or exchange of Physical Notes. Prior to such registration of transfer or exchange, the requesting Holder must present or surrender to the Note Registrar the Physical Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. In addition, the requesting Holder must provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(d).

 

(1)               Restricted Physical Notes to Restricted Physical Notes. Any Restricted Physical Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Physical Note if the Note Registrar receives the following:

 

(A)              if the transfer will be made pursuant to Rule 144A, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof;

 

(B)              if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and

 

(C)              if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable.

 

(2)               Restricted Physical Notes to Unrestricted Physical Notes. Any Restricted Physical Note may be exchanged by the Holder thereof for an Unrestricted Physical Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Physical Note if the Note Registrar receives the following:

 

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(A)              if the Holder of such Restricted Physical Notes proposes to exchange such Notes for an Unrestricted Physical Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or

 

(B)              if the Holder of such Restricted Physical Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Physical Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof;

 

and, if the Note Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Securities Act Legend are no longer required in order to maintain compliance with the Securities Act.

 

(3)               Unrestricted Physical Notes to Unrestricted Physical Notes. A Holder of Unrestricted Physical Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Physical Note. Upon receipt of a request to register such a transfer, the Note Registrar shall register the Unrestricted Physical Notes pursuant to the instructions from the Holder thereof.

 

(e)                Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Physical Notes or a particular Global Note has been converted, canceled, redeemed, repurchased or transferred in whole and not in part, each such Global Note will be returned to or retained and canceled by the Trustee in accordance with Section 2.09. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Physical Notes, the principal amount of Notes represented by such Global Note will be reduced accordingly and an endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note will be increased accordingly and an endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase.

 

Section 2.07              Mutilated, Destroyed, Lost or Stolen Notes. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and deliver, a new Note, bearing a registration number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless from any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

 

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The Trustee or such authenticating agent may authenticate any such substituted Note and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substitute Note, the Company or the Trustee may require the payment by the Holder of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note that has matured or is about to mature or has been surrendered for required repurchase, is about to be converted in accordance with Article 14 or is about to be redeemed in accordance with Article 16 shall become mutilated or be destroyed, lost or stolen, the Company may, in its sole discretion, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any Paying Agent or Conversion Agent evidence of their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

 

Every substitute Note issued pursuant to the provisions of this Section 2.07 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion or repurchase or redemption of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender.

 

Section 2.08              Temporary Notes. Pending the preparation of Physical Notes, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon written request of the Company, authenticate and deliver temporary Notes (printed or lithographed). Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the Physical Notes but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Physical Notes. Without unreasonable delay, the Company shall execute and deliver to the Trustee or such authenticating agent Physical Notes (other than any Global Note) and thereupon any or all temporary Notes (other than any Global Note) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 4.02 and the Trustee or such authenticating agent shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of Physical Notes. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Physical Notes authenticated and delivered hereunder.

 

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Section 2.09              Cancellation of Notes Paid, Converted, Etc. The Company shall cause all Notes surrendered for the purpose of payment, repurchase, redemption, registration of transfer or exchange or conversion, if surrendered to any Person other than the Trustee (including any of the Company’s Agents, Subsidiaries or Affiliates), to be surrendered to the Trustee for cancellation. All Notes delivered to the Trustee shall be canceled promptly by it, and no Notes shall be authenticated in exchange thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall dispose of canceled Notes in accordance with its customary procedures and, after such disposition, shall deliver a certificate of such disposition to the Company, at the Company’s written request in a Company Order. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption, repurchase or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation.

 

Section 2.10              CUSIP and ISIN Numbers. The Company in issuing the Notes may use “CUSIP” or “ISIN” numbers (if then generally in use), and, if so, the Trustee shall use CUSIP or ISIN numbers in all notices issued to Holders as a convenience to such Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or on such notice and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee in writing of any change in the CUSIP or ISIN numbers.

 

Section 2.11              Additional Notes; Repurchases. The Company may, without the consent of the Holders and notwithstanding Section 2.01, reopen this Indenture and issue additional Notes hereunder with the same terms as the Notes initially issued hereunder in an unlimited aggregate principal amount; provided if any additional Notes are not fungible with the Notes initially issued hereunder for U.S. federal income tax purposes, then such additional Notes shall have a separate CUSIP number. Prior to the issuance of any such additional Notes, the Company shall deliver to the Trustee a Company Order, an Officers’ Certificate and an Opinion of Counsel, such Officers’ Certificate and Opinion of Counsel to cover such matters, in addition to those required by Section 17.06, as the Trustee shall reasonably request. In addition, the Company may, to the extent permitted by law, and directly or indirectly (regardless of whether such Notes are surrendered to the Company), repurchase Notes in the open market or otherwise, whether by the Company or its Subsidiaries or through a private or public tender or exchange offer or through counterparties to private agreements, including by cash-settled swaps or other derivatives. The Company shall cause any Notes so repurchased (other than Notes repurchased pursuant to cash-settled swaps or other derivatives) to be surrendered to the Trustee for cancellation in accordance with Section 2.09.

 

ARTICLE 3
SATISFACTION AND DISCHARGE

 

Section 3.01              Satisfaction and Discharge. This Indenture shall upon request of the Company contained in an Officers’ Certificate cease to be of further effect, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) (i) all Notes theretofore authenticated and delivered (other than (x) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07 and (y) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 4.04(d)) have been delivered to the Trustee for cancellation; or (ii) the Company has deposited with the Trustee or delivered to Holders, as applicable, after the Notes have become due and payable, whether at the Maturity Date, the Tax Redemption Date, the Repurchase Date, any Fundamental Change Repurchase Date, upon conversion or otherwise, cash or (in the case of conversion) ADSs, if sufficient to pay all of the outstanding Notes or satisfy the Company’s Conversion Obligation, as the case may be, and pay all other sums due and payable under this Indenture by the Company; and (b) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 7.06 shall survive.

 

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ARTICLE 4
PARTICULAR COVENANTS OF THE COMPANY

 

Section 4.01              Payment of Principal and Interest. The Company covenants and agrees that it will cause to be paid the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes.

 

Section 4.02              Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment, repurchase or redemption (“Paying Agent”) or for conversion (“Conversion Agent”) and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. If the Company maintains an additional Paying Agent in a European Union member state, the Company shall ensure that it maintains such Paying Agent in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive (so long as there is such a member state). The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office or the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York.

 

The Company may also from time to time designate as co-Note Registrars one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The terms “Paying Agent” and “Conversion Agent” include any such additional or other offices or agencies, as applicable.

 

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The Company hereby initially designates (i) Citibank, N.A. as the Paying Agent, the Conversion Agent and the transfer agent and (ii) the Corporate Trust Office and the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York as an office or agency of the Company for purposes of this Section 4.02.

 

Section 4.03              Appointments to Fill Vacancies in Trustee’s Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.09, a Trustee, so that there shall at all times be a Trustee hereunder.

 

Section 4.04              Provisions as to Paying Agent. (a) If the Company shall appoint a Paying Agent other than the Trustee, the Company will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 4.04:

 

(i) that it will hold all sums held by it as such agent for the payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes in trust for the benefit of the Holders of the Notes;

 

(ii) that it will give the Trustee prompt notice of any failure by the Company to make any payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes when the same shall be due and payable; and

 

(iii) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust.

 

The Company shall, no later than 10:00 a.m., New York City time, on the Business Day immediately preceding each due date of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes, deposit with the Paying Agent a sum sufficient to pay such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) or accrued and unpaid interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action. Any deposit by the Company with the Paying Agent shall be made by wire transfer in immediately available funds.

 

To the extent the Paying Agent will act as the Company’s withholding agent with respect to any payment of principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes, the Company shall, no later than 10:00 a.m., New York City time, on the Business Day immediately preceding the due date of such payment, furnish the Paying Agent with an Officers’ Certificate instructing the Trustee as to any circumstances in which such payment shall be subject to deduction or withholding as described in Section 4.07 and the rate of any such deduction or withholding. The Company shall also specify in the Officers’ Certificate the amount required to be so withheld and the Additional Amounts, if any. For the avoidance of doubt, the Company shall deposit such Additional Amounts, if any, with the Paying Agent in accordance with the preceding paragraph.

 

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The Paying Agent shall not be bound to make payments under this Section 4.04 until funds in such amount required for such payments have been received from the Company.

 

(b) If the Company shall act as its own Paying Agent, it will, no later than 10:00 a.m., New York City time, on each due date of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes, set aside, segregate and hold in trust for the benefit of the Holders of the Notes a sum sufficient to pay such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable) and accrued and unpaid interest so becoming due and will promptly notify the Trustee in writing of any failure to take such action and of any failure by the Company to make any payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes when the same shall become due and payable.

 

(c) Anything in this Section 4.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay, cause to be paid or deliver to the Trustee all sums or amounts held in trust by the Company or any Paying Agent hereunder as required by this Section 4.04, such sums or amounts to be held by the Trustee upon the trusts herein contained and upon such payment or delivery by the Company or any Paying Agent to the Trustee, the Company or such Paying Agent shall be released from all further liability but only with respect to such sums or amounts.

 

(d) Any money and ADSs deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, accrued and unpaid interest on and the consideration due upon conversion of any Note and remaining unclaimed for two years after such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable), interest or consideration due upon conversion has become due and payable shall be paid to the Company on request of the Company contained in an Officers’ Certificate, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money and ADSs, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money and ADSs remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money and ADSs then remaining will be repaid or delivered to the Company.

 

Section 4.05              Existence. Subject to Article 11, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence.

 

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Section 4.06              Rule 144A Information Requirement and Annual Reports. (a) At any time the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company shall, so long as any of the Notes or the ADSs delivered upon conversion thereof shall, at such time, constitute “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, promptly provide to the Trustee and shall, upon written request, provide to any Holder, beneficial owner or prospective purchaser of such Notes or such ADSs the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act to facilitate the resale of such Notes or such ADSs pursuant to Rule 144A under the Securities Act. The Company shall take such further action as any Holder or beneficial owner of such Notes or such ADSs may reasonably request from time to time to enable such Holder or beneficial owner to sell such Notes or such ADSs in accordance with Rule 144A under the Securities Act, as such rule may be amended from time to time.

 

(b) The Company shall file with the Trustee within 15 days after the same are required to be filed with the Commission, copies of any documents or reports that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act (giving effect to any grace period provided by Rule 12b-25 under the Exchange Act). Any such document or report that the Company files with the Commission via the Commission’s EDGAR system shall be deemed to be filed with the Trustee for purposes of this Section 4.06(b) as of the time such documents are filed with the Commission via the EDGAR system; provided that the Company will notify the Trustee within 15 days of any such filing.

 

(c) Delivery of the reports and documents described in subsection (b) above to the Trustee is for informational purposes only, and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to conclusively rely on an Officers’ Certificate).

 

(d) If, at any time during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the Notes, the Company fails to timely file any document or report that it is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (after giving effect to all applicable grace periods thereunder and other than reports on Form 6-K), or the Notes are not otherwise freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (as a result of restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes), the Company shall pay Additional Interest on the Notes. Such Additional Interest shall accrue on the Notes at the rate of 0.50% per annum of the principal amount of the Notes outstanding for each day during such period for which the Company’s failure to file has occurred and is continuing or the Notes are not so freely tradable. As used in this Section 4.06(d), documents or reports that the Company is required to “file” with the Commission pursuant to Section 13 or 15(d) of the Exchange Act does not include documents or reports that the Company furnishes to the Commission pursuant to Section 13 or 15(d) of the Exchange Act.

 

(e) If, and for so long as, the restrictive legend on the Notes specified in Section 2.05(c) has not been removed, the Notes are assigned a restricted CUSIP number or the Notes are not otherwise freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (without restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes) as of the 365th day after the last date of original issuance of the Notes, the Company shall pay Additional Interest on the Notes. Such Additional Interest will accrue on the Notes at the rate of 0.50% per annum of the principal amount of Notes outstanding until the restrictive legend on the Notes has been removed in accordance with Section 2.05(c), the Notes are assigned an unrestricted CUSIP number and the Notes are freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (without restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes).

 

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(f) Additional Interest will be payable in arrears on each Interest Payment Date following accrual in the same manner as regular interest on the Notes.

 

(g) The Additional Interest that is payable in accordance with Section 4.06(d) or Section 4.06(e) shall be in addition to, and not in lieu of, any Additional Interest that may be payable as a result of the Company’s election pursuant to Section 6.03.

 

(h) If Additional Interest is payable by the Company pursuant to Section 4.06(d) or Section 4.06(e), the Company shall deliver to the Trustee an Officers’ Certificate to that effect stating (i) the amount of such Additional Interest that is payable and (ii) the date on which such Additional Interest is payable. Unless and until a Responsible Officer of the Trustee receives at the Corporate Trust Office such a certificate, the Trustee may assume without inquiry that no such Additional Interest is payable. If the Company has paid Additional Interest directly to the Persons entitled to it, the Company shall deliver to the Trustee an Officers’ Certificate setting forth the particulars of such payment.

 

Section 4.07              Payment of Additional Amounts. (a) All payments and deliveries made by the Company or any successor to the Company under or with respect to this Indenture and the Notes, including, but not limited to, payments of principal, payments of interest and deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) upon conversion, shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or within any jurisdiction in which the Company or any successor to the Company is, for tax purposes, organized or resident or doing business in or through which payment is made (or any political subdivision or taxing authority thereof or therein) (each, as applicable, a “Relevant Taxing Jurisdiction”), unless such withholding or deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction is so required, the Company or any successor to the Company shall pay to each Holder such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by the beneficial owner after such withholding or deduction (and after deducting any taxes on the Additional Amounts) shall equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required; provided that that no Additional Amounts shall be payable:

 

(i) for or on account of:

 

(A) any tax, duty, assessment or other governmental charge that would not have been imposed but for:

 

(1) the existence of any present or former connection between the Holder or beneficial owner of such Note and the Relevant Taxing Jurisdiction, other than merely holding such Note or the receipt of payments thereunder, including, without limitation, such Holder or beneficial owner being or having been a national, domiciliary or resident of such Relevant Taxing Jurisdiction or treated as a resident thereof or being or having been physically present or engaged in a trade or business therein or having or having had a permanent establishment therein;

 

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(2) the presentation of such Note (in cases in which presentation is required) more than 30 days after the later of the date on which the payment of the principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), premium, if any, and interest on, such Note became due and payable pursuant to the terms thereof or was made or duly provided for; or

 

(3) the failure of the Holder or beneficial owner to comply with a timely request from the Company or any successor of the Company, addressed to the Holder or beneficial owner, as the case may be, to provide certification, information, documents or other evidence concerning such Holder’s or beneficial owner’s nationality, residence, identity or connection with the Relevant Taxing Jurisdiction, or to make any declaration or satisfy any other reporting requirement relating to such matters, if and to the extent that due and timely compliance with such request is required by statute, regulation or administrative practice of the Relevant Taxing Jurisdiction to reduce or eliminate any withholding or deduction as to which Additional Amounts would have otherwise been payable to such Holder or beneficial owner;

 

(B) any estate, inheritance, gift, sale, transfer, excise, personal property or similar tax, assessment or other governmental charge;

 

(C) any taxes imposed pursuant to Sections 1471 to 1474 of the United States Internal Revenue Code of 1986, as amended, including any current or former United States Treasury Regulations or other official interpretations or guidance thereunder, any agreements or intergovernmental agreements thereunder, and any law implementing any intergovernmental agreement relating thereto;

 

(D) any tax, duty, assessment or other governmental charge that is payable otherwise than by withholding from payments under or with respect to the Notes; or

 

(E) any combination of taxes, duties, assessments or other governmental charges referred to in the preceding clauses (A), (B), (C) or (D); or

 

(ii) with respect to any payment of the principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), premium, if any, and interest on, such Note to a Holder, if the Holder is a fiduciary, partnership or person other than the sole beneficial owner of that payment to the extent that such payment would be required to be included in the income under the laws of the Relevant Taxing Jurisdiction, for tax purposes, of a beneficiary or settlor with respect to the fiduciary, a member of that partnership or a beneficial owner who would not have been entitled to such Additional Amounts had that beneficiary, settlor, partner or beneficial owner been the Holder thereof.

 

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(b) Any reference in this Indenture or the Notes in any context to the delivery of ADSs (together with a cash payment in lieu of any fractional ADSs) upon conversion of the Notes or the payment of principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), and any premium or interest on, any Note or any amount payable with respect to such Note, shall be deemed to include any Additional Amounts, unless the context requires otherwise, that may be payable with respect to that amount under the obligations referred to in this Section 4.07.

 

(c) The foregoing obligations shall survive termination or discharge of this Indenture.

 

Section 4.08              Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

 

Section 4.09              Compliance Certificate; Statements as to Defaults. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending on December 31, 2014) and within 14 days of a request from the Trustee an Officers’ Certificate stating whether or not the signers thereof have knowledge of any Default that occurred during the previous year, and, if so, specifying each such failure and the nature thereof.

 

In addition, the Company shall deliver to the Trustee, within 30 days after the Company becomes aware of the occurrence of any Event of Default or Default, an Officers’ Certificate setting forth the details of such Event of Default or Default, its status and the action that the Company proposes to take with respect thereto.

 

Section 4.10              Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture.

 

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ARTICLE 5
LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE

 

Section 5.01              Lists of Holders. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semi-annually, not more than 15 days after each February 1 and August 1 in each year beginning with February 1, 2015, and at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the Holders as of a date not more than 15 days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Note Registrar.

 

Section 5.02              Preservation and Disclosure of Lists. The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders contained in the most recent list furnished to it as provided in Section 5.01 or maintained by the Trustee in its capacity as Note Registrar, if so acting. The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished.

 

ARTICLE 6
DEFAULTS AND REMEDIES

 

Section 6.01              Events of Default. The following events shall be “Events of Default” with respect to the Notes:

 

(a) default in any payment of interest on any Note when due and payable if the default continues for a period of 30 days;

 

(b) default in the payment of principal of any Note when due and payable on the Maturity Date, upon any required repurchase, upon declaration of acceleration or otherwise;

 

(c) failure by the Company to comply with its obligation to convert the Notes in accordance with this Indenture upon exercise of a Holder’s conversion right that continues for five Business Days;

 

(d) failure by the Company to comply with its obligations under Article 11;

 

(e) failure by the Company to issue a Fundamental Change Company Notice in accordance with Section 15.02(c) or a notice of a Make-Whole Fundamental Change in accordance with Section 14.03(b) when due, and such failure continues for a period of five Business Days;

 

(f) failure by the Company for 60 days after written notice from the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding has been received by the Company to comply with any of its other agreements contained in the Notes or this Indenture;

 

(g) default by the Company or any Subsidiary of the Company with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for money borrowed in excess of US$30 million in the aggregate of the Company and/or any such Subsidiary, whether such indebtedness now exists or shall hereafter be created (i) resulting in such indebtedness becoming or being declared due and payable or (ii) constituting a failure to pay the principal of, or interest on, any such indebtedness when due and payable at its stated maturity, upon required repurchase, upon declaration or otherwise, in each of clauses (i) and (ii), where such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a period of 30 days;

 

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(h) a final judgment for the payment of US$30 million or more rendered against the Company or any Subsidiary of the Company if such amount is not covered by insurance or an indemnity and is not discharged or stayed within 30 days after (i) the date on which the right to appeal thereof has expired if no such appeal has commenced, or (ii) the date on which all rights to appeal have been extinguished;

 

(i) the Company or any Significant Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to the Company or any such Significant Subsidiary or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of the Company or any such Significant Subsidiary or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

 

(j) an involuntary case or other proceeding shall be commenced against the Company or any Significant Subsidiary seeking liquidation, reorganization or other relief with respect to the Company or such Significant Subsidiary or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of the Company or such Significant Subsidiary or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 30 consecutive days.

 

Section 6.02              Acceleration; Rescission and Annulment. In case one or more Events of Default shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), then, and in each and every such case (other than an Event of Default specified in Section 6.01(i) or Section 6.01(j) with respect to the Company), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding determined in accordance with Section 8.04, by notice in writing to the Company (and to the Trustee if given by Holders), may, and the Trustee at the request of such Holders shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable, and upon any such declaration the same shall become and shall automatically be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 6.01(i) or Section 6.01(j) with respect to the Company occurs and is continuing, 100% of the principal of and accrued and unpaid interest, if any, on all Notes shall become and shall automatically be immediately due and payable.

 

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The immediately preceding paragraph, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay installments of accrued and unpaid interest upon all Notes and the principal of any and all Notes that shall have become due otherwise than by acceleration (with interest on overdue installments of accrued and unpaid interest to the extent that payment of such interest is enforceable under applicable law, and on such principal at the rate borne by the Notes, plus one percent at such time) and amounts due to the Trustee pursuant to Section 7.06, and if (1) rescission would not conflict with any judgment or decree of a court of competent jurisdiction and (2) any and all existing Events of Default under this Indenture, other than the nonpayment of the principal of and accrued and unpaid interest, if any, on Notes that shall have become due solely by such acceleration, shall have been cured or waived pursuant to Section 6.09, then and in every such case (except as provided in the immediately succeeding sentence) the Holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all Defaults or Events of Default with respect to the Notes and rescind and annul such declaration and its consequences and such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent Default or Event of Default, or shall impair any right consequent thereon. Notwithstanding the above or anything to the contrary herein, no such waiver or rescission and annulment shall extend to or shall affect any Default or Event of Default resulting from (i) the nonpayment of the principal of, or accrued and unpaid interest on, any Notes, the Tax Redemption Price on the Tax Redemption Date, or the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price (ii) a failure to pay or deliver, as the case may be, the consideration due upon conversion of the Notes in accordance with this Indenture or (iii) in respect of any provision under this Indenture that cannot be modified or amended without the consent of the Holders of each outstanding Note affected.

 

Section 6.03              Additional Interest. Notwithstanding anything in this Indenture or in the Notes to the contrary, to the extent the Company elects, the sole remedy for Events of Default relating to the Company’s failure to comply with its obligations as set forth in Section 4.06(b) shall after the occurrence of such an Event of Default consist exclusively of the right to receive Additional Interest on the Notes at a rate equal to (a) 0.25% per annum of the principal amount of the Notes outstanding for each day during the 180-day period beginning on, and including, the date on which such an Event of Default first occurs and (b) 0.50% per annum of the principal amount of the Notes outstanding for each day during the 180-day period beginning on, and including, the 181st day following, and including, the occurrence of such an Event of Default during which, in each case, such Event of Default is continuing. Additional Interest payable pursuant to this Section 6.03 shall be in addition to, not in lieu of, any Additional Interest payable pursuant to Section 4.06(d) or Section 4.06(e). If the Company so elects, such Additional Interest shall be payable in the same manner and on the same dates as regular interest on the Notes. On the 361st day after such Event of Default (if the Event of Default relating to the Company’s failure to file is not cured or waived prior to such 361st day), the Notes shall be subject to acceleration as provided in Section 6.02. In the event the Company does not elect to pay Additional Interest following an Event of Default in accordance with this Section 6.03, the Notes shall be subject to acceleration as provided in Section 6.02.

 

In order to elect to pay Additional Interest as the sole remedy during the first 360 days after the occurrence of any Event of Default described in the immediately preceding paragraph, the Company must notify all Holders of the Notes, the Trustee and the Paying Agent of such election prior to the beginning of such 360-day period. Upon the failure to timely give such notice, the Notes shall be immediately subject to acceleration as provided in Section 6.02.

 

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Section 6.04              Payments of Notes on Default; Suit Therefor. If an Event of Default described in clause (a) or (b) of Section 6.01 shall have occurred, the Company shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of the Notes, the whole amount then due and payable on the Notes for principal and interest, if any, with interest on any overdue principal and interest, if any, at the rate borne by the Notes, plus one percent at such time, and, in addition thereto, such further amount as shall be sufficient to cover any amounts due to the Trustee under Section 7.06. If the Company shall fail to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Notes, wherever situated.

 

In the event there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the event of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 6.04, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and accrued and unpaid interest, if any, in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents and to take such other actions as it may deem necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due to the Trustee under Section 7.06; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Holders to make such payments to the Trustee, as administrative expenses, and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including agents and counsel fees, and including any other amounts due to the Trustee under Section 7.06, incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property that the Holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise.

 

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Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting such Holder or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

 

All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes.

 

In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Notes, and it shall not be necessary to make any Holders of the Notes parties to any such proceedings.

 

In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of any waiver pursuant to Section 6.09 or any rescission and annulment pursuant to Section 6.02 or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Holders, and the Trustee shall, subject to any determination in such proceeding, be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Holders, and the Trustee shall continue as though no such proceeding had been instituted.

 

Section 6.05              Application of Monies Collected by Trustee. Any monies collected by the Trustee pursuant to this Article 6 with respect to the Notes shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid:

 

First, to the payment of all amounts due the Trustee under Section 7.06 and due to the Paying Agents, Conversion Agents and Note Registrar pursuant to the Registrar, Paying, Transfer and Conversion Agency Appointment Letter dated August 6, 2014;

 

Second, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on, and any cash due upon conversion of, the Notes in default in the order of the date due of the payments of such interest and cash due upon conversion, as the case may be, with interest (to the extent that such interest has been collected by the Trustee) upon such overdue payments at the rate borne by the Notes at such time, such payments to be made ratably to the Persons entitled thereto;

 

Third, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount (including, if applicable, the payment of the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) then owing and unpaid upon the Notes for principal and interest, if any, with interest on the overdue principal and, to the extent that such interest has been collected by the Trustee, upon overdue installments of interest at the rate borne by the Notes at such time, plus one percent, and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal (including, if applicable, the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) and interest without preference or priority of principal over interest, or of interest over principal or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably to the aggregate of such principal (including, if applicable, the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) and accrued and unpaid interest; and

 

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Fourth, to the payment of the remainder, if any, to the Company.

 

Section 6.06              Proceedings by Holders. Except to enforce the right to receive payment of principal (including, if applicable, the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price) or accrued and unpaid interest, if any, or the right to receive payment or delivery of the consideration due upon conversion, no Holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless:

 

(a) such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as herein provided;

 

(b) Holders of at least 25% in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder;

 

(c) such Holders shall have offered to the Trustee such security or indemnity satisfactory in its sole discretion to it against any loss, liability or expense to be incurred therein or thereby;

 

(d) the Trustee for 60 days after its receipt of such notice of the request and offer of security or indemnity satisfactory to it in its sole discretion, shall have neglected or refused to institute any such action, suit or proceeding; and

 

(e) no direction that, in the opinion of the Trustee, is inconsistent with such written request shall have been given to the Trustee by the Holders of a majority in principal amount of the Notes then outstanding within such 60-day period pursuant to Section 6.09,

 

it being understood and intended, and being expressly covenanted by the taker and Holder of every Note with every other taker and Holder and the Trustee that no one or more Holders shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders (except as otherwise provided herein). For the protection and enforcement of this Section 6.06, each and every Holder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

 

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Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any Holder to receive payment or delivery, as the case may be, of (x) the principal (including the Tax Redemption Price on the Tax Redemption Date or the Repurchase Price on the Repurchase Date and the Fundamental Change Repurchase Price, if applicable) of, (y) accrued and unpaid interest, if any, on, and (z) the consideration due upon conversion of, such Note, on or after the respective due dates expressed or provided for in such Note or in this Indenture, or to institute suit for the enforcement of any such payment or delivery, as the case may be, on or after such respective dates against the Company shall not be impaired or affected without the consent of such Holder.

 

Section 6.07              Proceedings by Trustee. In case of an Event of Default the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as are necessary to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

 

Section 6.08              Remedies Cumulative and Continuing. Except as provided in the last paragraph of Section 2.07, all powers and remedies given by this Article 6 to the Trustee or to the Holders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the Holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any Holder of any of the Notes to exercise any right or power accruing upon any Default or Event of Default shall impair any such right or power, or shall be construed to be a waiver of any such Default or Event of Default or any acquiescence therein; and, subject to the provisions of Section 6.06, every power and remedy given by this Article 6 or by law to the Trustee or to the Holders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Holders.

 

Section 6.09              Direction of Proceedings and Waiver of Defaults by Majority of Holders. The Holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 8.04 shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to Notes; provided, however, that the Trustee may refuse to follow any direction that (i) conflicts with law or with this Indenture, or (ii) that the Trustee determines unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under this Indenture, the Trustee shall be entitled to indemnification satisfactory to the Trustee in its sole discretion against all loses and expenses caused by taking or not taking such action. The Holders of a majority of the aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 8.04 may on behalf of the Holders of all of the Notes, by notice to the Trustee, waive any past Default or Event of Default hereunder and its consequences except a Default or Event of Default (i) in the payment of accrued and unpaid interest, if any, on, or the principal (including any Tax Redemption Price on the Tax Redemption Date or the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price) of, the Notes when due that has not been cured pursuant to the provisions of Section 6.01, (ii) arising from a failure by the Company to deliver the consideration due upon conversion of the Notes in accordance with this Indenture or (iii) in respect of any provision hereof which under Article 10 cannot be modified or amended without the consent of each Holder of an outstanding Note affected. Upon any such waiver the Company, the Trustee and the Holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other Default or a Default or Event of Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 6.09, said Default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

 

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Section 6.10              Notice of Defaults. The Trustee shall, within 90 days after the occurrence and continuance of a Default of which a Responsible Officer has actual knowledge, mail to all Holders as the names and addresses of such Holders appear upon the Note Register, notice of all Defaults known to a Responsible Officer, unless such Defaults shall have been cured or waived before the giving of such notice; provided that, except in the case of a Default in the payment of the principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable), or accrued and unpaid interest on, any of the Notes or a Default in the payment or delivery of the consideration due upon conversion, the Trustee shall be protected in withholding such notice if and so long as a committee of Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Holders. The Trustee shall not be deemed to have knowledge of a Default or Event of Default (other than a Default in the payment of principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable), or accrued and unpaid interest on, any of the Notes) unless a Responsible Officer of the Trustee has received written notice thereof in the manner provided in this Indenture, which notice references the Notes and the Indenture.

 

Section 6.11              Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Note by its acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 6.11 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Notes at the time outstanding determined in accordance with Section 8.04, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or accrued and unpaid interest, if any, on any Note (including, but not limited to, the Tax Redemption Price with respect to the Notes being redeemed and the Repurchase Price or Fundamental Change Repurchase Price with respect to the Notes being repurchased as provided in this Indenture) on or after the due date expressed or provided for in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article 14.

 

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ARTICLE 7
CONCERNING THE TRUSTEE

 

Section 7.01              Duties and Responsibilities of Trustee. The Trustee, prior to the occurrence of an Event of Default and after the curing or waiver of all Events of Default that may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred that has not been cured or waived the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs; provided that if an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under this Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory in its sole discretion to it against any loss, liability or expense that might be incurred by it in compliance with such request or direction. The Trustee shall be held harmless and have no liability for actions taken at the direction of the requisite Holders.

 

No provision of this Indenture shall be construed to relieve the Trustee from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that:

 

(a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default that may have occurred:

 

(i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

 

(ii) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions that by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of any mathematical calculations or other facts stated therein);

 

(b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was grossly negligent in ascertaining the pertinent facts;

 

(c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding determined as provided in Section 8.04 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture;

 

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(d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section;

 

(e) the Trustee shall not be liable in respect of any payment (as to the correctness of amount, entitlement to receive or any other matters relating to payment) or notice effected by the Company or any Paying Agent or any records maintained by any co-Note Registrar with respect to the Notes;

 

(f) if any party fails to deliver a notice relating to an event the fact of which, pursuant to this Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its failure to receive such notice as reason to act as if no such event occurred;

 

(g) in the absence of a written agreement executed by the Company and the Trustee and written investment direction from the Company pursuant thereto, all cash received by the Trustee shall be placed in a non-interest bearing trust account, and in no event shall the Trustee be liable for interest thereon, or the selection of investments or for investment losses incurred thereon or for losses incurred as a result of the liquidation of any such investment prior to its maturity date or the failure of the party directing such investments prior to its maturity date or the failure of the party directing such investment to provide timely written investment direction, and the Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of such written investment direction from the Company; and

 

(h) in the event that the Trustee or an affiliate is also acting as Custodian, Note Registrar, Paying Agent, Conversion Agent or transfer agent hereunder, the rights and protections afforded to the Trustee pursuant to this Article 7 (including indemnity) shall also be afforded to such Custodian, Note Registrar, Paying Agent, Conversion Agent or transfer agent.

 

If an Event of Default occurs and is continuing, the Trustee may require the Paying Agent and Conversion Agent to act under its direction.

 

None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. Where there are any inconsistencies between the Trustee Ordinance (Cap. 29 Laws of Hong Kong) and this Indenture, the provisions of this Indenture shall prevail to the extent provided or permitted by law.

 

Section 7.02              Reliance on Documents, Opinions, Etc. Except as otherwise provided in Section 7.01:

 

(a) the Trustee may conclusively rely and shall be fully protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, Note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties;

 

(b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company;

 

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(c) the Trustee may consult with counsel and require an Opinion of Counsel and any advice of such counsel or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

 

(d) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the expense of the Company and shall incur no liability of any kind by reason of such inquiry or investigation;

 

(e) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, custodian, nominee or attorney appointed by it with due care hereunder; and

 

(f) the permissive rights of the Trustee enumerated herein shall not be construed as duties.

 

In no event shall the Trustee be liable for any special, punitive or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. The Trustee shall not be charged with knowledge of any Default or Event of Default (other than a Default in the payment of principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable), or accrued and unpaid interest on, any of the Notes) unless a Responsible Officer of the Trustee has received written notice thereof in the manner provided in this Indenture, which notice references the Notes and the Indenture.

 

Section 7.03              No Responsibility for Recitals, Etc. The recitals contained herein and in the Notes (except in the Trustee’s certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture.

 

Section 7.04              Individual Rights or the Trustee, Paying Agents, Conversion Agents or Note Registrar. The Trustee, any Paying Agent, any Conversion Agent or Note Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise engage in business or deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee, Paying Agent, Conversion Agent or Note Registrar. Nothing herein shall obligate the Trustee, the Conversion Agent, the Notes Registrar or the Paying Agent to account for any profits earned from any business or transactional relationship. The Trustee may have interest in or may be providing or may in the future provide financial or other services to other parties. The Conversion Agent, Paying Agent and the Notes Registrar may do the same with like rights.

 

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Section 7.05              Monies and ADSs to Be Held in Trust. All monies and ADSs received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money and ADSs held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money or ADSs received by it hereunder except as may be agreed from time to time by the Company and the Trustee.

 

Section 7.06              Compensation and Expenses of Trustee, Payment Agents, Conversion Agents and Note Registrar. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as mutually agreed to in writing between and executed by the Trustee and the Company, and the Company will pay or reimburse the Trustee upon its request for all expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture in any capacity thereunder (including the reasonable compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as shall have been caused by its gross negligence, willful misconduct or bad faith. Any payment by the Company to the Trustee shall be made by wire transfer in immediately available funds. The Company also covenants to indemnify the Trustee (which for purposes of this Section 7.06 shall be deemed to include its directors, officers, employees and agents) in any capacity under this Indenture and any other document or transaction entered into in connection herewith and its agents and any authenticating agent for, and to hold them harmless against, any loss, claim, damage, liability or expense incurred without gross negligence, willful misconduct or bad faith on the part of the Trustee, its officers, directors, agents or employees, or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 7.06 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a senior claim to which the Notes are hereby made subordinate on all money or property held or collected by the Trustee, except, subject to the effect of Section 6.05, funds held in trust herewith for the benefit of the Holders of particular Notes. The Trustee’s right to receive payment of any amounts due under this Section 7.06 shall not be subordinate to any other liability or indebtedness of the Company. The obligation of the Company under this Section 7.06 shall survive the satisfaction and discharge of this Indenture and the earlier resignation or removal or the Trustee. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The indemnification provided in this Section 7.06 shall extend to the officers, directors, agents and employees of the Trustee.

 

Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 6.01(i) or Section 6.01(j) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws.

 

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Section 7.07              Officers’ Certificate as Evidence. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of gross negligence, willful misconduct and bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate and/or an Opinion of Counsel delivered to the Trustee, and such Officers’ Certificate and/or Opinion of Counsel, in the absence of gross negligence, willful misconduct and bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

 

Section 7.08              Eligibility of Trustee. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least US$50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

 

Section 7.09              Resignation or Removal of Trustee. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the Holders at their addresses as they shall appear on the Note Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the Holders, the resigning Trustee may, upon ten Business Days’ notice to the Company and the Holders, petition any court of competent jurisdiction for the appointment of a successor trustee, or any Holder who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 6.11, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee.

 

(b) In case at any time any of the following shall occur:

 

(i) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.08 and shall fail to resign after written request therefor by the Company or by any such Holder, or

 

(ii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

 

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then, in either case, the Company may by a Board Resolution remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 6.11, any Holder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee.

 

(c) The Holders of a majority in aggregate principal amount of the Notes at the time outstanding, as determined in accordance with Section 8.04, may at any time remove the Trustee and nominate a successor trustee that shall be deemed appointed as successor trustee unless within ten days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Holder, upon the terms and conditions and otherwise as in Section 7.09(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee.

 

(d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 7.09 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.10.

 

Section 7.10              Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 7.09 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 7.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a senior claim to which the Notes are hereby made subordinate on all money or property held or collected by such trustee as such, except for funds held in trust for the benefit of Holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 7.06.

 

No successor trustee shall accept appointment as provided in this Section 7.10 unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 7.08.

 

Upon acceptance of appointment by a successor trustee as provided in this Section 7.10, each of the Company and the successor trustee, at the written direction and at the expense of the Company shall mail or cause to be mailed notice of the succession of such trustee hereunder to the Holders at their addresses as they shall appear on the Note Register. If the Company fails to mail such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company.

 

Section 7.11              Succession by Merger, Etc. Any corporation or other entity into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation or other entity resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or other entity succeeding to all or substantially all of the corporate trust business of the Trustee (including the administration of this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that in the case of any corporation or other entity succeeding to all or substantially all of the corporate trust business of the Trustee such corporation or other entity shall be eligible under the provisions of Section 7.08.

 

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In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or to authenticate Notes in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation.

 

Section 7.12              Trustee’s Application for Instructions from the Company. Any application by the Trustee for written instructions from the Company (other than with regard to any action proposed to be taken or omitted to be taken by the Trustee that affects the rights of the Holders of the Notes under this Indenture) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer that the Company has indicated to the Trustee should receive such application actually receives such application, unless any such officer shall have consented in writing to any earlier date), unless, prior to taking any such action (or the effective date in the case of any omission), the Trustee shall have received written instructions in accordance with this Indenture in response to such application specifying the action to be taken or omitted.

 

ARTICLE 8
CONCERNING THE HOLDERS

 

Section 8.01              Action by Holders. Whenever in this Indenture it is provided that the Holders of a specified percentage of the aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (b) by the record of the Holders voting in favor thereof at any meeting of Holders duly called and held in accordance with the provisions of Article 9, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Holders, or (d) pursuant to applicable procedures of the Depositary. Whenever the Company or the Trustee solicits the taking of any action by the Holders of the Notes, the Company or the Trustee may fix, but shall not be required to, in advance of such solicitation, a date as the record date for determining Holders entitled to take such action. The record date if one is selected shall be not more than fifteen days prior to the date of commencement of solicitation of such action.

 

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Section 8.02              Proof of Execution by Holders. Subject to the provisions of Section 7.01, Section 7.02 and Section 9.05, proof of the execution of any instrument by a Holder or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or the Depositary or in such manner as shall be satisfactory to the Trustee. The holding of Notes shall be proved by the Note Register or by a certificate of the Note Registrar. The record of any Holders’ meeting shall be proved in the manner provided in Section 9.06.

 

Section 8.03              Who Are Deemed Absolute Owners. The Company, the Trustee, any authenticating agent, any Paying Agent, any Conversion Agent and any Note Registrar may deem the Person in whose name a Note shall be registered upon the Note Register to be, and may treat it as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon made by any Person other than the Company or any Note Registrar) for the purpose of receiving payment of or on account of the principal of and (subject to Section 2.03) accrued and unpaid interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any Paying Agent nor any Conversion Agent nor any Note Registrar shall be affected by any notice to the contrary. All such payments or deliveries so made to any Holder for the time being, or upon its order, shall be valid, and, to the extent of the sums or ADSs so paid or delivered, effectual to satisfy and discharge the liability for monies payable or ADSs deliverable upon any such Note. Notwithstanding anything to the contrary in this Indenture or the Notes following an Event of Default, any Holder of a beneficial interest in a Global Note may directly enforce against the Company, without the consent, solicitation, proxy, authorization or any other action of the Depositary or any other Person, such Holder’s right to exchange such beneficial interest for a Note in certificated form in accordance with the provisions of this Indenture.

 

Section 8.04              Company-Owned Notes Disregarded. In determining whether the Holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes that are owned by the Company or by any Affiliate of the Company shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes that a Responsible Officer knows are so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as outstanding for the purposes of this Section 8.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to so act with respect to such Notes and that the pledgee is not the Company or an Affiliate of the Company. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers’ Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described Persons; and, subject to Section 7.01, the Trustee shall be entitled to accept such Officers’ Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination.

 

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Section 8.05              Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the Holders of the percentage of the aggregate principal amount of the Notes specified in this Indenture in connection with such action, any Holder of a Note that is shown by the evidence to be included in the Notes the Holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the Holder of any Note shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Note and of any Notes issued in exchange or substitution therefor or upon registration of transfer thereof, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor or upon registration of transfer thereof.

 

ARTICLE 9
HOLDERS’ MEETINGS

 

Section 9.01              Purpose of Meetings. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article 9 for any of the following purposes:

 

(a) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article 6;

 

(b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article 7;

 

(c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 10.02; or

 

(d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law.

 

Section 9.02              Call of Meetings by Trustee. The Trustee may at any time call a meeting of Holders to take any action specified in Section 9.01, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Holders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 8.01, shall be mailed to Holders of such Notes at their addresses as they shall appear on the Note Register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty nor more than ninety days prior to the date fixed for the meeting.

 

Any meeting of Holders shall be valid without notice if the Holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the Holders of all Notes then outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice.

 

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Section 9.03              Call of Meetings by Company or Holders. In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% of the aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Holders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Holders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 9.01, by mailing notice thereof as provided in Section 9.02.

 

Section 9.04              Qualifications for Voting. To be entitled to vote at any meeting of Holders a Person shall (a) be a Holder of one or more Notes on the record date pertaining to such meeting or (b) be a Person appointed by an instrument in writing as proxy by a Holder of one or more Notes on the record date pertaining to such meeting. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

 

Section 9.05              Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit.

 

The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders as provided in Section 9.03, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting.

 

Subject to the provisions of Section 8.04, at any meeting of Holders each Holder or proxyholder shall be entitled to one vote for each US$1,000 principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by it or instruments in writing as aforesaid duly designating it as the proxy to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 9.02 or Section 9.03 may be adjourned from time to time by the Holders of a majority in aggregate principal amount of Notes represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

 

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Section 9.06              Voting. The vote upon any resolution submitted to any meeting of Holders shall be by written ballot on which shall be subscribed the signatures of the Holders or of their representatives by proxy and the outstanding principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 9.02. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

 

Any record so signed and verified shall be conclusive evidence of the matters therein stated.

 

Section 9.07              No Delay of Rights by Meeting. Nothing contained in this Article 9 shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Notes.

 

ARTICLE 10
SUPPLEMENTAL INDENTURES

 

Section 10.01          Supplemental Indentures Without Consent of Holders. Without the consent of any Holder, the Company, when authorized by the resolutions of the Board of Directors and the Trustee, at the Company’s expense, may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes:

 

(a) to cure any ambiguity, omission, defect or inconsistency in this Indenture that does not, individually or in the aggregate adversely, affect the rights of any Holder of the Notes in any respect;

 

(b) to provide for the assumption by a Continuing Entity of the obligations of the Company under this Indenture pursuant to Article 11;

 

(c) to add guarantees with respect to the Notes;

 

(d) to secure the Notes;

 

(e) to add to the covenants for the benefit of the Holders or surrender any right or power conferred upon the Company;

 

(f) to make any change that does not, individually or in the aggregate, adversely affect the rights of any Holder in any respect; or

 

(g) to conform the provisions of this Indenture or the Notes to the “Description of Notes” section of the Offering Memorandum.

 

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Upon the written request of the Company, the Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture that affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

 

Any supplemental indenture authorized by the provisions of this Section 10.01 may be executed by the Company and the Trustee without the consent of the Holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 10.02.

 

Section 10.02          Supplemental Indentures with Consent of Holders. With the consent (evidenced as provided in Article 8) of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding (determined in accordance with Article 8 and including, without limitation, consents obtained in connection with a purchase of, or tender or exchange offer for, Notes), the Company, when authorized by the resolutions of the Board of Directors and the Trustee, at the Company’s expense, may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the Holders; provided, however, that, without the consent of each Holder of an outstanding Note affected, no such supplemental indenture shall:

 

(a) reduce the percentage in aggregate principal amount of Notes whose Holders must consent to an amendment of this Indenture or waive any past Default;

 

(b) reduce the rate of, or extend the stated time for payment of, interest on any Note;

 

(c) reduce the principal of, or extend the Maturity Date, of any Note;

 

(d) make any change that impairs or adversely affects the conversion rights of any Notes;

 

(e) reduce the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date or the Fundamental Change Repurchase Price of any Note, or amend or modify in any manner adverse to the Holders the Company’s obligation to make such payments, whether through an amendment or waiver of provisions in the covenants, definitions or otherwise;

 

(f) make any Note payable in a currency other than that stated in the Note;

 

(g) change the ranking of the Notes;

 

(h) impair the right of any Holder to receive payment of principal of, and interest on, such Holder’s Notes on or after the due dates therefor, or to institute suit for the enforcement of any payment on or with respect to such Holder’s Notes;

 

(i) change the obligation of the Company to pay Additional Amounts on any Note; or

 

(j) make any change in this Article 10 that requires each Holder’s consent or in the waiver provisions in Section 6.02 or Section 6.09.

 

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Upon the written request of the Company, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid and subject to Section 10.05, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.

 

Holders do not need under this Section 10.02 to approve the particular form of any proposed supplemental indenture. It shall be sufficient if such Holders approve the substance thereof. After any supplemental indenture becomes effective under Section 10.01 or this Section 10.02, the Company shall mail to the Holders a notice briefly describing such supplemental indenture. However, the failure to give such notice to all the Holders, or any defect in the notice, will not impair or affect the validity of the supplemental indenture.

 

Section 10.03          Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article 10, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the Holders shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.

 

Section 10.04          Notation on Notes. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article 10 may, at the Company’s expense, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company’s expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 17.11) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding.

 

Section 10.05          Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee. In addition to the documents required by Section 17.06, the Trustee shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article 10 and is permitted or authorized by this Indenture.

 

ARTICLE 11
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE

 

Section 11.01          Company May Consolidate, Etc. on Certain Terms. Subject to the provisions of Section 11.02, the Company shall not consolidate with, merge with or into, or sell, convey, transfer or lease all or substantially all of its properties and assets to another Person, unless:

 

(a) the resulting, surviving or transferee Person (the “Continuing Entity”), if not the Company, shall be a corporation organized and existing under the laws of any State of the United States of America or the District of Columbia, or a company organized and existing under the laws of the Cayman Islands, and the Continuing Entity (if not the Company) shall expressly assume, by supplemental indenture all of the obligations of the Company under the Notes and this Indenture (including, for the avoidance of doubt, the obligation to pay Additional Amounts pursuant to Section 4.07(a));

 

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(b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing under this Indenture; and

 

(c) if, pursuant to Section 14.07, upon the occurrence of any such consolidation, merger, sale, conveyance, transfer or lease the Notes would become convertible into securities issued by an issuer other than the Continuing Entity, such other issuer shall fully and unconditionally guarantee on a senior basis the resulting Continuing Entity’s obligations under the Notes.

 

For purposes of this Section 11.01, the sale, conveyance, transfer or lease of all or substantially all of the properties and assets of one or more Subsidiaries of the Company to another Person, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the sale, conveyance, transfer or lease of all or substantially all of the properties and assets of the Company to another Person.

 

Section 11.02          Successor Corporation to Be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or lease and upon the assumption by the Continuing Entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and accrued and unpaid interest on all of the Notes (including, for the avoidance of doubt, any Additional Amounts), the due and punctual delivery or payment, as the case may be, of any consideration due upon conversion of the Notes (including, for the avoidance of doubt, any Additional Amounts) and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such Continuing Entity (if not the Company) shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, except in the case of a lease of all or substantially all of the Company’s properties and assets. Such Continuing Entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such Continuing Entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes that previously shall have been signed and delivered by the Officers of the Company to the Trustee for authentication, and any Notes that such Continuing Entity thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale, conveyance or transfer (but not in the case of a lease), upon compliance with this Article 11 the Person named as the “Company” in the first paragraph of this Indenture (or any successor that shall thereafter have become such in the manner prescribed in this Article 11) may be dissolved, wound up and liquidated at any time thereafter and, except in the case of a lease, such Person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture and the Notes.

 

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In case of any such consolidation, merger, sale, conveyance, transfer or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate.

 

Section 11.03          Opinion of Counsel to Be Given to Trustee. No consolidation, merger, sale, conveyance, transfer or lease shall be effective unless the Trustee shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or lease and any such assumption and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with the provisions of this Article 11.

 

ARTICLE 12
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS

 

Section 12.01          Indenture and Notes Solely Corporate Obligations. No recourse for the payment of the principal of or accrued and unpaid interest on any Note, nor for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, nor because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, Officer or director or Subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes.

 

ARTICLE 13
INTENTIONALLY OMITTED

 

ARTICLE 14
CONVERSION OF NOTES

 

Section 14.01          Conversion Privilege. Subject to and upon compliance with the provisions of this Article 14, each Holder of a Note shall have the right, at such Holder’s option, at any time prior to the close of business on the third Business Day immediately preceding the Maturity Date, to convert all or any portion (if the portion to be converted is US$1,000 principal amount or an integral multiple thereof) of such Note at an initial conversion rate of 7.9789 ADSs (subject to adjustment as provided in Section 14.04, the “Conversion Rate”) per US$1,000 principal amount of Notes (subject to the settlement provisions of Section 14.02, the “Conversion Obligation”).

 

Section 14.02          Conversion Procedure; Settlement Upon Conversion.

(a) Upon conversion of any Note, the Company shall cause to be delivered to the converting Holder, in respect of each US$1,000 principal amount of Notes being converted, a number of ADSs equal to the Conversion Rate, together with a cash payment, if applicable, in lieu of any fractional ADS in accordance with subsection (j) of this Section 14.02, on the third Business Day immediately following the relevant Conversion Date.

 

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(b) Subject to Section 14.02(e), before any Holder of a Note shall be entitled to convert a Note as set forth above, such Holder shall (i) in the case of a Global Note, comply with the procedures of the Depositary in effect at that time for book-entry transfer to the Conversion Agent through the facilities of the Depositary and, if required, pay funds to the Issuer directly equal to interest payable on the next Interest Payment Date to which such Holder is not entitled as set forth in Section 14.02(i) and, if required, pay documentary, stamp or similar issue or transfer tax, if any, and provide an original signed notice of conversion with a medallion guaranty stamp on the reverse side of the Note as set forth in the Form of Notice of Conversion (a “Notice of Conversion”) and/or other appropriate clearing agency message and effect book-entry transfer or delivery of the Notes, together with necessary endorsements and (ii) in the case of a Physical Note (1) complete and manually sign Notice of Conversion or a facsimile of the Notice of Conversion, (2) deliver the original Notice of Conversion with a medallion guaranty stamp and/or appropriate clearing agency message, which is irrevocable, and the Note to the Conversion Agent and state in writing therein the principal amount of Notes to be converted and the name or names (with addresses) in which such Holder wishes the certificate or certificates for any ADSs to be delivered upon settlement of the Conversion Obligation to be registered, (3) furnish appropriate endorsements and transfer documents, and, ADS delivery instructions and pay applicable Depositary fees directly, (4) if required, pay to the Issuer directly funds equal to interest payable on the next Interest Payment Date to which such Holder is not entitled as set forth in Section 14.02(i) and (5) if required, pay any tax or duty which may be payable in respect of any transfer involving the issue or delivery of the ADSs in the name of a Person other than such Holder. The Trustee (and if different, the Conversion Agent) shall notify the Company of any conversion pursuant to this Article 14 on the Conversion Date for such conversion. No Notice of Conversion with respect to any Notes may be surrendered by a Holder thereof if such Holder has also delivered a Repurchase Notice or Fundamental Change Repurchase Notice to the Company in respect of such Notes and not validly withdrawn such Repurchase Notice or Fundamental Change Repurchase Notice in accordance with Section 15.03.

 

If more than one Note shall be surrendered for conversion at one time by the same Holder, the Conversion Obligation with respect to such Notes shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted thereby) so surrendered.

 

(c) A Note shall be deemed to have been converted immediately prior to the close of business on the date (the “Conversion Date”) that the Holder has complied with the requirements set forth in subsection (b) above, provided that such procedures must be complied with on or prior to 2:00 PM (New York time) on a Business Day in order for the conversion to be processed on the same date. The Company shall issue or cause to be issued, and deliver to such Holder, or such Holder’s nominee or nominees, certificates or a book-entry transfer through the Depositary for the full number of ADSs to which such Holder shall be entitled in satisfaction of the Conversion Obligation.

 

(d) In case any Note shall be surrendered for partial conversion, the Company shall execute and the Trustee shall authenticate and deliver to or upon the written order of the Holder of the Note so surrendered a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note, without payment of any service charge by the converting Holder but, if required by the Company or Trustee, with payment of a sum sufficient to cover any transfer tax or similar governmental charge required by law or that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such conversion being different from the name of the Holder of the old Notes surrendered for such conversion.

 

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(e) If a Holder submits a Note for conversion, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of the ADSs upon conversion, unless the tax is due because the Holder requests such ADSs to be issued in a name other than the Holder’s name, in which case the Holder shall pay that tax. The ADS Depositary may refuse to deliver the certificates representing the ADSs being issued in a name other than the Holder’s name until the ADS Depositary receives a sum sufficient to pay any tax that is due by such Holder in accordance with the immediately preceding sentence. The Holder shall pay to the ADS Depositary the applicable fees and expenses of the ADS Depositary for the issuance of all ADSs deliverable upon conversion.

 

(f) The Company shall undertake to maintain, as long as the Notes are outstanding, the effectiveness of a registration statement on Form F-6 relating to the ADSs and an adequate number of ADSs available for issuance thereunder such that ADSs can be delivered in accordance with the terms of this Indenture, the Notes and the Deposit Agreement upon conversion of the Notes.

 

(g) Except as provided in Section 14.04, no adjustment shall be made for dividends on any ADSs issued upon the conversion of any Note as provided in this Article 14.

 

(h) Upon the conversion of an interest in a Global Note, the Trustee, or the Custodian at the direction of the Trustee, shall make a notation on such Global Note as to the reduction in the principal amount represented thereby. The Company shall notify the Trustee in writing of any conversion of Notes effected through any Conversion Agent other than the Trustee.

 

(i) Upon conversion, a Holder shall not receive any separate cash payment or any Additional ADSs accrued and unpaid interest, if any, except as set forth below. The Company’s settlement of the Conversion Obligation shall be deemed to satisfy in full its obligation to pay the principal amount of the Note and accrued and unpaid interest, if any, to, but not including, the Conversion Date. As a result, accrued and unpaid interest, if any, to, but not including, the Conversion Date shall be deemed to be paid in full rather than cancelled, extinguished or forfeited. Notwithstanding the foregoing, if Notes are converted after the close of business on a Regular Record Date, Holders of such Notes as of the close of business on such Regular Record Date will receive the full amount of interest payable on such Notes on the corresponding Interest Payment Date notwithstanding the conversion. Notes surrendered for conversion during the period from the close of business on any Regular Record Date to the open of business on the immediately following Interest Payment Date must be accompanied by funds equal to the amount of interest payable on the Notes so converted; provided that no such payment shall be required (1) for Notes converted after the close of business on the Regular Record Date immediately preceding the Maturity Date and before the close of business on the third Business Day immediately preceding the Maturity Date; (2) if the Company has specified a Tax Redemption Date that is after a Regular Record Date and on or prior to the Scheduled Trading Day immediately following the corresponding Interest Payment Date; (3) if the Company has specified a Fundamental Change Repurchase Date that is after a Regular Record Date and on or prior to the Scheduled Trading Day immediately following the corresponding Interest Payment Date; or (4) to the extent of any Defaulted Amounts, if any Defaulted Amounts exist at the time of conversion with respect to such Note.

 

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(j) The Person in whose name the certificate for any ADSs delivered upon conversion is registered shall be deemed to become the holder of record of such ADSs as of the close of business on the relevant Conversion Date. Upon a conversion of Notes, such Person shall no longer be a Holder of such Notes surrendered for conversion.

 

(k) The Company shall not cause to be delivered any fractional ADSs upon conversion of the Notes and shall instead pay cash in lieu of any fractional ADS issuable upon conversion based on the Last Reported Sale Price of the ADSs on the relevant Conversion Date.

 

Section 14.03          Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection with Make-Whole Fundamental Changes or Tax Redemptions.

 

(a) If (i) either (X) a Make-Whole Fundamental Change occurs prior to the Maturity Date or (Y) the Company delivers a Tax Redemption Notice, and in each case, (ii) a Holder elects to convert its Notes in connection with such Make-Whole Fundamental Change or such Tax Redemption, then the Company shall, under the circumstances described below, increase the Conversion Rate for the Notes so surrendered for conversion by a number of additional ADSs (the “Additional ADSs”), as described below. A conversion of Notes shall be deemed for these purposes to be “in connection with” such Make-Whole Fundamental Change if the relevant Notice of Conversion is received by the Conversion Agent from, and including, the Effective Date of the Make-Whole Fundamental Change to, and including, the third Business Day immediately prior to the related Fundamental Change Repurchase Date (or, in the case of a Make-Whole Fundamental Change that would have been a Fundamental Change but for the proviso in clause (b) of the definition thereof, the 35th Trading Day immediately following the Effective Date of such Make-Whole Fundamental Change). A conversion of Notes shall be deemed for these purposes to be “in connection with” a Tax Redemption if the relevant Notice of Conversion is received by the Conversion Agent from, and including, the date the Company delivers a Tax Redemption Notice to, and including, the Business Day immediately prior to the related Tax Redemption Date (or if the Company fails to pay the Tax Redemption Price (such later date on which the Company pays the Tax Redemption Price)).

 

(b) Upon surrender of Notes for conversion in connection with a Make-Whole Fundamental Change, the Company cause to be delivered ADSs, including the Additional ADSs, in accordance with Section 14.02; provided, however, that if, at the effective time of a Make-Whole Fundamental Change described in clause (b) of the definition of Fundamental Change, the Reference Property is composed entirely of cash, for any conversion of Notes following the Effective Date of such Make-Whole Fundamental Change, the Conversion Obligation shall be calculated based solely on the ADS Price for the transaction and shall be deemed to be an amount of cash per US$1,000 principal amount of converted Notes equal to the Conversion Rate (including any adjustment for Additional ADSs), multiplied by such ADS Price. The Company shall notify the Holders of Notes, the Trustee, the Conversion Agent and the Paying Agent of the Effective Date of any Make-Whole Fundamental Change and issue a press release announcing such Effective Date no later than five Business Days after such Effective Date.

 

(c) The number of Additional ADSs, if any, by which the Conversion Rate shall be increased shall be determined by reference to the table below, based on (i) the date on which the Make-Whole Fundamental Change occurs or becomes effective or, in the case of a Tax Redemption, the date on which the Company delivers a Tax Redemption Notice (in each case, the “Effective Date”) and (ii) in the case of a Make-Whole Fundamental Change, the price paid (or deemed to be paid) per ADS in connection with such Make-Whole Fundamental Change or, in the case of a Tax Redemption, the average of the Last Reported Sale Prices of the ADSs over the five Trading-Day period ending on, and including, the Trading Day immediately preceding the date on which the Company delivers a Tax Redemption Notice (in each case, the “ADS Price”). If the holders of ADSs receive only cash in a Make-Whole Fundamental Change described in clause (b) of the definition of Fundamental Change, the ADS Price shall be the cash amount paid per share. Otherwise, the ADS Price shall be the average of the Last Reported Sale Prices of the ADSs for each Trading Day during the five Trading-Day period ending on, and including, the Trading Day immediately preceding the Effective Date of the Make-Whole Fundamental Change. The Board of Directors shall make appropriate adjustments to the ADS Price, in its good faith determination, to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Ex-Dividend Date of the event occurs, during such five consecutive Trading-Day period.

 

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(d) The ADS Prices set forth in the column headings of the table below shall be adjusted as of any date on which the Conversion Rate of the Notes is otherwise adjusted. The adjusted ADS Prices shall equal the ADS Prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to such adjustment giving rise to the ADS Price adjustment and the denominator of which is the Conversion Rate as so adjusted. The number of Additional ADSs set forth in the table below shall be adjusted in the same manner and at the same time as the Conversion Rate as set forth in Section 14.04.

 

(e) The following table sets forth the number of Additional ADSs to be added to the Conversion Rate pursuant to this Section 14.03 for each ADS Price and Effective Date set forth below:

 

  ADS Price 
Effective Date  US$91.15   US$100.00   US$110.00   US$120.00   US$125.33   US$130.00   US$140.00   US$150.00   US$175.00   US$200.00   US$250.00   US$300.00 
August 6, 2014   2.9920    2.4497    1.9742    1.6050    1.4416    1.3143    1.0825    0.8957    0.5654    0.3598    0.1413    0.0466 
August 15, 2015   2.9920    2.5258    2.0118    1.6167    1.4433    1.3088    1.0660    0.8724    0.5361    0.3321    0.1224    0.0359 
August 15, 2016   2.9920    2.5404    1.9836    1.5644    1.3834    1.2446    0.9975    0.8043    0.4779    0.2868    0.0977    0.0240 
August 15, 2017   2.9920    2.2663    1.7365    1.3725    1.2158    1.0950    0.8777    0.7059    0.4121    0.2394    0.0724    0.0122 
August 15, 2018   2.9920    2.2104    1.6983    1.3121    1.1455    1.0181    0.7922    0.6175    0.3310    0.1738    0.0379    0.0050 
August 15, 2019   2.9920    2.1424    1.5612    1.1357    0.9575    0.8242    0.5960    0.4290    0.1822    0.0701    0.0075    0.0016 
August 15, 2020   2.9920    2.0211    1.1120    0.3544    0.0000    0.0000    0.0000    0.0000    0.0000    0.0000    0.0000    0.0000 

 

The exact ADS Prices and Effective Dates may not be set forth in the table above, in which case:

 

(i) if the ADS Price is between two ADS Prices in the table above or the Effective Date is between two Effective Dates in the table, the number of Additional ADSs shall be determined by a straight-line interpolation between the number of Additional ADSs set forth for the higher and lower ADS Prices and the earlier and later Effective Dates based on a 365-day year, as applicable;

 

(ii) if the ADS Price is greater than US$300.00 per share (subject to adjustment in the same manner as the ADS Prices set forth in the column headings of the table above pursuant to subsection (d) above), no Additional ADSs shall be added to the Conversion Rate; and

 

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(iii) if the ADS Price is less than US$91.15 per share (subject to adjustment in the same manner as the ADS Prices set forth in the column headings of the table above pursuant to subsection (d) above), no Additional ADSs shall be added to the Conversion Rate.

 

Notwithstanding the foregoing, in no event shall the total number of ADSs issuable upon conversion exceed 10.9709 per US$1,000 principal amount of Notes, subject to adjustment in the same manner as the Conversion Rate pursuant to Section 14.04.

 

(f) Nothing in this Section 14.03 shall prevent an adjustment to the Conversion Rate pursuant to Section 14.04 in respect of a Make-Whole Fundamental Change.

 

Section 14.04          Adjustment of Conversion Rate. If the number of Class A Ordinary Shares represented by the ADSs is changed for any reason other than one or more of the events described in this Section 14.04, the Company shall make an appropriate adjustment to the Conversion Rate such that the number of Class A Ordinary Shares represented by the ADSs deliverable upon conversion of any Notes is not affected by such change.

 

Notwithstanding the adjustment provisions described in this Section 14.04, if the Company distributes to all or substantially all holders of the Ordinary Shares any cash, rights, options, warrants, shares of capital stock or similar equity interest, evidences of indebtedness or other assets or property of the Company (but excluding Expiring Rights) and, in lieu of a corresponding distribution to holders of the ADSs, the ADSs shall instead represent, in addition to Class A Ordinary Shares, such cash, rights, options, warrants, shares of capital stock or similar equity interest, evidences of indebtedness or other assets or property of the Company, then an adjustment to the Conversion Rate described in this Section 14.04 shall not be made unless and until a corresponding distribution (if any) is made to holders of the ADSs, and in which case such adjustment to the Conversion Rate shall be based on the distribution made to the holders of the ADSs and not on the distribution made to the holders of the Ordinary Shares. However, in the event that the Company issues or distributes to all or substantially all holders of the Ordinary Shares any Expiring Rights, notwithstanding the immediately preceding sentence, the Company shall adjust the Conversion Rate pursuant to Section 14.04(b) (in the case of Expiring Rights entitling holders of the Ordinary Shares for a period of not more than 45 calendar days after the announcement date of such issuance to subscribe for or purchase Ordinary Shares or ADSs) or Section 14.04(c) (in the case of all other Expiring Rights). “Expiring Rights” means any rights, options or warrants to purchase Ordinary Shares or ADSs that expire on or prior to the Maturity Date.

 

For the avoidance of doubt, if any event described in this Section 14.04(a) to 14.04(c) (inclusive) results in a change to the number of Class A Ordinary Shares represented by the ADSs, then such a change shall be deemed to satisfy the Company’s obligation to adjust the Conversion Rate on account of such event to the extent, but only to the extent, that such change reflects the adjustment to the Conversion Rate that would otherwise have been required on account of such event.

 

Subject to the foregoing, the Conversion Rate shall be adjusted from time to time by the Company if any of the following events occurs, except that the Company shall not make any adjustments to the Conversion Rate if Holders of the Notes participate (other than in the case of a share split or share combination), at the same time and upon the same terms as holders of the ADSs and solely as a result of holding the Notes, in any of the transactions described in this Section 14.04, without having to convert their Notes, as if they held a number of ADSs equal to the Conversion Rate in effect immediately prior to the effective time for such adjustment, multiplied by the principal amount (expressed in thousands) of Notes held by such Holder.

 

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(a) If the Company exclusively issues Ordinary Shares as a dividend or distribution on its Ordinary Shares, or if the Company effects a share split or share combination, the Conversion Rate shall be adjusted based on the following formula:

 

CR1 = CR0 x OS1
OS0

 

where,

 

CR0 =the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the Adjustment Effective Date of such share split or combination, as applicable;

 

CR1 =the Conversion Rate in effect immediately after the close of business on such Record Date or immediately after the open of business on such Adjustment Effective Date, as applicable;

 

OS0 =the number of Ordinary Shares outstanding immediately prior to the close of business on such Record Date or immediately prior to the open of business on such Adjustment Effective Date, as applicable; and

 

OS1 =the number of Ordinary Shares outstanding immediately after giving effect to such dividend, distribution, share split or share combination.

 

Any adjustment made under this Section 14.04(a) shall become effective immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Adjustment Effective Date for such share split or share combination, as applicable. If any dividend or distribution of the type described in this Section 14.04(a) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors determines not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” and “OS1” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

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(b) If the Company issues to all or substantially all holders of its Ordinary Shares or ADSs any rights, options or warrants entitling them for a period of not more than 45 calendar days after the announcement date of such issuance to subscribe for or purchase Ordinary Shares or ADSs at a price per Ordinary Share or ADS less than the average of the Last Reported Sale Prices of ADSs (in the case of any rights, options or warrants entitling holders thereof to subscribe for or purchase Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of such issuance, the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x OS0 + X
OS0 + Y

 

where,

 

CR0=the Conversion Rate in effect immediately prior to the close of business on the Record Date for such issuance;

 

CR1=the Conversion Rate in effect immediately after the close of business on such Record Date;

 

OS0=the number of Ordinary Shares outstanding immediately prior to the close of business on such Record Date;

 

X =the total number of Ordinary Shares issuable pursuant to such rights, options or warrants or, in the case of any rights, options or warrants entitling holders thereof to subscribe for or purchase ADSs, the total number of Class A Ordinary Shares represented by the total number of ADSs issuable pursuant to such rights, options or warrants; and

 

Y =the number of Ordinary Shares equal to the aggregate price payable to exercise such rights, options or warrants, divided by the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of the issuance of such rights, options or warrants.

 

Any increase made under this Section 14.04(b) shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the close of business on the Record Date for such issuance. To the extent that the Ordinary Shares or ADSs, as the case may be, are not delivered after the expiration of such rights, options or warrants, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect had the increase with respect to the issuance of such rights, options or warrants been made on the basis of delivery of only the number of Ordinary Shares or ADSs, as the case may be, actually delivered. If such rights, options or warrants are not so issued, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect if such Record Date for such issuance had not occurred. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

For purposes of this Section 14.04(b), in determining whether any rights, options or warrants entitle the holders to subscribe for or purchase Ordinary Shares or ADSs at less than such average of the Last Reported Sale Prices of the ADSs (in the case of any rights, options, warrants entitling holders thereof to subscribe for or purchase Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of such issuance, and in determining the aggregate offering price of such Ordinary Shares or ADSs, as the case may be, there shall be taken into account any consideration received by the Company for such rights, options or warrants and any amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be reasonably determined by the Board of Directors or a committee thereof in good faith.

 

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(c) If the Company distributes shares of its Capital Stock, evidences of its indebtedness, other assets or property or rights, options or warrants to acquire its Capital Stock or other securities, to all or substantially all holders of the Ordinary Shares, excluding (i) dividends, rights, options or warrants as to which an adjustment has been effected pursuant to Section 14.04(a) or Section 14.04(b), (ii) dividends or distributions paid exclusively in cash as to which an adjustment has been effected pursuant to Section 14.04(d) or Section 14.04(e), and (iii) Spin-Offs (as defined below) as to which the provisions set forth below in this Section 14.04(c) shall apply (any of such shares of Capital Stock, evidences of indebtedness, other assets or property or rights, options or warrants to acquire Capital Stock or other securities of the Company, the “Distributed Property”), then the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x SP0
SP0 - FMV

 

where,

 

CR0 =the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;

 

CR1 =the Conversion Rate in effect immediately after the close of business on such Record Date;

 

SP0 =the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex- Dividend Date for such distribution; and

 

FMV =the fair market value (as reasonably determined by the Board of Directors or a committee thereof in good faith) of the Distributed Property with respect to each outstanding Ordinary Share on the Ex-Dividend Date for such distribution.

 

Any increase made under the portion of this Section 14.04(c) above shall become effective immediately after the close of business on the Record Date for such distribution. If such distribution is not so paid or made, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

 

If the Board of Directors determines the “FMV” (as defined above) of any distribution for purposes of this Section 14.04(c) by reference to the actual or when-issued trading market for any securities, in doing so it shall consider the prices in such market over the same period used in computing the Last Reported Sale Prices of the ADSs over the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex-Dividend Date for such distribution.

 

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Notwithstanding the foregoing, if “FMV” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of a Note shall receive, in respect of each US$1,000 principal amount thereof, at the same time and upon the same terms as holders of the ADSs receive the Distributed Property, the amount of Distributed Property such Holder would have received if such Holder owned a number of ADSs equal to the Conversion Rate in effect on the Record Date for the distribution.

 

With respect to an adjustment pursuant to this Section 14.04(c) where there has been a payment of a dividend or other distribution on the Ordinary Shares of shares of Capital Stock of any class or series, or similar equity interest, of or relating to a Subsidiary or other business unit of the Company, where such Capital Stock or similar equity interest is listed or quoted (or will be listed or quoted upon consummation of the Spin-Off) on a U.S. national or regional securities exchange (a “Spin-Off”), the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x FMV0 + MP0
MP0

 

where,

 

CR0 =the Conversion Rate in effect immediately prior to the end of the Valuation Period;

 

CR1 =the Conversion Rate in effect immediately after the end of the Valuation Period;

 

FMV0 =the average of the Last Reported Sale Prices of the Capital Stock or similar equity interest distributed to holders of the Ordinary Shares applicable to one Ordinary Share (determined for purposes of the definition of Last Reported Sale Price as set forth in Section 1.01 as if such Capital Stock or similar equity interest were ADSs) for each Trading Day during the first 10 consecutive Trading-Day period beginning on, and including, the Ex- Dividend Date of the Spin-Off (the “Valuation Period”); and

 

MP0 =the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) over the Valuation Period.

 

The increase to the Conversion Rate under the preceding paragraph shall be determined on the last Trading Day of the Valuation Period but will be given effect immediately after the open of business on the Ex-Dividend Date for the Spin-Off; provided that in respect of any conversion during the Valuation Period, references in the portion of this Section 14.04(c) related to Spin-Offs to 10 Trading Days shall be deemed to be replaced with such lesser number of Trading Days as have elapsed from, and including, the Ex-Dividend Date of such Spin-Off to, and including, the Conversion Date in determining the Conversion Rate.

 

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For purposes of this Section 14.04(c) (and subject in all respect to Section 14.11), rights, options or warrants distributed by the Company to all holders of its Ordinary Shares entitling them to subscribe for or purchase shares of the Company’s Capital Stock, including Ordinary Shares (either initially or under certain circumstances), which rights, options or warrants, until the occurrence of a specified event or events (“Trigger Event”): (i) are deemed to be transferred with such Ordinary Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Section 14.04(c) (and no adjustment to the Conversion Rate under this Section 14.04(c) will be required) until the occurrence of the earliest Trigger Event, whereupon such rights, options or warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Rate shall be made under this Section 14.04(c). If any such right, option or warrant, including any such existing rights, options or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights, options or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and Record Date with respect to new rights, options or warrants with such rights (in which case the existing rights, options or warrants shall be deemed to terminate and expire on such date without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights, options or warrants, or any Trigger Event or other event (of the type described in the immediately preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Rate under this Section 14.04(c) was made, (1) in the case of any such rights, options or warrants that shall all have been redeemed or purchased without exercise by any holders thereof, upon such final redemption or purchase (x) the Conversion Rate shall be readjusted as if such rights, options or warrants had not been issued and (y) the Conversion Rate shall then again be readjusted to give effect to such distribution, deemed distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per Ordinary Share redemption or purchase price received by a holder or holders of Ordinary Shares with respect to such rights, options or warrants (assuming such holder had retained such rights, options or warrants), made to all holders of Ordinary Shares as of the date of such redemption or purchase, and (2) in the case of such rights, options or warrants that shall have expired or been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights, options and warrants had not been issued.

 

For purposes of Section 14.04(a), Section 14.04(b) and this Section 14.04(c), any dividend or distribution to which this Section 14.04(c) is applicable that also includes one or both of:

 

(A) a dividend or distribution of Ordinary Shares to which Section 14.04(a) is applicable (the “Clause A Distribution”); or

 

(B) a dividend or distribution of rights, options or warrants to which Section 14.04(b) is applicable (the “Clause B Distribution”),

 

then (1) such dividend or distribution, other than the Clause A Distribution and the Clause B Distribution, shall be deemed to be a dividend or distribution to which this Section 14.04(c) is applicable (the “Clause C Distribution”) and any adjustment to the Conversion Rate required by this Section 14.04(c) with respect to such Clause C Distribution shall then be made, and (2) the Clause A Distribution and Clause B Distribution shall be deemed to immediately follow the Clause C Distribution and any adjustment to the Conversion Rate required by Section 14.04(a) and Section 14.04(b) with respect thereto shall then be made, except that, if determined by the Company (I) the “Record Date” of the Clause A Distribution and the Clause B Distribution shall be deemed to be the Record Date of the Clause C Distribution and (II) any Ordinary Shares included in the Clause A Distribution or Clause B Distribution shall be deemed not to be “outstanding immediately prior to the close of business on such Record Date or immediately after the open of business on such Adjustment Effective Date, as applicable” within the meaning of Section 14.04(a) or “outstanding immediately prior to the close of business on such Record Date” within the meaning of Section 14.04(b).

 

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(d) If any cash dividend or distribution is made to all or substantially all holders of the Ordinary Shares, the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x SP0
SP0 - C

 

where,

 

CR0 =the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution;

 

CR1 =the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution;

 

SP0 =the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex- Dividend Date for such dividend or distribution; and

 

C =the amount in cash per Ordinary Share the Company distributes to holders of its Ordinary Shares.

 

Any increase made under this Section 14.04(d) shall become effective immediately after the close of business on the Record Date for such dividend or distribution. If such dividend or distribution is not so paid, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to make or pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

 

Notwithstanding the foregoing, if “C” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of a Note shall receive, for each US$1,000 principal amount of Notes, at the same time and upon the same terms as holders of ADSs, the amount of cash that such Holder would have received if such Holder owned a number of ADSs equal to the Conversion Rate on the Record Date for such cash dividend or distribution.

 

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(e) If the Company or any of its Subsidiaries makes a payment in respect of a tender or exchange offer for the Ordinary Shares or ADSs, if the cash and value of any other consideration included in the payment per Ordinary Share or ADS exceeds the average of the Last Reported Sale Prices of the ADSs (in the case of a tender or exchange offer for Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period beginning on, and including, the Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer, the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x AC + (SP1 + OS1)
OS0 x SP1

 

Where,

 

CR0 =the Conversion Rate in effect immediately prior to the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires;

 

CR1 =the Conversion Rate in effect immediately after the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires;

 

AC =the aggregate value of all cash and any other consideration (as reasonably determined by the Board of Directors or a committee thereof in good faith) paid or payable for all Ordinary Shares or ADSs, as the case may be, purchased in such tender or exchange offer;

 

OS0 =the number of Ordinary Shares outstanding immediately prior to the date such tender or exchange offer expires (prior to giving effect to the purchase of all Ordinary Shares and ADSs accepted for purchase or exchange in such tender or exchange offer);

 

OS1 =the number of Ordinary Shares outstanding immediately after the date such tender or exchange offer expires (after giving effect to the purchase of all Ordinary Shares and ADSs accepted for purchase or exchange in such tender or exchange offer); and

 

SP1 =the average of the Last Reported Sale Prices of the ADSs (divided by the number of Ordinary Shares then represented by one ADS) over the 10 consecutive Trading-Day period immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires.

 

The adjustment to the Conversion Rate under this Section 14.04(e) shall be determined at the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires but will be given effect immediately after the open of business on the Trading Day next succeeding the date such tender or exchange offer expires; provided that in respect of any conversion within the 10 Trading Days immediately following, and including, the Trading Day next succeeding the expiration date of any tender or exchange offer, references in this Section 14.04(e) with respect to 10 Trading Days shall be deemed to be replaced with such lesser number of Trading Days as have elapsed from, and including, the Trading Day next succeeding the expiration date of such tender or exchange offer to, and including, the Conversion Date in determining the Conversion Rate. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” and “OS1” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

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(f) Except as stated herein, the Company shall not adjust the Conversion Rate for the issuance of Ordinary Shares or ADSs, any securities convertible into or exchangeable for Ordinary Shares or ADSs, or the right to purchase Ordinary Shares or ADSs or such convertible or exchangeable securities. Notwithstanding the foregoing, if any Conversion Rate adjustment becomes effective as described in this Section 14.04, and a Holder that has converted any Notes with a Conversion Date occurring on or after the date such Conversion Rate adjustment becomes effective will participate, at the same time and upon the same terms as Holders of ADSs and solely as a result of holding the ADSs issuable upon conversion of such Notes, in the transaction or event giving rise to such Conversion Rate adjustment, then such Conversion Rate adjustment will not be made with respect to such Notes.

 

(g) In addition to those adjustments required by clauses (a), (b), (c), (d) and (e) of this Section 14.04, and to the extent permitted by law and the rules of The New York Stock Exchange or any other securities exchange on which any of the securities of the Company are then listed, the Company from time to time may increase the Conversion Rate by any amount for a period of at least 20 Business Days if the Board of Directors determines that such increase would be in the Company’s best interest (which determination shall be conclusive). In addition, the Company may (but is not required to) increase the Conversion Rate to avoid or diminish income tax to holders of Ordinary Shares or ADSs or rights to purchase Ordinary Shares or ADSs in connection with a dividend or distribution of Ordinary Shares or ADSs (or rights to acquire Ordinary Shares or ADSs) or similar event. Whenever the Conversion Rate is increased pursuant to either of the preceding two sentences, the Company shall mail to the Holder of each Note at its last address appearing on the Note Register a notice of the increase at least 15 days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

 

(h) Notwithstanding anything to the contrary in this Article 14, the Conversion Rate shall not be adjusted:

 

(i) upon the issuance of any Ordinary Shares or ADSs pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Company’s securities and the investment of additional optional amounts in Ordinary Shares or ADSs under any plan;

 

(ii) upon the issuance of any Ordinary Shares or ADSs or options or rights to purchase those Ordinary Shares or ADSs pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Company or any of the Company’s Subsidiaries;

 

(iii) upon the issuance of any Ordinary Shares or ADSs pursuant to any option, warrant, right or exercisable, exchangeable or convertible security not described in clause (ii) of this subsection and outstanding as of the date the Notes were first issued;

 

(iv) a change solely in the par value of the Ordinary Shares; or

 

(v) for accrued and unpaid interest, if any.

 

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(i) All calculations and other determinations under this Article 14 shall be made by the Company and shall be made to the nearest one-ten thousandth (1/10,000) of an ADS. The Company shall not be required to make an adjustment to the Conversion Rate unless the adjustment would require a change of at least 1% in the Conversion Rate. However, the Company shall carry forward any adjustments that are less than 1% of the Conversion Rate and make such carried-forward adjustments, regardless of whether the aggregate adjustment is less than 1%, on (x) December 31 of each calendar year and (y) the Conversion Date for any conversion of Notes.

 

(j) Whenever the Conversion Rate is adjusted as herein provided, the Company shall promptly notify the Trustee, the Conversion Agent and the Paying Agent of such adjustment to the Conversion Rate and file with the Trustee, the Conversion Agent and the Paying Agent an Officers’ Certificate setting forth the Conversion Rate after such adjustment and a brief statement of the facts requiring such adjustment, and the Trustee, the Conversion Agent and the Paying Agent may conclusively rely on the accuracy of such adjustment to the Conversion Rate provided by the Company in such Officers’ Certificate. Unless and until a Responsible Officer of the Trustee shall have received such Officers’ Certificate, neither the Trustee, the Conversion Agent nor the Paying Agent shall be deemed to have knowledge of any such adjustment of the Conversion Rate and may assume without inquiry that the last Conversion Rate of which it has been notified by the Company is still in effect. Promptly after providing such notice and delivery of such Officers’ Certificate to the Trustee, the Conversion Agent and the Paying Agent, the Company shall prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective and shall mail within 5 Business Days of the date on which such adjustment of the Conversion Rate is made to each Holder at its last address appearing on the Note Register of this Indenture. Failure by the Company to deliver such notice shall not affect the legality or validity of any such Conversion Rate adjustment.

 

(k) For purposes of this Section 14.04, the number of Ordinary Shares or ADSs at any time outstanding shall not include Ordinary Shares or ADSs held in the treasury of the Company so long as the Company does not pay any dividend or make any distribution on Ordinary Shares or ADSs held in the treasury of the Company, but shall include Ordinary Shares or ADSs issuable in respect of scrip certificates issued in lieu of fractions of Ordinary Shares or ADSs.

 

(l) Notwithstanding the foregoing, if (1) an adjustment to the Conversion Rate in respect of any dividend or distribution described in this Section 14.04 does not become effective prior to the Conversion Date for any Notes such that the relevant converting Holder receives, upon conversion, a number ADSs that does not reflect such adjustment to the Conversion Rate, and (2) the Record Date in respect of the ADSs due upon conversion for such dividend or distribution has occurred prior to the relevant Conversion Date, then, notwithstanding anything to contrary herein, the Company shall pay or deliver to the relevant converting Holder, at the same time and upon the same terms as holders of the ADSs, the dividend or distribution that such converting Holder would have received had it held, on such Record Date, a number of ADSs equal to the Conversion Rate, multiplied by the principal amount (expressed in thousands) of Notes converted by such Holder.

 

Section 14.05          Adjustments of Prices. Whenever any provision of this Indenture requires the Company to calculate the Last Reported Sale Prices (including the ADS Prices for purposes of a Make-Whole Fundamental Change or a Tax Redemption) over a span of multiple days, the Board of Directors shall make appropriate adjustments to each to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Record Date of the event occurs, at any time during the period when such Last Reported Sale Prices or ADS Prices are to be calculated.

 

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Section 14.06          Ordinary Shares to Be Fully Paid. The Company shall provide, free from preemptive rights, out of its authorized but unissued Ordinary Shares or Ordinary Shares held in treasury, a sufficient number of Ordinary Shares that corresponds to the number of ADSs due upon conversion of the Notes from time to time as such Notes are presented for conversion (assuming that at the time of computation of such number of Ordinary Shares, all such Notes would be converted by a single Holder).

 

Section 14.07          Effect of Recapitalizations, Reclassifications and Changes of the Ordinary Shares.

 

(a) In the event of:

 

(i) any recapitalization, reclassification or change of the Ordinary Shares (other than changes resulting from a subdivision or combination);

 

(ii) any consolidation, merger or combination involving the Company;

 

(iii) any sale, lease or other transfer to another Person of all or substantially all of the property and assets of the Company; or

 

(iv) any statutory share exchange,

 

in each case, as a result of which the ADSs would be converted into, or exchanged for, stock, other securities or other property or assets (including cash or any combination thereof) (any such event, a “Merger Event”), then, at and after the effective time of such Merger Event, the right to convert each US$1,000 principal amount of Notes shall be changed into a right to convert such principal amount of Notes into the kind and amount of shares of stock, other securities or other property or assets (including cash or any combination thereof) that a holder of a number of ADSs equal to the Conversion Rate immediately prior to such Merger Event would have owned or been entitled to receive (the “Reference Property”, with each “unit of Reference Property” meaning the kind and amount of Reference Property that a holder of one ADS is entitled to receive in such Merger Event) upon such Merger Event and, prior to or at the effective time of such Merger Event, the Company or the successor or purchasing Person, as the case may be, shall execute with the Trustee a supplemental indenture permitted under Section 10.01(f) providing for such change in the right to convert each US$1,000 principal amount of Notes; provided, however, that at and after the effective time of the Merger Event the number of ADSs otherwise deliverable upon conversion of the Notes in accordance with Section 14.02 shall instead be deliverable in the amount and type of Reference Property that a holder of that number of ADSs would have received in such Merger Event.

 

If the Merger Event causes the ADSs to be converted into, or exchanged for, the right to receive more than a single type of consideration (determined based in part upon any form of stockholder election), then (i) the Reference Property into which the Notes will be convertible shall be deemed to be the weighted average of the types and amounts of consideration received by the holders of the ADSs that affirmatively make such an election, and (ii) the unit of Reference Property for purposes of the immediately preceding paragraph shall refer to the consideration referred to in clause (i) attributable to one ADS. The Company shall notify Holders, the Trustee and the Conversion Agent (if other than the Trustee) of such weighted average as soon as practicable after such determination is made.

 

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Such supplemental indenture described in the second immediately preceding paragraph shall provide for adjustments that shall be as nearly equivalent as is possible to the adjustments provided for in this Article 14. If, in the case of any Merger Event, the Reference Property includes shares of stock, securities or other property or assets (including cash or any combination thereof) of a Person other than the successor or purchasing corporation, as the case may be, in such Merger Event, then such supplemental indenture shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holders of the Notes as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including to the extent required by the Board of Directors and practicable the provisions providing for the purchase rights set forth in Article 15.

 

(b) In the event the Company shall execute a supplemental indenture pursuant to subsection (a) of this Section 14.07, the Company shall promptly file with the Trustee, the Conversion Agent and the Paying Agent an Officers’ Certificate briefly stating the reasons therefore, the kind or amount of cash, securities or property or asset that will comprise the Reference Property after any such Merger Event, any adjustment to be made with respect thereto and that all conditions precedent have been complied with, and shall promptly mail notice thereof to all Holders. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at its address appearing on the Note Register provided for in this Indenture, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture.

 

(c) The Company shall not become a party to any Merger Event unless its terms are consistent with this Section 14.07. None of the foregoing provisions shall affect the right of a holder of Notes to convert its Notes into ADSs as set forth in Section 14.01 and Section 14.02 prior to the effective date of such Merger Event.

 

(d) The above provisions of this Section shall similarly apply to successive Merger Events.

 

Section 14.08          Certain Covenants. (a) The Company covenants that all ADSs issued upon conversion of Notes and all Class A Ordinary Shares represented by such ADSs will be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof.

 

(b) The Company covenants that, if any ADSs to be provided for the purpose of conversion of Notes hereunder or any Class A Ordinary Shares represented by such ADSs require registration with or approval of any governmental authority under any federal or state law before such ADSs may be validly issued upon conversion, the Company will, to the extent then permitted by the rules and interpretations of the Commission, secure such registration or approval, as the case may be.

 

(c) The Company further covenants that if at any time the ADSs shall be listed on any securities exchange or automated quotation system the Company will list and keep listed, so long as the ADSs shall be so listed on such exchange or automated quotation system, any ADSs issuable upon conversion of the Notes.

 

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Section 14.09          Responsibility of Trustee. The Trustee, the Conversion Agent, the Paying Agent and any other Conversion Agent other than Citibank, N.A. shall not at any time be under any duty or responsibility to any Holder to perform calculations or to determine the Conversion Rate (or any adjustment thereto) or whether any facts exist that may require any adjustment (including any increase) of the Conversion Rate, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. None of the Trustee, the Paying Agent nor the Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any ADSs, or of any securities or other property, that may at any time be issued or delivered upon the conversion of any Note; and the Trustee, the Paying Agent and the Conversion Agent make no representations with respect thereto in this Indenture. None of the Trustee, the Paying Agent nor any Conversion Agent shall be responsible for any failure of the Company to issue, transfer or deliver any ADSs, or the Class A Ordinary Shares represented thereby, or share certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Indenture. Without limiting the generality of the foregoing, none of the Trustee, the Paying Agent nor any Conversion Agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 14.07 relating either to the kind or amount of ADSs or securities or property (including cash) receivable by Holders upon the conversion of their Notes after any event referred to in such Section 14.07 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 7.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers’ Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) and Opinion of Counsel with respect thereto. None of the Trustee, the Paying Agent nor any Conversion Agent has any duty to determine how or when any adjustment described in Section 14.04 should be made. None of the Trustee, the Paying Agent nor any Conversion Agent shall be responsible for the failure of the Company to comply with this Indenture.

 

Section 14.10          Notice to Holders Prior to Certain Actions. In case of any: (a) action by the Company or one of its Subsidiaries that would require an adjustment in the Conversion Rate pursuant to Section 14.04 or Section 14.11;

 

(b) Merger Event; or

 

(c) voluntary or involuntary dissolution, liquidation or winding-up of the Company or any of its Subsidiaries;

 

then, in each case (unless notice of such event is otherwise required pursuant to another provision of this Indenture), the Company shall cause to be filed with the Trustee and the Conversion Agent (if other than the Trustee) and to be mailed to each Holder at its address appearing on the Note Register, as promptly as possible but in any event at least 20 days prior to the applicable date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such action by the Company or one of its Subsidiaries or, if a record is not to be taken, the date as of which the holders of Ordinary Shares or ADSs, as the case may be, of record are to be determined for the purposes of such action by the Company or one of its Subsidiaries, or (ii) the date on which such Merger Event, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Ordinary Shares or ADSs, as the case may be, of record shall be entitled to exchange their Ordinary Shares or ADSs, as the case may be, for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such action by the Company or one of its Subsidiaries, Merger Event, dissolution, liquidation or winding-up.

 

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Section 14.11          Stockholder Rights Plans. To the extent that the Company has a rights plan in effect upon conversion of the Notes, each ADS issued upon such conversion shall be entitled to receive the appropriate number of rights, if any, and the certificates representing the ADSs issued upon such conversion shall bear such legends, if any, in each case as may be provided by the terms of any such stockholder rights plan, as the same may be amended from time to time. If prior to any conversion, however, the rights have separated from the Ordinary Shares in accordance with the provisions of the applicable stockholder rights plan so that converting Holders would not be entitled to receive any rights in respect of ADSs issuable upon conversion of the Notes, the Conversion Rate shall be adjusted at the time of separation as if the Company distributed Distributed Property to all holders of Ordinary Shares as provided in Section 14.04(c), subject to readjustment in the event of the expiration, termination or redemption of such rights.

 

Section 14.12          Termination of Depositary Receipt Program. If the Class A Ordinary Shares cease to be represented by American Depositary Shares issued under a depositary receipt program sponsored by the Company, all references in this Indenture to the ADSs shall be deemed to have been replaced by a reference to the number of Class A Ordinary Shares (and other property, if any) represented by the ADSs on the last day on which the ADSs represented the Class A Ordinary Shares and as if the Class A Ordinary Shares and the other property had been distributed to holders of the ADSs on that day.

 

ARTICLE 15
REPURCHASE OF NOTES AT OPTION OF HOLDERS

 

Section 15.01          Repurchase at Option of Holders. (a) Each Holder shall have the right, at such Holder’s option, to require the Company to repurchase for cash on August 15, 2017 (the “Repurchase Date”) all of such Holder’s Notes, or any portion thereof that is an integral multiple of US$1,000 principal amount, at a repurchase price (the “Repurchase Price”) that is equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the Repurchase Date; provided that the Company shall pay the full amount of such accrued and unpaid interest not to the Holders submitting the Notes for repurchase on the Repurchase Date but instead to the Holders of such Notes at the close of business on the Regular Record Date immediately preceding the Repurchase Date. Not later than 20 Business Days immediately preceding the Repurchase Date, the Company shall mail a notice (the “Company Notice”) by first class mail to the Trustee, to the Paying Agent and to each Holder at its address shown in the Note Register of the Note Registrar (and to beneficial owners as required by applicable law). The Company Notice shall include a form of Repurchase Notice to be completed by a holder and shall state:

 

(i) the last date on which a Holder may exercise its repurchase right pursuant to this Section 15.01 (the “Repurchase Expiration Time”);

 

(ii) the Repurchase Price;

 

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(iii) the name and address of the Conversion Agent and Paying Agent;

 

(iv) that the Notes with respect to which a Repurchase Notice has been delivered by a Holder may be converted only if the Holder withdraws the Repurchase Notice in accordance with the terms of this Indenture;

 

(v) that the Holder shall have the right to withdraw any Notes surrendered prior to the Repurchase Expiration Time; and

 

(vi) the procedures a Holder must follow to exercise its repurchase rights under this Section 15.01 and a brief description of those rights.

 

At the Company’s request, the Trustee shall give such notice in the Company’s name and at the Company’s expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company.

 

Simultaneously with providing the Company Notice, the Company shall publish a notice containing the information included in the Company Notice in a newspaper of general circulation in The City of New York or publish such information on the Company’s website or through such other public medium as the Company may use at that time.

 

No failure of the Company to give the foregoing notices and no defect therein shall limit the Holders’ repurchase rights or affect the validity of the proceedings for the repurchase of the Notes pursuant to this Section 15.01.

 

To effect a repurchase of Notes under this Section 15.01, the Holder thereof must:

 

(A) deliver to the Paying Agent a duly completed notice (the “Repurchase Notice”) in the form set forth in Attachment 3 to the Form of Note attached hereto as Exhibit A, if the Notes are Physical Notes, or in compliance with the Depositary’s procedures for surrendering interests in Global Notes, if the Notes are Global Notes, in each case during the period beginning at any time from the open of business on the date that is 20 Business Days prior to the relevant Repurchase Date until the close of business on the third Business Day immediately preceding the Repurchase Date; and

 

(B) deliver the Notes, if the Notes are Physical Notes, to the Paying Agent at any time after delivery of the Repurchase Notice (together with all necessary endorsements) at the office of the Paying Agent located in New York, New York, or effect book-entry transfer of the Notes, if the Notes are Global Notes, in compliance with the procedures of the Depositary, in each case such delivery being a condition to receipt by the Holder of the Repurchase Price therefor.

 

Each Repurchase Notice shall state:

 

(1) in the case of Physical Notes, the certificate numbers of the Notes to be delivered for repurchase or, if Global Notes, the Repurchase Notice must comply with appropriate Depositary procedures;

 

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(2) the portion of the principal amount of the Notes to be repurchased, which must be US$1,000 or an integral multiple thereof; and

 

(3) that the Notes are to be repurchased by the Company pursuant to the applicable provisions of the Notes and this Indenture.

 

Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Repurchase Notice contemplated by this Section 15.01 shall have the right to withdraw, in whole or in part, such Repurchase Notice at any time prior to the close of business on the third Business Day immediately preceding the Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 15.03.

 

The Paying Agent shall promptly notify the Company of the receipt by it of any Repurchase Notice or written notice of withdrawal thereof.

 

No Repurchase Notice with respect to any Notes may be surrendered by a Holder thereof if such Holder has also surrendered a Fundamental Change Repurchase Notice and not validly withdrawn such Fundamental Change Repurchase Notice in accordance with Section 15.03.

 

(b) Notwithstanding the foregoing, no Notes may be repurchased by the Company at the option of the Holders on the Repurchase Date if the principal amount of the Notes has been accelerated, and such acceleration has not been rescinded, on or prior to such Repurchase Date (except in the case of an acceleration resulting from a Default by the Company in the payment of the Repurchase Price with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Physical Notes held by it during the acceleration of the Notes (except in the case of an acceleration resulting from a Default by the Company in the payment of the Repurchase Price with respect to such Notes), or any instructions for book-entry transfer of the Notes in compliance with the procedures of the Depositary shall be deemed to have been cancelled, and, upon such return or cancellation, as the case may be, the Repurchase Notice with respect thereto shall be deemed to have been withdrawn.

 

Section 15.02          Repurchase at Option of Holders Upon a Fundamental Change. (a) If a Fundamental Change occurs at any time, each Holder shall have the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes, or any portion thereof that is equal to US$1,000 or an integral multiple of US$1,000, on the date (the “Fundamental Change Repurchase Date”) specified by the Company that is not less than 20 calendar days or more than 35 calendar days following the date of the Fundamental Change Company Notice at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding, the Fundamental Change Repurchase Date (the “Fundamental Change Repurchase Price”), unless the Fundamental Change Repurchase Date falls after a Regular Record Date but on or prior to the Interest Payment Date to which such Regular Record Date relates, in which case the Company shall instead pay the full amount of accrued and unpaid interest to Holders of record as of such Regular Record Date, and the Fundamental Change Repurchase Price shall be equal to 100% of the principal amount of Notes to be repurchased pursuant to this Article 15.

 

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(b) To effect a repurchase of Notes under this Section 15.02, the Holder thereof must:

 

(i) deliver to the Paying Agent a duly completed notice (the “Fundamental Change Repurchase Notice”) in the form set forth in Attachment 2 to the Form of Note attached hereto as Exhibit A, if the Notes are Physical Notes, or in compliance with the Depositary’s procedures for surrendering interests in Global Notes, if the Notes are Global Notes, in each case on or before the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date; and

 

(ii) deliver the Notes, if the Notes are Physical Notes, to the Paying Agent at any time after delivery of the Fundamental Change Repurchase Notice (together with all necessary endorsements for transfer) at the office of the Paying Agent located in New York, New York, or effect book-entry transfer of the Notes, if the Notes are Global Notes, in compliance with the procedures of the Depositary, in each case such delivery being a condition to receipt by the Holder of the Fundamental Change Repurchase Price therefor.

 

The Fundamental Change Repurchase Notice in respect of any Notes to be repurchased shall state:

 

(i) in the case of Physical Notes, the certificate numbers of the Notes to be delivered for repurchase;

 

(ii) the portion of the principal amount of Notes to be repurchased, which must be US$1,000 or an integral multiple thereof; and

 

(iii) that the Notes are to be repurchased by the Company pursuant to the applicable provisions of the Notes and this Indenture;

 

provided, however, that if the Notes are Global Notes, the Fundamental Change Repurchase Notice must comply with appropriate Depositary procedures.

 

Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Repurchase Notice contemplated by this Section 15.02 shall have the right to withdraw, in whole or in part, such Fundamental Change Repurchase Notice at any time prior to the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 15.03.

 

The Paying Agent shall promptly notify the Company of the receipt by it of any Fundamental Change Repurchase Notice or written notice of withdrawal thereof.

 

(c) On or before the 20th calendar day after the occurrence of a Fundamental Change, the Company shall provide to all Holders of Notes and the Trustee, the Conversion Agent and the Paying Agent (in the case of a Paying Agent other than the Trustee) a notice (the “Fundamental Change Company Notice”) of the occurrence of the Fundamental Change and of the repurchase right at the option of the Holders arising as a result thereof. Such notice shall be by first class mail or, in the case of Global Notes, in accordance with the applicable procedures of the Depositary. Simultaneously with providing such notice, the Company shall publish a notice containing the information set forth in the Fundamental Change Company Notice in a newspaper of general circulation in The City of New York or publish such information on the Company’s website or through such other public medium as the Company may use at that time. Each Fundamental Change Company Notice shall specify, among other things:

 

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(i) the events causing the Fundamental Change;

 

(ii) the effective date of the Fundamental Change;

 

(iii) the last date on which a Holder may exercise the repurchase right pursuant to this Article 15;

 

(iv) the Fundamental Change Repurchase Price;

 

(v) the Fundamental Change Repurchase Date;

 

(vi) if applicable, the name and address of the Paying Agent and the Conversion Agent;

 

(vii) if applicable, the Conversion Rate and any adjustments to the Conversion Rate;

 

(viii) if applicable, that the Notes with respect to which a Fundamental Change Repurchase Notice has been delivered by a Holder may be converted only if the Holder withdraws the Fundamental Change Repurchase Notice in accordance with the terms of this Indenture; and

 

(ix) the procedures that Holders must follow to require the Company to repurchase their Notes.

 

No failure of the Company to give the foregoing notices and no defect therein shall limit the Holders’ repurchase rights or affect the validity of the proceedings for the repurchase of the Notes pursuant to this Section 15.02.

 

At the Company’s request, the Trustee shall give such notice in the Company’s name and at the Company’s expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company.

 

(d) Notwithstanding the foregoing, no Notes may be repurchased by the Company on any date at the option of the Holders upon a Fundamental Change if the principal amount of the Notes has been accelerated, and such acceleration has not been rescinded, on or prior to such date (except in the case of an acceleration resulting from a Default by the Company in the payment of the Fundamental Change Repurchase Price with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Physical Notes held by it during the acceleration of the Notes (except in the case of an acceleration resulting from a Default by the Company in the payment of the Fundamental Change Repurchase Price with respect to such Notes), or any instructions for book-entry transfer of the Notes in compliance with the procedures of the Depositary shall be deemed to have been cancelled, and, upon such return or cancellation, as the case may be, the Fundamental Change Repurchase Notice with respect thereto shall be deemed to have been withdrawn.

 

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Section 15.03          Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice. (a) A Repurchase Notice or Fundamental Change Repurchase Notice may be withdrawn (in whole or in part) by means of a written notice of withdrawal delivered to the office of the Paying Agent located in New York, New York at in accordance with this Section 15.03 at any time prior to the close of business on the third Business Day immediately preceding the Repurchase Date or prior to the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date, as the case may be, specifying:

 

(i) the principal amount of the Notes with respect to which such notice of withdrawal is being submitted,

 

(ii) if Physical Notes have been issued, the certificate number of the Note in respect of which such notice of withdrawal is being submitted, and

 

(iii) the principal amount, if any, of such Note that remains subject to the original Repurchase Notice or Fundamental Change Repurchase Notice, as the case may be, which portion must be in principal amounts of US$1,000 or an integral multiple of US$1,000;

 

provided, however, that if the Notes are Global Notes, the notice must comply with appropriate procedures of the Depositary.

 

Section 15.04          Deposit of Repurchase Price or Fundamental Change Repurchase Price. (a) The Company will deposit with the Trustee by wire transfer in immediately available funds (or other Paying Agent appointed by the Company, or if the Company is acting as its own Paying Agent, set aside, segregate and hold in trust as provided in Section 4.04) on or prior to 10:00 a.m., New York City time, on the Business Day immediately preceding the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, an amount of money sufficient to repurchase all of the Notes to be repurchased at the appropriate Repurchase Price or Fundamental Change Repurchase Price. Any deposit by the Company with the Paying Agent shall be made by wire transfer in immediately available funds. Subject to receipt of funds and/or Notes by the Trustee (or other Paying Agent appointed by the Company), payment for Notes surrendered for repurchase (and not withdrawn in accordance with Article 15) will be made on the later of (i) the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, with respect to such Note (provided the Holder has satisfied the conditions in Section 15.01 or Section 15.02, as the case may be) and (ii) the time of book-entry transfer or the delivery of such Note to the Trustee (or other Paying Agent appointed by the Company) by the Holder thereof in the manner required by Section 15.01 or Section 15.02, as applicable, by mailing checks for the amount payable to the Holders of such Notes entitled thereto as they shall appear in the Note Register; provided, however, that payments to the Depositary shall be made by wire transfer of immediately available funds to the account of the Depositary or its nominee. The Trustee shall, promptly after such payment and upon written demand by the Company, return to the Company any funds in excess of the Repurchase Price or Fundamental Change Repurchase Price, as the case may be.

 

(b) If by 10:00 a.m. New York City time, on the Business Day immediately preceding the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, the Trustee (or other Paying Agent appointed by the Company) holds money sufficient to make payment on all the Notes or portions thereof that are to be repurchased on such Repurchase Date or Fundamental Change Repurchase Date, as the case may be, then on such Repurchase Date or Fundamental Change Repurchase Date, as the case may be, (i) such Notes will cease to be outstanding and interest will cease to accrue on such Notes (whether or not book-entry transfer of the Notes has been made or the Notes have been delivered to the Trustee or Paying Agent) and (ii) all other rights of the Holders of such Notes will terminate (other than the right to receive the Repurchase Price or Fundamental Change Repurchase Price, as the case may be, upon delivery or book-entry transfer of such Notes).

 

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(c) Upon surrender of a Note that is to be repurchased in part pursuant to Section 15.01 or Section 15.02, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Note in an authorized denomination equal in principal amount to the unrepurchased portion of the Note surrendered.

 

Section 15.05          Covenant to Comply with Applicable Laws Upon Repurchase of Notes. In connection with any repurchase of Notes on the Repurchase Date or in connection with any repurchase offer pursuant to a Fundamental Change Repurchase Notice, the Company will, if required:

 

(a) comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act;

 

(b) file a Schedule TO or any successor or similar schedule; and

 

(c) otherwise comply with all federal and state securities laws in connection with any offer by the Company to repurchase the Notes;

 

in each case, so as to permit the rights and obligations under this Article 15 to be exercised in the time and in the manner specified in this Article 15.

 

ARTICLE 16
TAX REDEMPTION

 

Section 16.01          Redemption for Taxation Reasons

 

If as a result of any change in or amendment to the statutes (or any rules or regulations thereunder) of a Relevant Taxing Jurisdiction, or any amendment to or change in an official interpretation, administration or application of such statutes, rules or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective or, in the case of a change in official interpretation, is announced on or after August 6, 2014 or, if the Relevant Taxing Jurisdiction has changed after August 6, 2014, the date on which such change occurred, the Company or its successor is, or will become, obligated to pay Additional Amounts as described under Section 4.07, the Company or its successor may, at its option, redeem all, but not less than all, of the Notes, for cash at a price (the “Tax Redemption Price”) equal to 100% of their principal amount, together with accrued and unpaid interest to, but excluding, the Tax Redemption Date and Additional Amounts, if any, upon giving irrevocable notice in writing to each of the Holder of Notes not less than 20 calendar days nor more than 60 calendar days prior to the Tax Redemption Date (the “Tax Redemption Notice” and such redemption, a “Tax Redemption”). However, if the Tax Redemption Date occurs after a Regular Record Date and on or prior to the corresponding Interest Payment Date, the Company will pay the full amount of accrued and unpaid interest due on such payment date to the record Holder on the Regular Record Date corresponding to such Interest Payment Date, and the Tax Redemption Price payable to the Holder who presents the Note for redemption will be 100% of the principal amount of such Note and Additional Amounts, if any. No Tax Redemption Notice may be given earlier than 60 calendar days prior to the earliest date on which the Company or any such successor would, but for such Tax Redemption, be obligated to pay the Additional Amounts. Notwithstanding the foregoing, the Company or any such successor shall not have the right to so redeem the Notes unless it has taken reasonable measures to avoid the obligation to pay Additional Amounts.

 

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In the event that the Company or any successor elects to so redeem the notes, it shall deliver to the Trustee: (1) a certificate, signed in the Company’s name or its successor’s name by any two of its executive officers stating that it is entitled to redeem the Notes pursuant to their terms and setting forth a statement of facts showing that the condition or conditions precedent to its right or the right of any successor to so redeem have occurred or been satisfied including, that it cannot avoid payment of such Additional Amounts by taking reasonable measures available to it and that all governmental requirements necessary for the Company or any successor to effect the redemption have been complied with; and (2) an Opinion of Counsel, who is acceptable to the Trustee, to the effect that the Company or its successor has or will become obligated to pay Additional Amounts as a result of the change or amendment.

 

Notwithstanding the foregoing, if the Company or its successor has given a Tax Redemption Notice, each Holder of Notes shall have the right to elect that such Holder’s Notes will not be subject to such Tax Redemption. If a Holder elects not to be subject to a Tax Redemption, the Company or its successor will not be required to pay Additional Amounts with respect to payments made in respect of such Holder’s Notes following the Tax Redemption Date, and all subsequent payments in respect of such Holder’s Notes will be subject to any tax required to be withheld or deducted under the laws of a Relevant Taxing Jurisdiction. The obligation to pay Additional Amounts to any electing Holder for periods up to the Tax Redemption Date will remain subject to the exceptions set forth under Section 4.07. Holders must exercise their option to elect to avoid a Tax Redemption by written notice to the Trustee no later than the 15th calendar day prior to the Tax Redemption Date.

 

In the case of such Tax Redemption, Holders shall have the right to elect to convert the Notes at any time until the close of business on the second Business Day preceding the Tax Redemption Date.

 

Section 16.02                Effect of Tax Redemption Notice

 

The Tax Redemption Notice having been given as provided in Section 16.01 hereof, the Notes to be redeemed shall, on the Tax Redemption Date, become due and payable at the Tax Redemption Price therein specified, and from and after such date (unless the Company shall Default in the payment of the Tax Redemption Price and any interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with such Tax Redemption Notice, such Note shall be paid by the Company at the Tax Redemption Price.

 

If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Tax Redemption Date.

 

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Section 16.03                Deposit and Payment of Tax Redemption Price

 

Not later than 10:00 a.m. New York time on the Business Day prior to any Tax Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent an amount of money in immediately available funds sufficient to pay the Tax Redemption Price and interest in respect of all the Notes to be redeemed on that Tax Redemption Date from the last Interest Payment Date to but not including the Tax Redemption Date, other than any Notes called for redemption on that date which have been converted prior to the date of such deposit, and accrued and unpaid interest on such Notes. The Trustee and Paying Agent shall then cause such funds to be paid to the Holders of the Notes being redeemed in accordance with this Article 16.

 

If any Note delivered for redemption shall not be so redeemed by payment to the Holders thereof on the Tax Redemption Date, the principal amount of such Note shall, until it is redeemed, bear interest on the Tax Redemption Date to but not including the actual date of redemption at the applicable interest rate, and each such Note shall remain convertible into ADSs pursuant to Article 14 until such Note shall have been so redeemed.

 

If any Note called for redemption is converted, any money deposited with the Trustee or with a Paying Agent or so segregated and held in trust for the redemption of such Note shall be paid to the Company upon request by the Company or, if then held by the Company, shall be discharged from such trust.

 

ARTICLE 17
MISCELLANEOUS PROVISIONS

 

Section 17.01          Provisions Binding on Company’s Successors. All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not.

 

Section 17.02          Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or Officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation or other entity that shall at the time be the lawful sole successor of the Company.

 

Section 17.03          Addresses for Notices, Etc. Any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders on the Company shall be deemed to have been sufficiently given or made, for all purposes if given or served in writing, in the English language, signed and transmitted by facsimile or by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Qihoo 360 Technology Co. Ltd., Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China, Attention: Alex Zuoli Xu, Fax No. +86-10-5682-2000. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by facsimile or by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office.

 

The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications.

 

Any notice or communication mailed to a Holder shall be mailed to it by first class mail, postage prepaid, at its address as it appears on the Note Register or transmitted in accordance with the Depositary’s applicable procedures, and shall be sufficiently given to it if so mailed or otherwise transmitted within the time prescribed In the case of a Global Note, a notice shall be sufficiently given if transmitted by the Trustee to the Depositary for dispatch to Holders.

 

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Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

 

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

 

Section 17.04          Governing Law. THIS INDENTURE AND EACH NOTE, AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS INDENTURE AND EACH NOTE, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

Section 17.05          Submission to Jurisdiction; Service of Process. Each of the parties hereto hereby submits to the non-exclusive jurisdiction of the federal and state courts in the Borough of Manhattan in the City of New York in any suit or proceeding arising out of or relating to this Indenture or the Notes or any transaction contemplated hereby or thereby. Each of the parties hereto irrevocably and unconditionally waives any objection to the laying of venue of any suit or proceeding arising out of or relating to this Indenture or the Notes or any transaction contemplated hereby or thereby in federal and state courts in the Borough of Manhattan in the City of New York and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. The Company irrevocably appoints Corporation Service Company as its authorized agent in the Borough of Manhattan in the City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Company by the person serving the same to Qihoo 360 Technology Co. Ltd., Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China, Attention: Alex Zuoli Xu, shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Indenture. If for any reason such agent shall cease to be such agent for service of process, the Company shall forthwith appoint a new agent of recognized standing for service of process in the State of New York and deliver to the Trustee a copy of the new agent’s acceptance of that appointment within 30 days. Nothing herein shall affect the right of the Trustee, any agent or any Holder to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other court of competent jurisdiction.

 

Section 17.06          Evidence of Compliance with Conditions Precedent; Certificates and Opinions of Counsel to Trustee. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, including Section 2.04, the Company shall, if requested by the Trustee, furnish to the Trustee an Officers’ Certificate and/or an Opinion of Counsel, as the case may be, stating that such action is permitted by the terms of this Indenture.

 

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Each Officers’ Certificate and Opinion of Counsel provided for, by or on behalf of the Company in this Indenture and delivered to the Trustee with respect to compliance with this Indenture (other than the Officers’ Certificates provided for in Section 4.09) shall include (a) a statement that the Person making such certificate is familiar with the requested action and this Indenture; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statement contained in such certificate is based; (c) a statement that, in the judgment of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed judgment as to whether or not such action is permitted by this Indenture; and (d) a statement as to whether or not, in the judgment of such Person, such action is permitted by this Indenture.

 

Notwithstanding anything to the contrary in this Section 17.06, if any provision in this Indenture specifically provides that the Trustee shall or may receive an Opinion of Counsel in connection with any action to be taken by the Trustee or the Company hereunder, the Trustee shall be entitled to, or entitled to request, such Opinion of Counsel.

 

Section 17.07          Legal Holidays. In any case where any Interest Payment Date, Fundamental Change Repurchase Date, Conversion Date, Repurchase Date, Tax Redemption Date or Maturity Date is not a Business Day, then any action to be taken on such date need not be taken on such date, but may be taken on the next succeeding Business Day with the same force and effect as if taken on such date, and no interest shall accrue in respect of the delay.

 

Section 17.08          No Security Interest Created. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction.

 

Section 17.09          Benefits of Indenture. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent, any authenticating agent, any Note Registrar and their successors hereunder or the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

 

Section 17.10          Table of Contents, Headings, Etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

 

Section 17.11          Authenticating Agent.

 

The Trustee may appoint an authenticating agent that shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Section 2.04, Section 2.05, Section 2.06, Section 2.07, Section 2.08, Section 10.04 and Section 15.04 as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes “by the Trustee” and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee’s certificate of authentication. Such authenticating agent shall at all times be a Person eligible to serve as trustee hereunder pursuant to Section 7.08.

 

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Any corporation or other entity into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation or other entity resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation or other entity succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation or other entity is otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation or other entity.

 

Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee may appoint a successor authenticating agent (which may be the Trustee), shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Holders as the names and addresses of such Holders appear on the Note Register.

 

The Company agrees to pay to the authenticating agent from time to time reasonable compensation for its services although the Company may terminate the authenticating agent, if it determines such agent’s fees to be unreasonable.

 

The provisions of Section 7.02, Section 7.03, Section 7.04, Section 8.03 and this Section 17.11 shall be applicable to any authenticating agent.

 

If an authenticating agent is appointed pursuant to this Section, the Notes may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

 

__________________________,

 

as Authenticating Agent, certifies that this is one of the Notes described in the within-named Indenture.

 

By: ____________________

 

Authorized Officer

 

Section 17.12          Execution in Counterparts.

 

This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

 

Section 17.13          Severability. In the event any provision of this Indenture or in the Notes shall be invalid, illegal or unenforceable, then (to the extent permitted by law) the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired.

 

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Section 17.14          Waiver of Jury Trial. EACH OF THE COMPANY AND THE TRUSTEE HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE NOTES OR THE TRANSACTION CONTEMPLATED HEREBY.

 

Section 17.15          Force Majeure. In no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; it being understood that the Trustee shall use reasonable efforts that are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.

 

Section 17.16          Calculations. Except as otherwise provided herein, the Company shall be responsible for making all calculations called for under the Notes. These calculations include, but are not limited to, determinations of the Last Reported Sale Prices of the ADSs, accrued interest payable on the Notes, the number of Additional ADSs to be added to the Conversion Rate upon a Make-Whole Fundamental Change or a Tax Redemption, if any, and the Conversion Rate of the Notes. The Company shall make all these calculations in good faith and, absent manifest error, the Company’s calculations shall be final and binding on Holders of Notes. The Company shall provide a schedule of its calculations to each of the Trustee, the Paying Agent and the Conversion Agent, and each of the Trustee, the Paying Agent and the Conversion Agent is entitled to rely conclusively upon the accuracy of the Company’s calculations without independent verification. The Trustee will forward the Company’s calculations to any Holder of Notes upon the request of that Holder at the sole cost and expense of the Company.

 

Section 17.17          Information Sharing. The Trustee will treat information relating to Company as confidential, but (unless consent is prohibited by law) the Company consents to the transfer and disclosure by the Trustee of any information relating to the Company to and between branches, subsidiaries, representative offices, affiliates and agents of the Trustee and third parties selected by it, wherever situated, for confidential use (including in connection with the provision of any service and for data processing, statistical and risk analysis purposes) solely in connection with its appointment as a Trustee, the exercise of its rights, powers and discretions and/or the performance of its duties and compliance with its obligations under this Indenture and in connection with the Notes. The Trustee and any branch, subsidiary, representative office, affiliate, agent or third party may transfer and disclose any such information as required by any law, court regulator or legal process or regulator or examining authority (whether governmental or otherwise) including any auditor of a party (and may use and its performance will be subject to the rules of) any communications, clearing or payment intermediary bank or other system.

 

87
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above.

 

  QIHOO 360 TECHNOLOGY CO. LTD.
         
  By:  /s/ Alex Zuoli Xu
     Name:   Alex Zuoli Xu
  Title:  Co-Chief Financial Officer

 

 
 

 

  CITICORP INTERNATIONAL LIMITED,
  as Trustee
         
  By:  /s/ Vanessa Loh
     Name:  Vanessa Loh
    Title:  Vice President

 

 
 

 

EXHIBIT A

 

[FORM OF FACE OF NOTE]

 

[INCLUDE FOLLOWING LEGEND IF A GLOBAL NOTE]

 

[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

 

[INCLUDE FOLLOWING LEGEND IF A RESTRICTED SECURITY]

 

[THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

A-1
 

 

(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THIS SECURITY OR SUCH AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.]

 

NO AFFILIATE (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT (‘‘RULE 144’’)) OF QIHOO 360 TECHNOLOGY CO. LTD. OR ANY PERSON THAT IS NOT AN AFFILIATE OF QIHOO 360 TECHNOLOGY CO. LTD., BUT WAS AN AFFILIATE (WITHIN THE MEANING OF RULE 144) OF QIHOO 360 TECHNOLOGY CO. LTD. DURING THE THREE IMMEDIATELY PRECEDING MONTHS, OTHER THAN QIHOO 360 TECHNOLOGY CO. LTD., OR ANY SUBSIDIARY OF QIHOO 360 TECHNOLOGY CO. LTD., MAY PURCHASE, OTHERWISE ACQUIRE OR OWN THE NOTES EVIDENCED HEREBY, THE AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION THEREOF OR THE CLASS A ORDINARY SHARES OF QIHOO 360 TECHNOLOGY CO. LTD. REPRESENTED BY SUCH AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION OF THESE NOTES OR A BENEFICIAL INTEREST THEREIN.

 

A-2
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

0.50% Convertible Senior Note due 2020

 

No. ______________ Initially US$______________
CUSIP No.  
ISIN No.  

 

Qihoo 360 Technology Co. Ltd., an exempted limited liability company duly organized and validly existing under the laws of the Cayman Islands (the “Company,” which term includes any successor company or corporation or other entity under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum as set forth in the “Schedule of Exchanges of Notes” attached hereto, which amount, taken together with the principal amounts of all other outstanding Notes, shall not, unless permitted by the Indenture, exceed US$450,000,000 in aggregate at any time, in accordance with the rules and procedures of the Depositary, on August 15, 2020, and interest thereon as set forth below.

 

This Note shall bear interest at the rate of 0.50% per year from August 6, 2014, or from the most recent date to which interest had been paid or provided for to, but excluding, the next scheduled Interest Payment Date until August 15, 2020. Interest is payable semi-annually in arrears on each February 15 and August 15, commencing on February 1, 2015, to Holders of record at the close of business on the preceding February 1 and August 1 (whether or not such day is a Business Day), respectively. Additional Interest will be payable as set forth in Section 4.06(d), Section 4.06(e) and Section 6.03 of the within-mentioned Indenture, and any reference to interest on, or in respect of, any Note therein shall be deemed to include Additional Interest if, in such context, Additional Interest is, was or would be payable pursuant to any of such Section 4.06(d), Section 4.06(e) or Section 6.03 and any express mention of the payment of Additional Interest in any provision therein shall not be construed as excluding Additional Interest in those provisions thereof where such express mention is not made.

 

Any Defaulted Amounts shall accrue interest per annum at the rate borne by the Notes, plus one percent, subject to the enforceability thereof under applicable law, from, and including, the relevant payment date to, but excluding, the date on which such Defaulted Amounts shall have been paid by the Company, at its election, in accordance with Section 2.03(c) of the Indenture.

 

The Company shall pay the principal of and interest on this Note, so long as such Note is a Global Note, in immediately available funds to the Depositary or its nominee, as the case may be, as the registered Holder of such Note. As provided in and subject to the provisions of the Indenture, the Company shall pay the principal of any Notes (other than Notes that are Global Notes) at the office or agency designated by the Company for that purpose. The Company has initially designated Citibank, N.A. as its Paying Agent, Transfer Agent, Conversion Agent and Note Registrar in respect of the Notes. Notes may be presented for payment, conversion or for registration of transfer or exchange at the offices of the Paying Agent and Transfer Agent in the Borough of Manhattan, The City of New York.

 

Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions giving the Holder of this Note the right to convert this Note into ADSs on the terms and subject to the limitations set forth in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.

 

A-3
 

 

This Note, and any claim, controversy or dispute arising under or related to this Note, shall be construed in accordance with and governed by the laws of the State of New York.

 

In the case of any conflict between this Note and the Indenture, the provisions of the Indenture shall control and govern.

 

This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture.

 

[Remainder of page intentionally left blank]

 

A-4
 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.

 

  QIHOO 360 TECHNOLOGY CO. LTD.
   
  By: 
     Name:
    Title:
         

Dated:

 

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

CITICORP INTERNATIONAL LIMITED

as Trustee, certifies that this is one of the Notes described

in the within-named Indenture.

 

By:   
   Authorized Officer  

 

A-5
 

 

[FORM OF REVERSE OF NOTE]

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

0.50% Convertible Senior Note due 2020

 

This Note is one of a duly authorized issue of Notes of the Company, designated as its 0.50% Convertible Senior Notes due 2020 (the “Notes”), limited to the aggregate principal amount of US$450,000,000 all issued under and pursuant to an Indenture dated as of August 6, 2014 (the “Indenture”), between the Company and Citicorp International Limited (the “Trustee”), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Notes. Additional Notes may be issued in an unlimited aggregate principal amount, subject to certain conditions specified in the Indenture.

 

In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of, and interest on, all Notes may be declared, by either the Trustee or Holders of at least 25% in aggregate principal amount of Notes then outstanding, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions and certain exceptions set forth in the Indenture.

 

Subject to the terms and conditions of the Indenture, the Company will make all payments and deliveries in respect of the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and the principal amount on the Maturity Date, as the case may be, to the Holder who surrenders a Note to a Paying Agent to collect such payments in respect of the Note. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts.

 

Subject to the terms, exceptions and conditions of the Indenture, in the event any withholding or deduction of taxes, duties, assessments or governmental charges is imposed or levied by a Relevant Taxing Jurisdiction in connection with any payments and deliveries made by the Company or any successor to the Company under or with respect to the Indenture and the Notes, including, but not limited to, payments of principal, payments of interest and deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) upon conversion, Additional Amounts will be paid to ensure that the net amount received by the beneficial owner after any applicable withholding or deduction (and after deducting any taxes on the Additional Amounts) will equal the amount that would have been received by such beneficial owner had no such withholding or deduction been required. References to principal, interest or deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) in respect of the Notes shall be deemed also to refer to any Additional Amounts which may be payable.

 

The Indenture contains provisions permitting the Company and the Trustee in certain circumstances, without the consent of the Holders of the Notes, and in certain other circumstances, with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures modifying the terms of the Indenture and the Notes as described therein. It is also provided in the Indenture that, subject to certain exceptions, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the Holders of all of the Notes waive any past Default or Event of Default under the Indenture and its consequences.

 

A-6
 

 

No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of and accrued and unpaid interest on this Note at the place, at the respective times, at the rate and in the lawful money herein prescribed.

 

The Notes are issuable in registered form without coupons in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations, without payment of any service charge but, if required by the Company or Trustee, with payment of a sum sufficient to cover any documentary, stamp or similar issue or transfer taxes, if any, that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such exchange of Notes being different from the name of the Holder of the old Notes surrendered for such exchange.

 

Subject to the terms and conditions of the Indenture, the Notes may only be redeemed, in whole but not in part, at the Company’s option, at a redemption price equal to 100% of the aggregate principal amount of the Notes to be redeemed, plus accrued interest to, but excluding, the Tax Redemption Date, if, as a result of any change in, or amendment to, the statutes (or any rules or regulations thereunder) of a Relevant Taxing Jurisdiction or any amendment to or change in an official interpretation, administration or application of such statutes, rules or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective or, if in the case of a change in official interpretation, is announced on or after August 6, 2014 or, if the Relevant Taxing Jurisdiction has changed after August 6, 2014, the date on which such change occurred, the Company is, or its successor, is, or would be, obligated on the next succeeding due date to pay Additional Amounts and such obligation cannot be avoided by the use of reasonable measures available to the Company or its successor in accordance with the Indenture.

 

The Holder has the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes or any portion thereof (in principal amounts of US$1,000 or integral multiples thereof) on the Repurchase Date at a price equal to the Repurchase Price.

 

Upon the occurrence of a Fundamental Change, the Holder has the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes or any portion thereof (in principal amounts of US$1,000 or integral multiples thereof) on the Fundamental Change Repurchase Date at a price equal to the Fundamental Change Repurchase Price.

 

Subject to the provisions of the Indenture, the Holder hereof has the right, at its option, prior to the close of business on the third Business Day immediately preceding the Maturity Date, to convert any Notes or portion thereof that is US$1,000 or an integral multiple thereof, into ADSs at the Conversion Rate specified in the Indenture, as adjusted from time to time as provided in the Indenture.

 

Terms used in this Note and defined in the Indenture are used herein as therein defined.

 

A-7
 

 

ABBREVIATIONS

 

The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations:

 

TEN COM = as tenants in common

 

UNIF GIFT MIN ACT = Uniform Gifts to Minors Act

 

CUST = Custodian

 

TEN ENT = as tenants by the entireties

 

JT TEN = joint tenants with right of survivorship and not as tenants in common

 

Additional abbreviations may also be used though not in the above list.

 

A-8
 

 

SCHEDULE A

 

SCHEDULE OF EXCHANGES OF NOTES*

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

0.50% Convertible Senior Notes due 2020

 

The initial principal amount of this Global Note is _______ DOLLARS (US$_________). The following increases or decreases in this Global Note have been made:

 

Date of exchange

Amount of decrease
in principal amount
of this Global Note

Amount of increase
in principal amount
of this Global Note

Principal amount of
this Global Note
following such
decrease or increase

Signature of
authorized signatory
of Trustee or
Custodian

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

 

 

 * To be included for Global Notes only.

A-9
 

 

ATTACHMENT 1

 

[FORM OF NOTICE OF CONVERSION]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

THE BANK OF NEW YORK MELLON, as depositary for the ADSs

 

CITIBANK, N.A., as Conversion Agent

 

Re:0.50% Convertible Senior Note due 2020

 

The undersigned registered owner of this Note hereby exercises the option to convert this Note, or the portion hereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, into ADSs in accordance with the terms of the Indenture referred to in this Note, and directs that any cash payable and any ADSs issuable and deliverable upon such conversion, together with any cash payable for any fractional ADSs, and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered Holder hereof unless a different name has been indicated below. If any ADSs or any portion of this Note not converted are to be issued in the name of a Person other than the undersigned, the undersigned will pay all documentary, stamp or similar issue or transfer taxes, if any, in accordance with Section 14.02(d) and Section 14.02(e) of the Indenture. Any amount required to be paid to the undersigned on account of interest accompanies this Note.

 

The undersigned hereby certifies that it (or if it is acting for the account of one or more persons, that each such person) is not, and has not been, during the three months immediately preceding the date hereof, an affiliate of the Company (within the meaning of Rule 144 under the Securities Act of 1933, as amended).

 

[The undersigned further certifies:

 

1. The undersigned acknowledges (and if the undersigned is acting for the account of another person, that person has confirmed that it acknowledges) that the Restricted Securities received upon conversion of this Note represented thereby have not been and are not expected to be registered under the Securities Act of 1933, as amended (the “Act”).

 

2. The undersigned certifies that the undersigned, and any account for which it is acting, (a) is a qualified institutional buyer (as defined in Rule 144A under the Act) or (b) is a non-U.S. person located outside the United States (within the meaning of Regulation S under the Securities Act), and the undersigned is (or such account or accounts are) the sole beneficial owner(s) of the Restricted Securities to be received upon conversion of the Notes.

 

3. The undersigned certifies that the undersigned is not (and if the undersigned is acting for the account of another person, that person has confirmed that it is not) an affiliate (within the meaning of Rule 144 under the Act) of the Company and the undersigned acknowledges that the undersigned (and any such other account) may not continue to hold or retain any interest in Restricted Securities received upon conversion of this Note if the undersigned (or such other account) becomes an affiliate of the Company.

 

4. The undersigned agrees (and if the undersigned is acting for the account of another person, that person has confirmed that it agrees) that, unless and until the undersigned (or such other account) is notified by the Depositary that the restrictive legend on such Restricted Security has been removed from such security, the undersigned (and such other account) will not offer, sell, pledge or otherwise transfer the Restricted Security (or securities represented by such Restricted Security) except in accordance with the restrictions set forth in that legend and any applicable securities laws of any state of the United States.]1

 

 

 

1Include bracketed language in Conversion Notice if the Note being converted is a Restricted Security.

 

A-10
 

 

[For Global Notes, please use:]

 

Fill in the following information for the Notes to be converted:

 

Principal amount to be converted: (US$______,000)

 

 

________________________________

DTC/ Euroclear/ Clearstream Participant Number

 

________________________________

(Account Name)

 

________________________________

(Account Number)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

 

________________________________

(Phone Number)

 

 

Fill in the following information for delivery of ADSs if to be issued:

 

________________________________

DTC account/custodian DTC account number for ADSs

 

________________________________

(Name)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

 

________________________________

(Phone Number)

 

A-11
 

 

________________________________

Social Security or Other Taxpayer Identification Number

 

 

Dated: _____________________ 
    
    
 
  Signature(s)

 

 

 

 

________________________________  
Signature Guarantee  
   
Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if ADSs are to be issued, or Notes are to be delivered, other than to and in the name of the registered holder.  

 

 

[For Physical Notes, please use:]

 

Dated: _____________________     
   Principal amount to be converted (if less than all): US$______,000
      
   Principal amount not being converted (if less than all of the principal amount is being converted): US$______,000
      
   Signature(s)  
      
      
   Social Security or Other Taxpayer  
  Identification Number  

 

A-12
 

 

  NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

 

________________________________

Signature Guarantee

 

Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if ADSs are to be issued, or Notes are to be delivered, other than to and in the name of the registered holder.  
   
Fill in for delivery of ADSs if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder:  

 

________________________________

(Name)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

Please print name and address

 

A-13
 

 

******

 

 

Important Information for converting Holder:

 

 

Address of the Conversion Agent is:

 

Citibank, N.A.

480 Washington Boulevard, 30th Floor

Jersey City, NJ 07310

USA

 

Attention: Agency and Trust Conversion Unit

SWIFT= CITIUS33FADR

 

 

Holders must submit an original Conversion Notice with the Medallion Guaranty Stamp to the Conversion Agent to complete the DWAC (DTC Procedure).

 

Reg S Holders may request a Euroclear or Clearstream SWIFT Message of the Conversion Notice to be sent to the Conversion Agent at CITIUS33FADR in lieu of the original Conversion Notice with a Medallion Guaranty Stamp.

 

2. Payment to the Company pursuant to Section 14 of the Indenture shall be made to Qihoo 360 Technology Co. Ltd. Contact Helen Wu, +86 10 58781574, wujing@360.cn for specific instructions.

 

3. Fees of the ADS Depositary for issuance of the ADSs shall be made to The Bank of New York Mellon by wire transfer or DTC payment against delivery. Contact Anita Sung, +1 212 815 8161, anita.sung@bnymellon.com for specific instructions. U.S. legal opinion to the ADS Depositary shall be addressed to: The Bank of New York Mellon.

 

A-14
 

 

ATTACHMENT 2

 

[FORM OF FUNDAMENTAL CHANGE REPURCHASE NOTICE]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Paying Agent

 

The undersigned registered owner of this Note hereby acknowledges receipt of a notice from Qihoo 360 Technology Co. Ltd. (the “Company”) as to the occurrence of a Fundamental Change with respect to the Company and specifying the Fundamental Change Repurchase Date and requests and instructs the Company to pay to the registered holder hereof in accordance with Section 15.02 of the Indenture referred to in this Note (1) the entire principal amount of this Note, or the portion thereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, and (2) if such Fundamental Change Repurchase Date does not fall during the period after a Regular Record Date and on or prior to the corresponding Interest Payment Date, accrued and unpaid interest, if any, thereon to, but excluding, such Fundamental Change Repurchase Date.

 

In the case of Physical Notes, the certificate numbers of the Notes to be repurchased are as set forth below:

 

Certificate Number(s):    

 

Dated:    
    
    
   Signature(s)
    
   Social Security or Other Taxpayer Identification Number
    
   Principal amount to be repaid (if less than all): US$______,000
    
  NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

A-15
 

 

ATTACHMENT 3

 

[FORM OF REPURCHASE NOTICE]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Paying Agent

 

The undersigned registered owner of this Note hereby acknowledges receipt of a notice from Qihoo 360 Technology Co. Ltd. (the “Company”) regarding the right of Holders to elect to require the Company to repurchase the entire principal amount of this Note, or the portion thereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, in accordance with Section 15.01 of the Indenture referred to in this Note, at the Repurchase Price to the registered Holder hereof.

 

In the case of Physical Notes, the certificate numbers of the Notes to be purchased are as set forth below:

 

Certificate Number(s):    

 

Dated:    
    
    
   Signature(s)
    
   Social Security or Other Taxpayer Identification Number
    
   Principal amount to be repaid (if less than all): US$______,000
    
  NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

A-16
 

ATTACHMENT 4

 

[FORM OF ASSIGNMENT]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Note Registrar

 

 

Re: 0.50% Convertible Senior Notes due 2020

 

For value received ____________________________ hereby sell(s), assign(s) and transfer(s) unto _________________ (Please insert social security or Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints _____________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises.

 

A-17
 

 

 

Dated: _____________________ 
    
    
Signature(s)

 

 

 

 

________________________________

Signature Guarantee

 

Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if Notes are to be delivered, other than to and in the name of the registered holder.  
   
NOTICE: The signature on the assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.  

 

A-18
 

 

EXHIBIT B

 

[FORM OF CERTIFICATE OF TRANSFER]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Note Registrar

 

 

Re: 0.50% Convertible Senior Notes due 2020

 

Reference is hereby made to the Indenture, dated as of August 6, 2014 (the “Indenture”), between Qihoo 360 Technology Co. Ltd., as issuer (the “Company”), and Citicorp International Limited, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.

 

___________________, (the “Transferor”) owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of US$___________ in such Note[s] or interests (the “Transfer”), to ___________________________ (the “Transferee”), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that:

 

[CHECK ALL THAT APPLY]

 

1. ¨ Check if Transferee will take delivery of a beneficial interest in the Rule 144A Global Note or a Restricted Physical Note pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and, accordingly, the Transferor hereby further certifies that the beneficial interest in the Rule 144A Global Note or Physical Note is being transferred to a Person that the Transferor reasonably believes is purchasing the beneficial interest in the Rule 144A Global Note or Physical Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a “qualified institutional buyer” within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A, and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest in the Rule 144A Global Note or Physical Note will be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Rule 144A Global Note and/or the Restricted Physical Note and in the Indenture and the Securities Act.

 

2. ¨ Check if Transferee will take delivery of a beneficial interest in the Regulation S Global Note or a Restricted Physical Note pursuant to Regulation S under the Securities Act. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest in the Regulation S Global Note or Physical Note will be subject to the restrictions on Transfer enumerated in the Securities Act Legend printed on the Regulation S Global Note and/or the Restricted Physical Note and in the Indenture and the Securities Act.

 

B-1
 

 

3. ¨ Check and complete if Transferee will take delivery of a beneficial interest in the Global Note or a Restricted Physical Note pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Physical Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one):

 

(a) ¨ such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act;

 

or

 

(b) ¨ such Transfer is being effected to the Company or a subsidiary thereof;

 

or

 

(c) ¨ such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act.

 

4. ¨ Check and complete if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Physical Note.

 

(a) ¨ Check if Transfer is pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes or on the Restricted Physical Notes and in the Indenture.

 

(b) ¨ Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes, or on the Restricted Physical Notes and in the Indenture.

 

B-2
 

 

(c) ¨ Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes or Restricted Physical Notes and in the Indenture.

 

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

   
    [Insert Name of Transferor]
      
  By: 
   Name:
  Title:

 

Dated: _______________________

 

B-3
 

 

ANNEX A TO CERTIFICATE OF TRANSFER

 

1. The Transferor owns and proposes to transfer the following:

 

[CHECK ONE OF (a) OR (b)]

 

(a)    ¨ a beneficial interest in the:

 

(i) ¨ Rule 144A Global Note (CUSIP _________; ISIN _________), or

 

(ii) ¨ Regulation S Global Note (CUSIP _________; ISIN _________), or

 

(b)   ¨ a Restricted Physical Note.

 

2. After the Transfer the Transferee will hold:

 

[CHECK ONE]

 

(a) ¨ a beneficial interest in the:

 

(i) ¨ Rule 144A Global Note (CUSIP _________; ISIN _________), or

 

(ii) ¨ Regulation S Global Note (CUSIP _________; ISIN _________), or

 

(iii) ¨ Unrestricted Global Note (CUSIP _________; ISIN _________); or

 

(b) ¨ a Restricted Physical Note; or

 

(c) ¨ an Unrestricted Physical Note,

 

in accordance with the terms of the Indenture.

 

B-4
 

 

EXHIBIT C

 

[FORM OF CERTIFICATE OF EXCHANGE]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Note Registrar

 

 

Re: 0.50% Convertible Senior Notes due 2020

 

(CUSIP _________; ISIN _________)

 

Reference is hereby made to the Indenture, dated as of August 6, 2014 (the “Indenture”), between Qihoo 360 Technology Co. Ltd., as issuer (the “Company”) and Citicorp International Limited, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.

 

__________________________, (the “Owner”) owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the “Exchange”). In connection with the Exchange, the Owner hereby certifies that:

 

1. Exchange of Restricted Physical Notes or Beneficial Interests in a Restricted Global Note for Unrestricted Physical Notes or Beneficial Interests in an Unrestricted Global Note

 

(a) ¨ Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the Securities Act of 1933, as amended (the “Securities Act”), (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

(b) ¨ Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Physical Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for an Unrestricted Physical Note, the Owner hereby certifies (i) the Physical Note is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the Physical Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

C-1
 

 

(c) ¨ Check if Exchange is from Restricted Physical Note to Unrestricted Physical Note. In connection with the Owner’s Exchange of a Restricted Physical Note for an Unrestricted Physical Note, the Owner hereby certifies (i) the Unrestricted Physical Note is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Physical Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Physical Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

 

2. Exchange of Restricted Physical Notes or Beneficial Interests in Restricted Global Notes for Restricted Physical Notes or Beneficial Interests in Restricted Global Notes

 

¨ Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Physical Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for a Restricted Physical Note with an equal principal amount, the Owner hereby certifies that the Restricted Physical Note is being acquired for the Owner’s own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Physical Note issued will continue to be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Physical Note and in the Indenture and the Securities Act.

 

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

   
    [Insert Name of Transferor]
      
  By: 
   Name:
  Title:

 

Dated: ______________________

 

C-2

 



 

EXHIBIT 4.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

AND

 

CITICORP INTERNATIONAL LIMITED,

 

as Trustee

 

INDENTURE

 

Dated as of August 6, 2014

 

1.75% Convertible Senior Notes due 2021

 

 

 
 

 

TABLE OF CONTENTS

 

  PAGE
ARTICLE 1 DEFINITIONS 1
Section 1.01   Definitions. 1
Section 1.02   References to Interest. 10
Section 1.03   New York Office of Trustee, Conversion Agent, Note Registrar, Paying Agent and Transfer Agent. 11
ARTICLE 2 ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES 11
Section 2.01   Designation and Amount. 11
Section 2.02   Form of Notes. 11
Section 2.03   Date and Denomination of Notes; Payments of Interest and Defaulted Amounts. 12
Section 2.04   Execution, Authentication and Delivery of Notes. 13
Section 2.05   Exchange and Registration of Transfer of Notes; Restrictions on Transfer; Depositary. 14
Section 2.06   Transfer and Exchange. 21
Section 2.07   Mutilated, Destroyed, Lost or Stolen Notes. 25
Section 2.08   Temporary Notes. 26
Section 2.09   Cancellation of Notes Paid, Converted, Etc. 27
Section 2.10   CUSIP and ISIN Numbers. 27
Section 2.11   Additional Notes; Repurchases. 27
ARTICLE 3 SATISFACTION AND DISCHARGE 27
Section 3.01   Satisfaction and Discharge. 27
ARTICLE 4 PARTICULAR COVENANTS OF THE COMPANY 28
Section 4.01   Payment of Principal and Interest. 28
Section 4.02   Maintenance of Office or Agency. 28
Section 4.03   Appointments to Fill Vacancies in Trustee’s Office 29
Section 4.04   Provisions as to Paying Agent. 29
Section 4.05   Existence. 30
Section 4.06   Rule 144A Information Requirement and Annual Reports 30
Section 4.07   Payment of Additional Amounts 32
Section 4.08   Stay, Extension and Usury Laws. 34
Section 4.09   Compliance Certificate; Statements as to Defaults. 34
Section 4.10   Further Instruments and Acts. 34
ARTICLE 5 LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE 34
Section 5.01   Lists of Holders. 34
Section 5.02   Preservation and Disclosure of Lists. 35

 

i
 

 

ARTICLE 6 DEFAULTS AND REMEDIES 35
Section 6.01   Events of Default. 35
Section 6.02   Acceleration; Rescission and Annulment. 36
Section 6.03   Additional Interest. 37
Section 6.04   Payments of Notes on Default; Suit Therefor. 38
Section 6.05   Application of Monies Collected by Trustee 39
Section 6.06   Proceedings by Holders. 40
Section 6.07   Proceedings by Trustee. 41
Section 6.08   Remedies Cumulative and Continuing. 41
Section 6.09   Direction of Proceedings and Waiver of Defaults by Majority of Holders 41
Section 6.10   Notice of Defaults. 42
Section 6.11   Undertaking to Pay Costs. 42
ARTICLE 7 CONCERNING THE TRUSTEE 43
Section 7.01   Duties and Responsibilities of Trustee. 43
Section 7.02   Reliance on Documents, Opinions, Etc. 44
Section 7.03   No Responsibility for Recitals, Etc. 45
Section 7.04   Individual Rights or the Trustee, Paying Agents, Conversion Agents or Note Registrar. 45
Section 7.05   Monies and ADSs to Be Held in Trust. 46
Section 7.06   Compensation and Expenses of Trustee, Payment Agents, Conversion Agents and Note Registrar. 46
Section 7.07   Officers’ Certificate as Evidence. 47
Section 7.08   Eligibility of Trustee. 47
Section 7.09   Resignation or Removal of Trustee. 47
Section 7.10   Acceptance by Successor Trustee. 48
Section 7.11   Succession by Merger, Etc. 49
Section 7.12   Trustee’s Application for Instructions from the Company. 49
ARTICLE 8 CONCERNING THE HOLDERS 49
Section 8.01   Action by Holders. 49
Section 8.02   Proof of Execution by Holders. 50
Section 8.03   Who Are Deemed Absolute Owners. 50
Section 8.04   Company-Owned Notes Disregarded. 50
Section 8.05   Revocation of Consents; Future Holders Bound. 51
ARTICLE 9 HOLDERS’ MEETINGS 51
Section 9.01   Purpose of Meetings. 51
Section 9.02   Call of Meetings by Trustee. 51
Section 9.03   Call of Meetings by Company or Holders. 52
Section 9.04   Qualifications for Voting. 52
Section 9.05   Regulations. 52
Section 9.06   Voting. 52
Section 9.07   No Delay of Rights by Meeting. 53

 

ii
 

 

ARTICLE 10 SUPPLEMENTAL INDENTURES 53
Section 10.01   Supplemental Indentures Without Consent of Holders. 53
Section 10.02   Supplemental Indentures with Consent of Holders. 54
Section 10.03   Effect of Supplemental Indentures. 55
Section 10.04   Notation on Notes. 55
Section 10.05   Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee. 55
ARTICLE 11 CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE 55
Section 11.01   Company May Consolidate, Etc. on Certain Terms. 55
Section 11.02   Successor Corporation to Be Substituted. 56
Section 11.03   Opinion of Counsel to Be Given to Trustee. 57
ARTICLE 12 IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS 57
Section 12.01   Indenture and Notes Solely Corporate Obligations. 57
ARTICLE 13 INTENTIONALLY OMITTED 57
ARTICLE 14 CONVERSION OF NOTES 57
Section 14.01   Conversion Privilege. 57
Section 14.02   Conversion Procedure; Settlement Upon Conversion. 57
Section 14.03   Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection with Make-Whole Fundamental Changes or Tax Redemptions. 60
Section 14.04   Adjustment of Conversion Rate. 62
Section 14.05   Adjustments of Prices. 72
Section 14.06   Ordinary Shares to Be Fully Paid. 72
Section 14.07   Effect of Recapitalizations, Reclassifications and Changes of the Ordinary Shares. 72
Section 14.08   Certain Covenants. 73
Section 14.09   Responsibility of Trustee. 74
Section 14.10   Notice to Holders Prior to Certain Actions. 74
Section 14.11   Stockholder Rights Plans. 75
Section 14.12   Termination of Depositary Receipt Program. 75
ARTICLE 15 REPURCHASE OF NOTES AT OPTION OF HOLDERS 75
Section 15.01   Repurchase at Option of Holders. 75
Section 15.02   Repurchase at Option of Holders Upon a Fundamental Change. 77
Section 15.03   Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice. 80
Section 15.04   Deposit of Repurchase Price or Fundamental Change Repurchase Price. 80
Section 15.05   Covenant to Comply with Applicable Laws Upon Repurchase of Notes. 81

 

iii
 

 

ARTICLE 16 TAX REDEMPTION 81
Section 16.01   Redemption for Taxation Reasons 81
Section 16.02   Effect of Tax Redemption Notice 82
Section 16.03   Deposit and Payment of Tax Redemption Price 83
ARTICLE 17 MISCELLANEOUS PROVISIONS 83
Section 17.01   Provisions Binding on Company’s Successors. 83
Section 17.02   Official Acts by Successor Corporation. 83
Section 17.03   Addresses for Notices, Etc. 83
Section 17.04   Governing Law. 84
Section 17.05   Submission to Jurisdiction; Service of Process. 84
Section 17.06   Evidence of Compliance with Conditions Precedent; Certificates and Opinions of Counsel to Trustee. 85
Section 17.07   Legal Holidays. 85
Section 17.08   No Security Interest Created. 85
Section 17.09   Benefits of Indenture. 85
Section 17.10   Table of Contents, Headings, Etc. 85
Section 17.11   Authenticating Agent. 85
Section 17.12   Execution in Counterparts. 87
Section 17.13   Severability. 87
Section 17.14   Waiver of Jury Trial. 87
Section 17.15   Force Majeure. 87
Section 17.16   Calculations. 87
Section 17.17   Information Sharing. 87

 

EXHIBIT

 

Exhibit A Form of Note   A-1
Exhibit B Form of Certificate of Transfer   B-1
Exhibit C Form of Certificate of Exchange   C-1

 

iv
 

 

INDENTURE dated as of August 6, 2014 between QIHOO 360 TECHNOLOGY CO. LTD., a Cayman Islands exempted limited liability company, as issuer (the “Company”, as more fully set forth in Section 1.01) and CITICORP INTERNATIONAL LIMITED., a banking corporation organized under the laws of Hong Kong, as trustee (the “Trustee”, as more fully set forth in Section 1.01).

 

WITNESSETH:

 

WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its 1.75% Convertible Senior Notes due 2021 (the “Notes”), initially in an aggregate principal amount not to exceed US$450,000,000, and in order to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and

 

WHEREAS, the Form of Note, the certificate of authentication to be borne by each Note, the Form of Notice of Conversion, the Form of Fundamental Change Repurchase Notice, the Form of Purchase Notice and the Form of Assignment to be borne by the Notes are to be substantially in the forms hereinafter provided; and

 

WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and this Indenture a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized.

 

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

 

That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the Holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective Holders from time to time of the Notes (except as otherwise provided below), as follows:

 

ARTICLE 1
DEFINITIONS

 

Section 1.01              Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. The words “herein,” “hereof,” “hereunder,” and words of similar refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. The terms defined in this Article include the plural as well as the singular.

 

“Additional ADSs” shall have the meaning specified in Section 14.03(a).

 

“Additional Amounts” shall have the meaning specified in Section 4.07(a).

 

“Additional Interest” means all amounts, if any, payable pursuant to Section 4.06(d), Section 4.06(e) and Section 6.03, as applicable.

 

1
 

 

“Adjustment Effective Date” means, with respect to any share split or share combination in respect of Ordinary Shares, the first date on which the ADSs trade on the applicable exchange or in the applicable market, regular way, reflecting such share split or share combination.

 

“ADR” means an American Depositary Receipt, evidencing one or more ADSs, issued pursuant to the Deposit Agreement.

 

“ADS” means an American Depositary Share, issued pursuant to the Deposit Agreement, each two representing three Class A Ordinary Shares of the Company as of the date of this Indenture and deposited with the ADS Custodian.

 

“ADS Custodian” means The Bank of New York Mellon, with respect to the ADSs issued pursuant to the Deposit Agreement, or any successor entity thereto.

 

“ADS Depositary” means The Bank of New York Mellon, as depositary for the ADSs.

 

“ADS Price” shall have the meaning specified in Section 14.03(c).

 

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

 

“Agent Members” shall have the meaning specified in Section 2.05(c).

 

“Applicable Procedures” means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary, Euroclear and Clearstream that apply to such transfer or exchange.

 

“Authentication Order” shall have the meaning specified in Section 2.04.

 

“Board of Directors” means the board of directors of the Company or a committee of such board duly authorized to act for it hereunder.

 

“Board Resolution” means a copy of a resolution certified by a director of the Company to have been duly adopted by the Board of Directors, and to be in full force and effect on the date of such certification, and delivered to the Trustee.

 

“Business Day” means, with respect to any Note, any day other than a Saturday, a Sunday or a day on which commercial banks in New York are authorized or required by law or executive order to close or be closed.

 

“Capital Stock” means, for any entity, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) stock issued by that entity.

 

2
 

 

“Class A Ordinary Shares” means Class A ordinary shares of the Company, par value US$0.001 per share, at the date of this Indenture, subject to Section 14.07.

 

“Class B Ordinary Shares” means Class B ordinary shares of the Company, par value US$0.001 per share.

 

“Clause A Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clause B Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clause C Distribution” shall have the meaning specified in Section 14.04(c).

 

“Clearstream” means Clearstream Banking, société anonyme (or any successor securities clearing agency).

 

“close of business” means 5:00 p.m. (New York City time).

 

“Commission” means the U.S. Securities and Exchange Commission.

 

“Common Equity” of any Person means ordinary share capital (including ADSs) of such Person that is generally entitled (a) to vote in the election of directors of such Person or (b) if such Person is not a corporation, to vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management or policies of such Person.

 

“Company” shall have the meaning specified in the first paragraph of this Indenture, and subject to the provisions of Article 11, shall include its successors and assigns.

 

“Company Notice” shall have the meaning specified in Section 15.01(a).

 

“Company Order” means a written order of the Company, signed by two Officers, and to delivered to the Trustee.

 

“Continuing Entity” shall have the meaning specified in Section 11.01(a).

 

“Conversion Agent” shall have the meaning specified in Section 4.02.

 

“Conversion Date” shall have the meaning specified in Section 14.02(c).

 

“Conversion Obligation” shall have the meaning specified in Section 14.01.

 

“Conversion Rate” shall have the meaning specified in Section 14.01.

 

“Corporate Trust Office” means the principal office of the Trustee at which at any time its corporate trust business shall be administered, which office at the date hereof is located at 50th Floor, Citibank Tower, Citibank Plaza, 3 Garden Road, Central, Hong Kong, Attention: Agency and Trust, Fax No. +852-2323-0279 or such other address as the Trustee may designate from time to time by notice to the Holders and the Company, or the principal corporate trust office of any successor trustee (or such other address as such successor trustee may designate from time to time by notice to the Holders and the Company).

 

3
 

 

“Custodian” means Citibank N.A., as custodian for The Depository Trust Company, with respect to the Global Notes, or any successor entity thereto.

 

“Default” means any event that is, or after notice or passage of time, or both, would be, an Event of Default.

 

“Defaulted Amounts” means any amounts on any Note (including, without limitation, the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date, the Fundamental Change Repurchase Price, principal and interest) that are payable but are not punctually paid or duly provided for.

 

“Deposit Agreement” means the deposit agreement, as amended and restated on or about May 19, 2014, among the Company, the ADS Depositary, and the owners and holders from time to time of the ADSs issued thereunder or, if amended or supplemented as provided therein, as so amended or supplemented.

 

“Depositary” means, with respect to each Global Note, the Person specified in Section 2.05(c) as the Depositary with respect to such Notes, until a successor shall have been appointed and become such pursuant to the applicable provisions of this Indenture, and thereafter, “Depositary” shall mean or include such successor.

 

“Distributed Property” shall have the meaning specified in Section 14.04(c).

 

“Effective Date” shall have the meaning specified in Section 14.03(c).

 

“Euroclear” means Euroclear Bank S.A./N.V.

 

“Event of Default” shall have the meaning specified in Section 6.01.

 

“Ex-Dividend Date” means, with respect to any issuance, dividend or distribution to holders of Ordinary Shares, the first date on which the ADSs trade on the applicable exchange or in the applicable market, regular way, without the right to receive the corresponding issuance, dividend or distribution in question, from the ADS Depositary or, if applicable, from the seller of the ADSs on such exchange or market (in the form of due bills or otherwise) as determined by such exchange or market.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“Expiring Rights” shall have the meaning specified in Section 14.04.

 

“Form of Assignment” shall mean the “Form of Assignment” attached as Attachment 4 to the Form of Note attached hereto as Exhibit A.

 

“Form of Fundamental Change Repurchase Notice” shall mean the “Form of Fundamental Change Repurchase Notice” attached as Attachment 2 to the Form of Note attached hereto as Exhibit A.

 

“Form of Notice of Conversion” shall mean the “Form of Notice of Conversion” attached as Attachment 1 to the Form of Note attached hereto as Exhibit A.

 

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“Form of Repurchase Notice” shall mean the “Form of Repurchase Notice” attached as Attachment 3 to the Form of Note attached hereto as Exhibit A.

 

“Fundamental Change” shall be deemed to have occurred at the time after the Notes are originally issued that any of the following occurs:

 

(a) a “person” or “group” within the meaning of Section 13(d) of the Exchange Act, other than the Company, its Subsidiaries and the employee benefit plans of the Company and its Subsidiaries, has become the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of the Company’s Common Equity representing more than 50% of the voting power of the Company’s Common Equity;

 

(b) consummation of (A) any recapitalization, reclassification or change of the Ordinary Shares or ADSs (other than changes resulting from a subdivision or combination and changes to the number of Class A Ordinary Shares represented by each ADS) as a result of which the Ordinary Shares or ADSs would be converted into, or exchanged for, shares, other securities, other property or assets, (B) any share exchange, consolidation or merger of the Company pursuant to which the Ordinary Shares or ADSs will be converted into cash, securities or other property, or (C) any sale, lease or other transfer in one transaction or a series of transactions of all or substantially all of the consolidated assets of the Company and its Subsidiaries, taken as a whole, to any Person other than one of the Company’s Subsidiaries; provided, however, that a transaction described in clause (B) in which the holders of all classes of the Company’s Common Equity immediately prior to such transaction (each such holder, a “Pre-Transaction Holder”) own, directly or indirectly, more than 50% of all classes of Common Equity of the continuing or surviving corporation or transferee immediately after such transaction shall not be a Fundamental Change pursuant to this clause (b), so long as the proportion of the respective ownership of each Pre-Transaction Holder remains substantially the same relative to all other Pre-Transaction Holders;

 

(c) the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company; or

 

(d) the ADSs (or other common equity or ADSs underlying the Notes) cease to be listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors);

 

provided, however, that a transaction or transactions described in clause (b) above shall not constitute a Fundamental Change if at least 90% of the consideration received or to be received by the holders of the ADSs, excluding cash payments for fractional ADSs and cash payments made pursuant to dissenters’ appraisal rights, in connection with such transaction or transactions consists of shares of Publicly Traded Securities, and as a result of this transaction or transactions the Notes become convertible into such consideration, excluding cash payments for fractional ADSs.

 

“Fundamental Change Company Notice” shall have the meaning specified in Section 15.02(c).

 

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“Fundamental Change Repurchase Date” shall have the meaning specified in Section 15.02(a).

 

“Fundamental Change Repurchase Notice” shall have the meaning specified in Section 15.02(b)(i).

 

“Fundamental Change Repurchase Price” shall have the meaning specified in Section 15.02(a).

 

“Global Note” shall have the meaning specified in Section 2.05(b).

 

“Holder,” as applied to any Note, or other similar terms (but excluding the term “beneficial holder”), shall mean any person in whose name at the time a particular Note is registered on the Note Register.

 

“Indenture” means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented.

 

“Initial Purchasers” means Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc., China Renaissance Securities (Hong Kong) Limited and UBS Securities LLC.

 

“Interest Payment Date” means each February 15 and August 15 of each year, beginning on February 15, 2015.

 

“Last Reported Sale Price” of the ADSs on any date means the closing sale price per ADS (or if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on that date as reported in composite transactions for the principal U.S. national or regional securities exchange on which the ADSs are traded. If the ADSs are not listed for trading on a U.S. national or regional securities exchange on the relevant date, the “Last Reported Sale Price” shall be the average of the last quoted bid and ask prices for the ADSs in the over-the-counter market on the relevant date as reported by OTC Markets Group Inc. or a similar organization. If the ADSs are not so quoted, the “Last Reported Sale Price” shall be the average of the mid-point of the last bid and ask prices for the ADSs on the relevant date from each of at least three nationally recognized independent investment banking firms selected by the Company for this purpose.

 

“Make-Whole Fundamental Change” means any transaction or event described in the definition of “Fundamental Change” (determined after giving effect to any exceptions to or exclusions from such definition, but without regard to the proviso in clause (b) of the definition thereof).

 

“Maturity Date” means August 15, 2021.

 

“Merger Event” shall have the meaning specified in Section 14.07(a).

 

“Note” or “Notes” shall have the meaning specified in the first paragraph of the recitals of this Indenture.

 

“Note Register” shall have the meaning specified in Section 2.05(a).

 

“Note Registrar” shall have the meaning specified in Section 2.05(a).

 

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“Notice of Conversion” shall have the meaning specified in Section 14.02(b).

 

“Offering Memorandum” means the preliminary offering memorandum dated July 30, 2014, as supplemented by the pricing term sheet dated July 31, 2014, relating to the offering and sale of the Notes.

 

“Officer” means, with respect to the Company, the chief executive officer, the president, the chief financial officer or a director.

 

“Officers’ Certificate,” when used with respect to the Company, means a certificate that is delivered to the Trustee and that is signed by two Officers of the Company. Each such certificate shall include the statements provided for in Section 17.06 if and to the extent required by the provisions of such Section. One of the Officers giving an Officers’ Certificate pursuant to Section 4.09 shall be the principal executive, financial or accounting officer of the Company.

 

“open of business” means 9:00 a.m. (New York City time).

 

“Opinion of Counsel” means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel, which opinion shall be acceptable to the Trustee, that is delivered to the Trustee. Each such opinion shall include the statements provided for in Section 17.06 if and to the extent required by the provisions of such Section 17.06.

 

“Ordinary Shares” means the ordinary shares of the of the Company, including Class A Ordinary Shares and/or Class B Ordinary Shares as the context requires.

 

“outstanding,” when used with reference to Notes, shall, subject to the provisions of Section 8.04, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except:

 

(a) Notes theretofore canceled by the Trustee or accepted by the Trustee for cancellation;

 

(b) Notes, or portions thereof, that have become due and payable and in respect of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any Paying Agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent);

 

(c) Notes that have been paid pursuant to Section 2.07 or Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.07 unless proof satisfactory to the Trustee is presented that any such Notes are held by protected purchasers in due course;

 

(d) Notes converted pursuant to Article 14 and required to be cancelled pursuant to Section 2.09;

 

(e) Notes repurchased by the Company pursuant to the penultimate sentence of Section 2.11 or pursuant to Article 15 and required to be cancelled pursuant to Section 2.09; and

 

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(f) Notes redeemed pursuant to Article 16 and required to be cancelled pursuant to Section 2.09.

 

“Paying Agent” shall have the meaning specified in Section 4.02.

 

“Person” means an individual, a corporation, a limited liability company, an association, a partnership, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof.

 

“Physical Notes” means permanent certificated Notes in registered form issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof.

 

“Pre-Transaction Holder” shall have the meaning specified in clause (b) of the definition of “Fundamental Change.”

 

“Predecessor Note” of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.07 in lieu of or in exchange for a mutilated, lost, destroyed or stolen Note shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Note that it replaces.

 

“Publicly Traded Securities” means shares of common equity or ADSs that are listed or quoted on any of The New York Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Global Market (or any of their respective successors), or will be so listed or quoted when issued or exchanged, in each case, in connection with a Fundamental Change described in clause (b) of the definition thereof.

 

“Qualified Institutional Buyer” shall have the meaning specified in Rule 144A under the Securities Act.

 

“Purchase Agreement” means that certain Purchase Agreement, dated as of July 31, 2014, among the Company and the Initial Purchasers.

 

“Record Date” means, with respect to any issuance, dividend or distribution to holders of Ordinary Shares, the date fixed for determination of shareholders entitled to receive such issuance, dividend or distribution (whether such date is fixed by the Board of Directors, by statute, by contract or otherwise).

 

“Reference Property” shall have the meaning specified in Section 14.07(a).

 

“Regular Record Date,” with respect to any Interest Payment Date, shall mean the February 1 or August 1 (whether or not such day is a Business Day) immediately preceding the relevant Interest Payment Date.

 

“Regulation S” means Regulation S as promulgated under the Securities Act.

 

“Regulation S Global Notes” shall have the meaning specified in Section 2.05(b).

 

“Relevant Taxing Jurisdiction” shall have the meaning specified in Section 4.07(a).

 

“Repurchase Date” shall have the meaning specified in Section 15.01(a).

 

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“Repurchase Expiration Time” shall have the meaning specified in Section 15.01(a).

 

“Repurchase Notice” shall have the meaning specified in Section 15.01(a).

 

“Repurchase Price” shall have the meaning specified in Section 15.01(a).

 

“Resale Restriction Termination Date” shall have the meaning specified in Section 2.05(c).

 

“Responsible Officer” means, when used with respect to the Trustee, any officer within the Corporate Trust Office of the Trustee, including any director, vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture.

 

“Restricted Global Notes” means Global Notes that are Restricted Securities.

 

“Restricted Physical Notes” means Physical Notes that are Restricted Securities.

 

“Restricted Securities” shall have the meaning specified in Section 2.05(c).

 

“Rule 144A” means Rule 144A as promulgated under the Securities Act.

 

“Rule 144A Global Notes” shall have the meaning specified in Section 2.05(b).

 

“Scheduled Trading Day” means a day that is scheduled to be a Trading Day on the principal U.S. national securities exchange or market on which the ADSs (or other relevant securities) are listed or admitted for trading. If the ADSs (or other relevant securities) are not so listed or admitted for trading, “Scheduled Trading Day” means a Business Day.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

“Securities Act Legend” shall have the meaning specified in Section 2.05(c).

 

“Significant Subsidiary” means a Subsidiary of the Company that meets the definition of “significant subsidiary” in Article 1, Rule 1-02 of Regulation S-X under the Exchange Act.

 

“Spin-Off” shall have the meaning specified in Section 14.04(c).

 

“Subsidiary” means, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers, general partners or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person; (ii) such Person and one or more Subsidiaries of such Person; or (iii) one or more Subsidiaries of such Person.

 

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“Tax Redemption” shall have the meaning specified in Section 16.01.

 

“Tax Redemption Date”, when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

 

“Tax Redemption Notice” shall have the meaning specified in Section 16.01.

 

“Tax Redemption Price” shall have the meaning specified in Section 16.01.

 

“Trading Day” means a day (i) during which trading in the ADSs (or other relevant securities) generally occurs on The New York Stock Exchange or, if the ADSs (or other relevant securities) are not then listed on The New York Stock Exchange, on the other principal United States national or regional securities exchange on which the ADSs (or other relevant securities) are then listed or, if the ADSs (or other relevant securities) are not then listed on a United States national or regional securities exchange, on the other principal market on which the ADSs (or other relevant securities) are then listed or admitted for trading and (ii) on which the Last Reported Sale Price for the ADSs (or other relevant securities) is available on such securities exchange or market; provided that if the ADSs (or other relevant securities) are not so listed or admitted for trading, “Trading Day” means a Business Day.

 

“transfer” shall have the meaning specified in Section 2.05(c).

 

“Trigger Event” shall have the meaning specified in Section 14.04(c).

 

“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture; provided, however, that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term “Trust Indenture Act” shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939, as so amended.

 

“Trustee” means the Person named as the “Trustee” in the first paragraph of this Indenture until a successor trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder.

 

“unit of Reference Property” shall have the meaning specified in Section 14.07(a).

 

“Unrestricted Global Notes” means Global Notes that are not Restricted Securities.

 

“Unrestricted Physical Notes” means Physical Notes that are not Restricted Securities.

 

“Valuation Period” shall have the meaning specified in Section 14.04(c).

 

Section 1.02              References to Interest. Unless the context otherwise requires, any reference to interest on, or in respect of, any Note in this Indenture shall be deemed to include Additional Interest if, in such context, Additional Interest is, was or would be payable pursuant to any of Section 4.06(d), Section 4.06(e) and Section 6.03. Unless the context otherwise requires, any express mention of Additional Interest in any provision hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made.

 

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Section 1.03              New York Office of Trustee, Conversion Agent, Note Registrar, Paying Agent and Transfer Agent. For purposes of Physical Notes under this Indenture, unless an alternative address is subsequently designated after the date hereof in accordance with the terms of this Indenture, the corporate trust office of the Trustee, and the office of the Conversion Agent, Note Registrar, Paying Agent and transfer agent in the Borough of Manhattan, The City of New York, shall initially be located at c/o Citibank, N.A., 14th Floor, 388 Greenwich Street, New York, New York 10013, United States, Attention: Agency & Trust.

 

ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES

 

Section 2.01              Designation and Amount. The Notes shall be designated as the “1.75% Convertible Senior Notes due 2021.” The aggregate principal amount of Notes that may be authenticated and delivered under this Indenture is initially limited to US$450,000,000, subject to Section 2.11 and except for Notes authenticated and delivered upon registration or transfer of, or in exchange for, or in lieu of other Notes pursuant to Section 2.05, Section 2.06, Section 2.07, Section 10.04, Section 14.02 and Section 15.04.

 

Section 2.02              Form of Notes. The Notes and the Trustee’s certificate of authentication to be borne by such Notes shall be substantially in the respective forms set forth in Exhibit A, the terms and provisions of which shall constitute, and are hereby expressly incorporated in and made a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby.

 

Any Global Note may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Indenture as may be required by the Custodian or the Depositary, or as may be required to comply with any applicable law or any regulation thereunder or with the rules and regulations of any securities exchange or automated quotation system upon which the Notes may be listed or traded or designated for issuance or to conform with any usage with respect thereto, or to indicate any special limitations or restrictions to which any particular Notes are subject.

 

Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends or endorsements as the Officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, or to conform to usage or to indicate any special limitations or restrictions to which any particular Notes are subject.

 

Each Global Note shall represent such principal amount of the outstanding Notes as shall be specified therein and shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be increased or reduced to reflect redemptions, repurchases, cancellations, conversions, transfers or exchanges permitted hereby. Any endorsement of the Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in such manner and upon instructions given by the Holder of such Notes in accordance with this Indenture. Payment of principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Global Note shall be made to the Holder of such Note on the date of payment, unless a record date or other means of determining Holders eligible to receive payment is provided for herein.

 

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Each Note shall bear a legend in substantially the following form (unless otherwise agreed by the Company in writing, with notice thereof to the Trustee):

 

NO AFFILIATE (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT (‘‘RULE 144’’)) OF QIHOO 360 TECHNOLOGY CO. LTD. OR ANY PERSON THAT IS NOT AN AFFILIATE OF QIHOO 360 TECHNOLOGY CO. LTD., BUT WAS AN AFFILIATE (WITHIN THE MEANING OF RULE 144) OF QIHOO 360 TECHNOLOGY CO. LTD. DURING THE THREE IMMEDIATELY PRECEDING MONTHS, OTHER THAN QIHOO 360 TECHNOLOGY CO. LTD., OR ANY SUBSIDIARY OF QIHOO 360 TECHNOLOGY CO. LTD., MAY PURCHASE, OTHERWISE ACQUIRE OR OWN THE NOTES EVIDENCED HEREBY, THE AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION THEREOF OR THE CLASS A ORDINARY SHARES OF QIHOO 360 TECHNOLOGY CO. LTD. REPRESENTED BY SUCH AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION OF THESE NOTES OR A BENEFICIAL INTEREST THEREIN.

 

Section 2.03              Date and Denomination of Notes; Payments of Interest and Defaulted Amounts. (a) The Notes shall be issued in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof and shall be in registered form, without coupons. Each Note shall be dated the date of its authentication and shall bear interest from the date specified on the face of the form of Note attached as Exhibit A hereto. Accrued interest on the Notes shall be computed on the basis of a 360-day year composed of twelve 30-day months.

 

(b) The Person in whose name any Note (or its Predecessor Note) is registered on the Note Register at the close of business on any Regular Record Date with respect to any Interest Payment Date shall be entitled to receive the interest payable on such Interest Payment Date. Interest shall be payable at the office or agency of the Company maintained by the Company for such purposes in the Borough of Manhattan, The City of New York, which shall initially be the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York, or such address as the Trustee may designate from time to time by notice to the Holders and the Company. The Company shall pay interest (i) on any Physical Notes (A) to Holders holding Physical Notes having an aggregate principal amount of US$1,000,000 or less, by check mailed to the Holders of these Notes at their address as it appears in the Note Register and (B) to Holders holding Physical Notes having an aggregate principal amount of more than US$1,000,000, either by check mailed to such Holders or, upon application by such Holder to the Note Registrar not later than the relevant Regular Record Date, by wire transfer in immediately available funds to that Holder’s account within the United States, which application shall remain in effect until the Holder notifies, in writing, the Note Registrar to the contrary or (ii) on any Global Note by wire transfer of immediately available funds to the account of the Depositary or its nominee.

 

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(c) Any Defaulted Amounts shall forthwith cease to be payable to the Holder on the relevant payment date but shall accrue interest per annum at the rate borne by the Notes, plus one percent, subject to the enforceability thereof under applicable law, from, and including, such relevant payment date, and such Defaulted Amounts together with such interest thereon shall be paid by the Company, at its election in each case, as provided in clause (i) or (ii) below:

 

(i) The Company may elect to make payment of any Defaulted Amounts to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Amounts, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of the Defaulted Amounts proposed to be paid on each Note and the date of the proposed payment (which shall be not less than 25 days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Amounts or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Amounts as in this clause provided. Thereupon the Company shall fix a special record date for the payment of such Defaulted Amounts which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment, and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Company shall promptly notify the Trustee of such special record date and the Trustee, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Amounts and the special record date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Note Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Amounts and the special record date therefor having been so mailed, such Defaulted Amounts shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (ii) of this Section 2.03(c).

 

(ii) The Company may make payment of any Defaulted Amounts in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange or automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee.

 

Section 2.04              Execution, Authentication and Delivery of Notes. The Notes shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its chief executive officer, president or chief financial officer.

 

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes executed by the Company to the Trustee for authentication, together with a written order of the Company signed by one Officer and delivered to the Trustee (the “Authentication Order”) for the authentication and delivery of such Notes, an Officers’ Certificate and an Opinion of Counsel, such Officers’ Certificate and Opinion of Counsel to cover such matters, in addition to those required by Section 17.06, as the Trustee shall reasonably request, and the Trustee in accordance with such Authentication Order shall authenticate and deliver such Notes, without any further action by the Company hereunder.

 

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Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, executed manually or by facsimile by an authorized officer of the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 17.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture.

 

In case any Officer of the Company who shall have signed any of the Notes shall cease to be such Officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Notes had not ceased to be such Officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the Officers of the Company, although at the date of the execution of this Indenture any such Person was not such an Officer.

 

Section 2.05              Exchange and Registration of Transfer of Notes; Restrictions on Transfer; Depositary. (a) The Company shall cause to be kept at the office of the Note Registrar at 14th Floor, 388 Greenwich Street, New York, New York 10013, United States a register (the register maintained in such office or in any other office or agency of the Company designated pursuant to Section 4.02, the “Note Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. Such register shall be in written form or in any form capable of being converted into written form within a reasonable period of time. Citibank, N.A., is hereby initially appointed the “Note Registrar” for the purpose of registering Notes and transfers of Notes as herein provided. The Company may appoint one or more co-Note Registrars in accordance with Section 4.02. The Company shall maintain an office or agency in the Borough of Manhattan, the City of New York, which shall initially be the office of the Note Registrar in New York, New York, where Physical Notes may be accepted for registration or transfers.

 

Upon surrender for registration of transfer of any Note to the Note Registrar or any co-Note Registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.05, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture.

 

Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency maintained by the Company pursuant to Section 4.02. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Notes that the Holder making the exchange is entitled to receive, bearing registration numbers not contemporaneously outstanding.

 

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All Notes presented or surrendered for registration of transfer or for exchange, repurchase, redemption or conversion shall (if so required by the Company, the Trustee, the Note Registrar or any co- Note Registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and duly executed, by the Holder thereof or its attorney-in-fact duly authorized in writing.

 

No service charge shall be imposed by the Company, the Trustee, the Note Registrar or any co-Note Registrar for any exchange or registration of transfer of Notes, but the Company or the Trustee may require a Holder to pay a sum sufficient to cover any transfer tax or similar governmental charge required by law or that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such exchange or transfer being different from the name of the Holder of the old Notes surrendered for such exchange or transfer.

 

None of the Company, the Trustee, the Note Registrar or any co-Note Registrar shall be required to exchange or register a transfer of (i) any Notes that have been surrendered for conversion or, if a portion of any Note that has been surrendered for conversion, such portion thereof surrendered for conversion or (ii) any Notes, or a portion of any Note, that have been surrendered for repurchase (and not withdrawn) in accordance with Article 15.

 

All Notes issued upon any registration of transfer or exchange of Notes in accordance with this Indenture shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture as the Notes surrendered upon such registration of transfer or exchange.

 

(b) So long as the Notes are eligible for book-entry settlement with the Depositary, unless otherwise required by law, subject to the fourth paragraph from the end of Section 2.05(c), all Notes shall be represented by one or more Notes in global form (each, a “Global Note”) registered in the name of the Depositary or the nominee of the Depositary. Notes offered and sold to qualified institutional buyers in reliance on Rule 144A shall be issued initially in the form of one or more permanent Global Notes (the “Rule 144A Global Notes”). Notes offered and sold in offshore transactions to non-U.S. persons in reliance on Regulation S shall be issued initially in the form of one or more Global Notes (the “Regulation S Global Notes”). The aggregate principal amount of the Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, pursuant to transfers and exchanges in Section 2.05(c). The transfer and exchange of beneficial interests in a Global Note that does not involve the issuance of a Physical Note, shall be effected through the Depositary (but not the Trustee or the Custodian) in accordance with this Indenture (including the restrictions on transfer set forth in this Section 2.05 and procedures set forth in Section 2.06) and the procedures of the Depositary therefor.

 

(c) Every Note that bears or is required under this Section 2.05(c) to bear the legend set forth in this Section 2.05(c) (together with any ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of the Notes and required to bear the legend set forth in Section 2.05(d), collectively, the “Restricted Securities”) shall be subject to the restrictions on transfer set forth in this Section 2.05(c) (including the legend set forth below), unless such restrictions on transfer shall be eliminated or otherwise waived by written consent of the Company, and the Holder of each such Restricted Security, by such Holder’s acceptance thereof, agrees to be bound by all such restrictions on transfer. As used in this Section 2.05(c) and Section 2.05(d), the term “transfer” encompasses any sale, pledge, transfer or other disposition whatsoever of any Restricted Security.

 

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Until the date (the “Resale Restriction Termination Date”) that is the later of (1) the date that is one year after the last date of original issuance of the Notes, or such shorter period of time as permitted by Rule 144 under the Securities Act or any successor provision thereto, and (2) such later date, if any, as may be required by applicable law, any certificate evidencing such Note (and all securities issued in exchange therefor or substitution thereof, other than ADSs (including any Class A Ordinary Shares represented thereby), if any, issued upon conversion thereof which shall bear the legend set forth in Section 2.05(d), if applicable) shall bear a legend (the “Securities Act Legend”) in substantially the following form (unless such Notes have been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or sold pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or unless otherwise agreed by the Company in writing, with notice thereof to the Trustee):

 

THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

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(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THIS SECURITY OR SUCH AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

 

No transfer of any Note prior to the Resale Restriction Termination Date will be registered by the Note Registrar unless the applicable box on the Form of Certificate of Transfer has been checked and any transfers shall follow the procedures set forth in Section 2.06.

 

Any Note (or security issued in exchange or substitution therefor) as to which such restrictions on transfer shall have expired in accordance with their terms may, upon surrender of such Note for exchange to the Note Registrar in accordance with the provisions of this Section 2.05, be exchanged for a new Note or Notes, of like tenor and aggregate principal amount, which shall not bear the restrictive legend required by this Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall be entitled to instruct the Custodian in writing to so surrender any Global Note as to which such restrictions on transfer shall have expired in accordance with their terms for exchange, and, upon such instruction, the Custodian shall so surrender such Global Note for exchange; and any new Global Note so exchanged therefor shall not bear the Securities Act Legend specified in this Section 2.05(c) and shall not be assigned a restricted CUSIP number. The Company shall promptly notify the Trustee upon the occurrence of the Resale Restriction Termination Date and promptly after a registration statement, if any, with respect to the Notes or any ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of the Notes has been declared effective under the Securities Act.

 

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The Depositary shall be a clearing agency registered under the Exchange Act. The Company initially appoints The Depository Trust Company to act as Depositary with respect to each Global Note (the “Depositary”). Initially, each Global Note shall be issued to the Depositary, registered in the name of Cede & Co., as the nominee of the Depositary, and deposited with the Trustee as custodian for Cede & Co. Beneficial interests in the Regulation S Global Notes may be held by any member of, or participants in, the Depositary, including Euroclear and Clearstream (collectively, the “Agent Members”). Agent Members shall have no rights under this Indenture with respect to any Global Notes held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Notes, and the Depositary may be treated by the Company, the Trustee and any agent of either of them as the absolute owner of such Global Notes for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall (i) prevent the Company, the Trustee or any agent of either of them, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or (ii) impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Global Notes.

 

Holders of Global Notes will be entitled to receive Physical Notes if (i) the Depositary (or any other clearing system as shall have been designated by the Company and approved by the Trustee on behalf of which the Notes evidenced by the Rule 144A Global Note or the Regulations S Global Note may be held) notifies the Company that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the Global Notes or ceases to be a “Clearing Agency” registered under the Exchange Act or is at any time no longer eligible to act as such and the Company is unable to locate a qualified successor within 60 days of receiving notice of such ineligibility on the part of the Depositary Trust Company (or, as the case may be, such other clearing system), (ii) there shall have occurred and be continuing an Event of Default, or (iii) instructions have been given for the transfer of an interest in the Notes evidenced by the Rule 144A Global Note to a Person who would otherwise take delivery thereof in the form of an interest in the Note evidenced by the Regulation S Global Note where the Regulation S Global Note has been exchanged for Physical Notes or vice versa, the Company shall execute, and the Trustee, upon receipt of an Officers’ Certificate and a Company Order for the authentication and delivery of Notes, shall authenticate and deliver (x) in the case of clause (ii) or (iii), a Physical Note to such beneficial owner in a principal amount equal to the principal amount of such Note corresponding to such beneficial owner’s beneficial interest and (y) in the case of clause (i), Physical Notes to each beneficial owner of the related Global Notes (or a portion thereof) in an aggregate principal amount equal to the aggregate principal amount of such Global Notes in exchange for such Global Notes, and upon delivery of the Global Notes to the Trustee such Global Notes shall be canceled.

 

In the case of Physical Notes, Holders of a Physical Note may transfer such Note by surrendering it to the Note Registrar. In the event of a partial transfer or a partial redemption of a holding of Physical Notes represented by one Physical Note, a Physical Note will be issued to the transferee in respect of the part transferred and a new Physical Note in respect of the balance of the holding not transferred or redeemed will be issued to the transferor or the Holder, as applicable; provided that no Physical Note in a denomination less than US$200,000 will be issued. The Company shall bear the cost of preparing, printing, packaging and delivering the Physical Notes.

 

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Physical Notes delivered in exchange for any Global Note or beneficial interest in Global Notes pursuant to this Section 2.05(c) shall be registered in such names and in such authorized denominations requested by or on behalf of the Depositary (in accordance with its customary procedures) and will bear the applicable legends specified in this Section 2.05, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. Upon execution and authentication, the Trustee shall deliver such Physical Notes to the Persons in whose names such Physical Notes are so registered. Physical Notes may be transferred and exchanged only after the transferor first delivers to the Trustee a written certification (in the form provided in this Indenture) to the effect that such transfer will comply with the transfer restrictions applicable to such Physical Notes.

 

Neither the Company, the Trustee nor any agent of the Company or the Trustee shall have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Note or maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

 

(d) Until the Resale Restriction Termination Date, any stock certificate representing ADSs (including any Class A Ordinary Shares represented thereby) issued upon conversion of such Note shall bear a legend in substantially the following form (unless the Note or such ADSs or any Class A Ordinary Shares represented thereby has been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or such ADSs or such Class A Ordinary Shares represented thereby have been issued upon conversion of Notes that have been transferred pursuant to a registration statement that has become or been declared effective under the Securities Act and that continues to be effective at the time of such transfer, or pursuant to the exemption from registration provided by Rule 144 or any similar provision then in force under the Securities Act, or unless otherwise agreed by the Company with written notice thereof to the Trustee and any transfer agent for the ADSs):

 

THE AMERICAN DEPOSITARY SHARES EVIDENCED HEREBY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THE COMPANY’S 1.75% CONVERTIBLE SENIOR NOTES DUE 2021, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

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(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THE AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES REPRESENTED THEREBY;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

 

Any such ADSs as to which such restrictions on transfer shall have expired in accordance with their terms may, upon surrender of the certificates representing such ADSs for exchange in accordance with the procedures of the transfer agent for the ADSs, be exchanged for a new certificate or certificates for a like aggregate number of ADSs, which shall not bear the restrictive legend required by this Section 2.05(d).

 

(e) The Company (i) shall not resell and (ii) shall not permit any of its “affiliate” (as defined under Rule 144 under the Securities Act) or Person that has been an “affiliate” of the Company during the three immediately preceding months to purchase, otherwise acquire or own, in each case, any Notes or any beneficial interest therein.

 

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Section 2.06              Transfer and Exchange.

 

(a)                Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole or in part except (i) by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary and (ii) for transfers of portions of a Global Note in certificated form made upon request of a member of, or a participant in, the Depositary (for itself or on behalf of a beneficial owner) by written notice given to the Trustee by or on behalf of the Depositary in accordance with customary procedures of the Depositary and in compliance with Section 2.05(c).

 

(b)               Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes will be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Beneficial interests in the Restricted Global Notes will be subject to restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Transfers of beneficial interests in the Global Notes also will require compliance with either subparagraph (1) or (2) below, as applicable, as well as one or more of the other following subparagraphs, as applicable:

 

(1)               Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Restricted Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Restricted Global Note in accordance with the transfer restrictions set forth in the Securities Act Legend. No written orders or instructions shall be required to be delivered to the Note Registrar to effect the transfers described in this Section 2.06(b)(1).

 

(2)               All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(1) above, the transferor of such beneficial interest must deliver to the Note Registrar either:

 

(A)              both:

 

(i)                 a written order from an Agent Member given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged; and

 

(ii)               instructions given in accordance with the Applicable Procedures containing information regarding the Agent Member account to be credited with such increase; or

 

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(B)              both:

 

(i)                 a written order from an Agent Member given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Physical Note in an amount equal to the beneficial interest to be transferred or exchanged; and

 

(ii)               instructions given by the Depositary to the Note Registrar containing information regarding the Person in whose name such Physical Note shall be registered to effect the transfer or exchange referred to in (1) above.

 

Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(e).

 

(3)               Transfer of Beneficial Interests to Another Restricted Global Note. A beneficial interest in any Restricted Global Note may be transferred to a Person who takes delivery thereof in the form of a beneficial interest in another Restricted Global Note if the transfer complies with the requirements of Section 2.06(b)(2) above and the Note Registrar receives the following:

 

(A)              if the transferee will take delivery in the form of a beneficial interest in the Rule 144A Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof; and

 

(B)              if the transferee will take delivery in the form of a beneficial interest in the Regulation S Global Note, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof.

 

(c)                Transfer or Exchange of Beneficial Interests for Physical Notes.

 

(1)               Beneficial Interests in Restricted Global Notes to Restricted Physical Notes. If any holder of a beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Physical Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Restricted Physical Note, then, upon receipt by the Note Registrar of the following documentation:

 

(A)              if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for a Restricted Physical Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (2) thereof;

 

(B)              if such beneficial interest is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (1) thereof;

 

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(C)              if such beneficial interest is being transferred to a non-U.S. person in an offshore transaction in accordance with Rule 903 or Rule 904, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (2) thereof;

 

(D)              if such beneficial interest is being transferred pursuant to an exemption from the registration requirements of the Securities Act in accordance with Rule 144, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(a) thereof;

 

(E)               if such beneficial interest is being transferred to the Company or any of its Subsidiaries, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(b) thereof; or

 

(F)               if such beneficial interest is being transferred pursuant to an effective registration statement under the Securities Act, a certificate to the effect set forth in Exhibit B hereto, including the certifications in item (3)(c) thereof,

 

the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(e) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Physical Note in the appropriate principal amount. Any Physical Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Note Registrar through instructions from the Depositary and the Agent Member. The Trustee shall deliver such Physical Notes to the Persons in whose names such Notes are so registered. Any Physical Note issued in exchange for a beneficial interest in a Restricted Global Note pursuant to this Section 2.07(c)(1) shall bear the Securities Act Legend and shall be subject to all restrictions on transfer contained therein.

 

(2)               Beneficial Interests in Restricted Global Notes to Unrestricted Physical Notes. A holder of a beneficial interest in a Restricted Global Note may exchange such beneficial interest for an Unrestricted Physical Note or may transfer such beneficial interest to a Person who takes delivery thereof in the form of an Unrestricted Physical Note only if the Note Registrar receives the following:

 

(A)              if the holder of such beneficial interest in a Restricted Global Note proposes to exchange such beneficial interest for an Unrestricted Physical Note, a certificate from such holder in the form of Exhibit C hereto, including the certifications in item (1)(b) thereof; or

 

(B)              if the holder of such beneficial interest in a Restricted Global Note proposes to transfer such beneficial interest to a Person who shall take delivery thereof in the form of an Unrestricted Physical Note, a certificate from such holder in the form of Exhibit B hereto, including the certifications in item (4) thereof;

 

and, if the Note Registrar so requests or if the Applicable Procedures so require, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Securities Act Legend are no longer required in order to maintain compliance with the Securities Act.

 

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(3)               Beneficial Interests in Unrestricted Global Notes to Unrestricted Physical Notes. If any holder of a beneficial interest in an Unrestricted Global Note proposes to exchange such beneficial interest for a Physical Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Physical Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(2) hereof, the Trustee will cause the aggregate principal amount of the applicable Unrestricted Global Note to be reduced accordingly pursuant to Section 2.06(e), and the Company will execute and the Trustee will authenticate and deliver to the Person designated in the instructions a Physical Note in the appropriate principal amount. Any Physical Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(3) will be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest requests through instructions to the Note Registrar from or through the Depositary and the Agent Member. The Trustee will deliver such Physical Notes to the Persons in whose names such Notes are so registered. Any Physical Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c)(3) will not bear the Securities Act Legend.

 

(d)               Transfer and Exchange of Physical Notes for Physical Notes. Upon request by a Holder of Physical Notes and such Holder’s compliance with the provisions of this Section 2.06(d), the Note Registrar will register the transfer or exchange of Physical Notes. Prior to such registration of transfer or exchange, the requesting Holder must present or surrender to the Note Registrar the Physical Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. In addition, the requesting Holder must provide any additional certifications, documents and information, as applicable, required pursuant to the following provisions of this Section 2.06(d).

 

(1)               Restricted Physical Notes to Restricted Physical Notes. Any Restricted Physical Note may be transferred to and registered in the name of Persons who take delivery thereof in the form of a Restricted Physical Note if the Note Registrar receives the following:

 

(A)              if the transfer will be made pursuant to Rule 144A, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (1) thereof;

 

(B)              if the transfer will be made pursuant to Rule 903 or Rule 904, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications in item (2) thereof; and

 

(C)              if the transfer will be made pursuant to any other exemption from the registration requirements of the Securities Act, then the transferor must deliver a certificate in the form of Exhibit B hereto, including the certifications, certificates and Opinion of Counsel required by item (3) thereof, if applicable.

 

(2)               Restricted Physical Notes to Unrestricted Physical Notes. Any Restricted Physical Note may be exchanged by the Holder thereof for an Unrestricted Physical Note or transferred to a Person or Persons who take delivery thereof in the form of an Unrestricted Physical Note if the Note Registrar receives the following:

 

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(A)              if the Holder of such Restricted Physical Notes proposes to exchange such Notes for an Unrestricted Physical Note, a certificate from such Holder in the form of Exhibit C hereto, including the certifications in item (1)(c) thereof; or

 

(B)              if the Holder of such Restricted Physical Notes proposes to transfer such Notes to a Person who shall take delivery thereof in the form of an Unrestricted Physical Note, a certificate from such Holder in the form of Exhibit B hereto, including the certifications in item (4) thereof;

 

and, if the Note Registrar so requests, an Opinion of Counsel in form reasonably acceptable to the Note Registrar to the effect that such exchange or transfer is in compliance with the Securities Act and that the restrictions on transfer contained herein and in the Securities Act Legend are no longer required in order to maintain compliance with the Securities Act.

 

(3)               Unrestricted Physical Notes to Unrestricted Physical Notes. A Holder of Unrestricted Physical Notes may transfer such Notes to a Person who takes delivery thereof in the form of an Unrestricted Physical Note. Upon receipt of a request to register such a transfer, the Note Registrar shall register the Unrestricted Physical Notes pursuant to the instructions from the Holder thereof.

 

(e)                Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Physical Notes or a particular Global Note has been converted, canceled, redeemed, repurchased or transferred in whole and not in part, each such Global Note will be returned to or retained and canceled by the Trustee in accordance with Section 2.09. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Physical Notes, the principal amount of Notes represented by such Global Note will be reduced accordingly and an endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note will be increased accordingly and an endorsement will be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase.

 

Section 2.07              Mutilated, Destroyed, Lost or Stolen Notes. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and deliver, a new Note, bearing a registration number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless from any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

 

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The Trustee or such authenticating agent may authenticate any such substituted Note and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substitute Note, the Company or the Trustee may require the payment by the Holder of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note that has matured or is about to mature or has been surrendered for required repurchase, is about to be converted in accordance with Article 14 or is about to be redeemed in accordance with Article 16 shall become mutilated or be destroyed, lost or stolen, the Company may, in its sole discretion, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any Paying Agent or Conversion Agent evidence of their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof.

 

Every substitute Note issued pursuant to the provisions of this Section 2.07 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion or repurchase or redemption of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender.

 

Section 2.08              Temporary Notes. Pending the preparation of Physical Notes, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon written request of the Company, authenticate and deliver temporary Notes (printed or lithographed). Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the Physical Notes but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the Physical Notes. Without unreasonable delay, the Company shall execute and deliver to the Trustee or such authenticating agent Physical Notes (other than any Global Note) and thereupon any or all temporary Notes (other than any Global Note) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 4.02 and the Trustee or such authenticating agent shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of Physical Notes. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as Physical Notes authenticated and delivered hereunder.

 

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Section 2.09              Cancellation of Notes Paid, Converted, Etc. The Company shall cause all Notes surrendered for the purpose of payment, repurchase, redemption, registration of transfer or exchange or conversion, if surrendered to any Person other than the Trustee (including any of the Company’s Agents, Subsidiaries or Affiliates), to be surrendered to the Trustee for cancellation. All Notes delivered to the Trustee shall be canceled promptly by it, and no Notes shall be authenticated in exchange thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee shall dispose of canceled Notes in accordance with its customary procedures and, after such disposition, shall deliver a certificate of such disposition to the Company, at the Company’s written request in a Company Order. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption, repurchase or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation.

 

Section 2.10              CUSIP and ISIN Numbers. The Company in issuing the Notes may use “CUSIP” or “ISIN” numbers (if then generally in use), and, if so, the Trustee shall use CUSIP or ISIN numbers in all notices issued to Holders as a convenience to such Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or on such notice and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee in writing of any change in the CUSIP or ISIN numbers.

 

Section 2.11              Additional Notes; Repurchases. The Company may, without the consent of the Holders and notwithstanding Section 2.01, reopen this Indenture and issue additional Notes hereunder with the same terms as the Notes initially issued hereunder in an unlimited aggregate principal amount; provided if any additional Notes are not fungible with the Notes initially issued hereunder for U.S. federal income tax purposes, then such additional Notes shall have a separate CUSIP number. Prior to the issuance of any such additional Notes, the Company shall deliver to the Trustee a Company Order, an Officers’ Certificate and an Opinion of Counsel, such Officers’ Certificate and Opinion of Counsel to cover such matters, in addition to those required by Section 17.06, as the Trustee shall reasonably request. In addition, the Company may, to the extent permitted by law, and directly or indirectly (regardless of whether such Notes are surrendered to the Company), repurchase Notes in the open market or otherwise, whether by the Company or its Subsidiaries or through a private or public tender or exchange offer or through counterparties to private agreements, including by cash-settled swaps or other derivatives. The Company shall cause any Notes so repurchased (other than Notes repurchased pursuant to cash-settled swaps or other derivatives) to be surrendered to the Trustee for cancellation in accordance with Section 2.09.

 

ARTICLE 3
SATISFACTION AND DISCHARGE

 

Section 3.01              Satisfaction and Discharge. This Indenture shall upon request of the Company contained in an Officers’ Certificate cease to be of further effect, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) (i) all Notes theretofore authenticated and delivered (other than (x) Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07 and (y) Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 4.04(d)) have been delivered to the Trustee for cancellation; or (ii) the Company has deposited with the Trustee or delivered to Holders, as applicable, after the Notes have become due and payable, whether at the Maturity Date, the Tax Redemption Date, the Repurchase Date, any Fundamental Change Repurchase Date, upon conversion or otherwise, cash or (in the case of conversion) ADSs, if sufficient to pay all of the outstanding Notes or satisfy the Company’s Conversion Obligation, as the case may be, and pay all other sums due and payable under this Indenture by the Company; and (b) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 7.06 shall survive.

 

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ARTICLE 4
PARTICULAR COVENANTS OF THE COMPANY

 

Section 4.01              Payment of Principal and Interest. The Company covenants and agrees that it will cause to be paid the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes.

 

Section 4.02              Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment, repurchase or redemption (“Paying Agent”) or for conversion (“Conversion Agent”) and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. If the Company maintains an additional Paying Agent in a European Union member state, the Company shall ensure that it maintains such Paying Agent in a European Union member state that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 or any law implementing or complying with, or introduced in order to conform to, such Directive (so long as there is such a member state). The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office or the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York.

 

The Company may also from time to time designate as co-Note Registrars one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The terms “Paying Agent” and “Conversion Agent” include any such additional or other offices or agencies, as applicable.

 

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The Company hereby initially designates (i) Citibank, N.A. as the Paying Agent, the Conversion Agent and the transfer agent and (ii) the Corporate Trust Office and the corporate trust office of the Trustee in the Borough of Manhattan, The City of New York as an office or agency of the Company for purposes of this Section 4.02.

 

Section 4.03              Appointments to Fill Vacancies in Trustee’s Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.09, a Trustee, so that there shall at all times be a Trustee hereunder.

 

Section 4.04              Provisions as to Paying Agent. (a) If the Company shall appoint a Paying Agent other than the Trustee, the Company will cause such Paying Agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 4.04:

 

(i) that it will hold all sums held by it as such agent for the payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes in trust for the benefit of the Holders of the Notes;

 

(ii) that it will give the Trustee prompt notice of any failure by the Company to make any payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes when the same shall be due and payable; and

 

(iii) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust.

 

The Company shall, no later than 10:00 a.m., New York City time, on the Business Day immediately preceding each due date of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes, deposit with the Paying Agent a sum sufficient to pay such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) or accrued and unpaid interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action. Any deposit by the Company with the Paying Agent shall be made by wire transfer in immediately available funds.

 

To the extent the Paying Agent will act as the Company’s withholding agent with respect to any payment of principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes, the Company shall, no later than 10:00 a.m., New York City time, on the Business Day immediately preceding the due date of such payment, furnish the Paying Agent with an Officers’ Certificate instructing the Trustee as to any circumstances in which such payment shall be subject to deduction or withholding as described in Section 4.07 and the rate of any such deduction or withholding. The Company shall also specify in the Officers’ Certificate the amount required to be so withheld and the Additional Amounts, if any. For the avoidance of doubt, the Company shall deposit such Additional Amounts, if any, with the Paying Agent in accordance with the preceding paragraph.

 

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The Paying Agent shall not be bound to make payments under this Section 4.04 until funds in such amount required for such payments have been received from the Company.

 

(b) If the Company shall act as its own Paying Agent, it will, no later than 10:00 a.m., New York City time, on each due date of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, and accrued and unpaid interest on, the Notes, set aside, segregate and hold in trust for the benefit of the Holders of the Notes a sum sufficient to pay such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable) and accrued and unpaid interest so becoming due and will promptly notify the Trustee in writing of any failure to take such action and of any failure by the Company to make any payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, or accrued and unpaid interest on, the Notes when the same shall become due and payable.

 

(c) Anything in this Section 4.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay, cause to be paid or deliver to the Trustee all sums or amounts held in trust by the Company or any Paying Agent hereunder as required by this Section 4.04, such sums or amounts to be held by the Trustee upon the trusts herein contained and upon such payment or delivery by the Company or any Paying Agent to the Trustee, the Company or such Paying Agent shall be released from all further liability but only with respect to such sums or amounts.

 

(d) Any money and ADSs deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of, accrued and unpaid interest on and the consideration due upon conversion of any Note and remaining unclaimed for two years after such principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable), interest or consideration due upon conversion has become due and payable shall be paid to the Company on request of the Company contained in an Officers’ Certificate, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money and ADSs, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money and ADSs remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money and ADSs then remaining will be repaid or delivered to the Company.

 

Section 4.05              Existence. Subject to Article 11, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence.

 

Section 4.06              Rule 144A Information Requirement and Annual Reports. (a) At any time the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company shall, so long as any of the Notes or the ADSs delivered upon conversion thereof shall, at such time, constitute “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, promptly provide to the Trustee and shall, upon written request, provide to any Holder, beneficial owner or prospective purchaser of such Notes or such ADSs the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act to facilitate the resale of such Notes or such ADSs pursuant to Rule 144A under the Securities Act. The Company shall take such further action as any Holder or beneficial owner of such Notes or such ADSs may reasonably request from time to time to enable such Holder or beneficial owner to sell such Notes or such ADSs in accordance with Rule 144A under the Securities Act, as such rule may be amended from time to time.

 

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(b) The Company shall file with the Trustee within 15 days after the same are required to be filed with the Commission, copies of any documents or reports that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act (giving effect to any grace period provided by Rule 12b-25 under the Exchange Act). Any such document or report that the Company files with the Commission via the Commission’s EDGAR system shall be deemed to be filed with the Trustee for purposes of this Section 4.06(b) as of the time such documents are filed with the Commission via the EDGAR system; provided that the Company will notify the Trustee within 15 days of any such filing.

 

(c) Delivery of the reports and documents described in subsection (b) above to the Trustee is for informational purposes only, and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to conclusively rely on an Officers’ Certificate).

 

(d) If, at any time during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the Notes, the Company fails to timely file any document or report that it is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act, as applicable (after giving effect to all applicable grace periods thereunder and other than reports on Form 6-K), or the Notes are not otherwise freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (as a result of restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes), the Company shall pay Additional Interest on the Notes. Such Additional Interest shall accrue on the Notes at the rate of 0.50% per annum of the principal amount of the Notes outstanding for each day during such period for which the Company’s failure to file has occurred and is continuing or the Notes are not so freely tradable. As used in this Section 4.06(d), documents or reports that the Company is required to “file” with the Commission pursuant to Section 13 or 15(d) of the Exchange Act does not include documents or reports that the Company furnishes to the Commission pursuant to Section 13 or 15(d) of the Exchange Act.

 

(e) If, and for so long as, the restrictive legend on the Notes specified in Section 2.05(c) has not been removed, the Notes are assigned a restricted CUSIP number or the Notes are not otherwise freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (without restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes) as of the 365th day after the last date of original issuance of the Notes, the Company shall pay Additional Interest on the Notes. Such Additional Interest will accrue on the Notes at the rate of 0.50% per annum of the principal amount of Notes outstanding until the restrictive legend on the Notes has been removed in accordance with Section 2.05(c), the Notes are assigned an unrestricted CUSIP number and the Notes are freely tradable by Holders other than the Company’s Affiliates or Persons who were the Company’s Affiliates during the three immediately preceding months (without restrictions pursuant to U.S. securities law or the terms of this Indenture or the Notes).

 

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(f) Additional Interest will be payable in arrears on each Interest Payment Date following accrual in the same manner as regular interest on the Notes.

 

(g) The Additional Interest that is payable in accordance with Section 4.06(d) or Section 4.06(e) shall be in addition to, and not in lieu of, any Additional Interest that may be payable as a result of the Company’s election pursuant to Section 6.03.

 

(h) If Additional Interest is payable by the Company pursuant to Section 4.06(d) or Section 4.06(e), the Company shall deliver to the Trustee an Officers’ Certificate to that effect stating (i) the amount of such Additional Interest that is payable and (ii) the date on which such Additional Interest is payable. Unless and until a Responsible Officer of the Trustee receives at the Corporate Trust Office such a certificate, the Trustee may assume without inquiry that no such Additional Interest is payable. If the Company has paid Additional Interest directly to the Persons entitled to it, the Company shall deliver to the Trustee an Officers’ Certificate setting forth the particulars of such payment.

 

Section 4.07              Payment of Additional Amounts. (a) All payments and deliveries made by the Company or any successor to the Company under or with respect to this Indenture and the Notes, including, but not limited to, payments of principal, payments of interest and deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) upon conversion, shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or within any jurisdiction in which the Company or any successor to the Company is, for tax purposes, organized or resident or doing business in or through which payment is made (or any political subdivision or taxing authority thereof or therein) (each, as applicable, a “Relevant Taxing Jurisdiction”), unless such withholding or deduction is required by law or by regulation or governmental policy having the force of law. In the event that any such withholding or deduction is so required, the Company or any successor to the Company shall pay to each Holder such additional amounts (“Additional Amounts”) as may be necessary to ensure that the net amount received by the beneficial owner after such withholding or deduction (and after deducting any taxes on the Additional Amounts) shall equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required; provided that that no Additional Amounts shall be payable:

 

(i) for or on account of:

 

(A) any tax, duty, assessment or other governmental charge that would not have been imposed but for:

 

(1) the existence of any present or former connection between the Holder or beneficial owner of such Note and the Relevant Taxing Jurisdiction, other than merely holding such Note or the receipt of payments thereunder, including, without limitation, such Holder or beneficial owner being or having been a national, domiciliary or resident of such Relevant Taxing Jurisdiction or treated as a resident thereof or being or having been physically present or engaged in a trade or business therein or having or having had a permanent establishment therein;

 

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(2) the presentation of such Note (in cases in which presentation is required) more than 30 days after the later of the date on which the payment of the principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), premium, if any, and interest on, such Note became due and payable pursuant to the terms thereof or was made or duly provided for; or

 

(3) the failure of the Holder or beneficial owner to comply with a timely request from the Company or any successor of the Company, addressed to the Holder or beneficial owner, as the case may be, to provide certification, information, documents or other evidence concerning such Holder’s or beneficial owner’s nationality, residence, identity or connection with the Relevant Taxing Jurisdiction, or to make any declaration or satisfy any other reporting requirement relating to such matters, if and to the extent that due and timely compliance with such request is required by statute, regulation or administrative practice of the Relevant Taxing Jurisdiction to reduce or eliminate any withholding or deduction as to which Additional Amounts would have otherwise been payable to such Holder or beneficial owner;

 

(B) any estate, inheritance, gift, sale, transfer, excise, personal property or similar tax, assessment or other governmental charge;

 

(C) any taxes imposed pursuant to Sections 1471 to 1474 of the United States Internal Revenue Code of 1986, as amended, including any current or former United States Treasury Regulations or other official interpretations or guidance thereunder, any agreements or intergovernmental agreements thereunder, and any law implementing any intergovernmental agreement relating thereto;

 

(D) any tax, duty, assessment or other governmental charge that is payable otherwise than by withholding from payments under or with respect to the Notes; or

 

(E) any combination of taxes, duties, assessments or other governmental charges referred to in the preceding clauses (A), (B), (C) or (D); or

 

(ii) with respect to any payment of the principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), premium, if any, and interest on, such Note to a Holder, if the Holder is a fiduciary, partnership or person other than the sole beneficial owner of that payment to the extent that such payment would be required to be included in the income under the laws of the Relevant Taxing Jurisdiction, for tax purposes, of a beneficiary or settlor with respect to the fiduciary, a member of that partnership or a beneficial owner who would not have been entitled to such Additional Amounts had that beneficiary, settlor, partner or beneficial owner been the Holder thereof.

 

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(b) Any reference in this Indenture or the Notes in any context to the delivery of ADSs (together with a cash payment in lieu of any fractional ADSs) upon conversion of the Notes or the payment of principal of (including the Repurchase Price or Fundamental Change Repurchase Price, if applicable), and any premium or interest on, any Note or any amount payable with respect to such Note, shall be deemed to include any Additional Amounts, unless the context requires otherwise, that may be payable with respect to that amount under the obligations referred to in this Section 4.07.

 

(c) The foregoing obligations shall survive termination or discharge of this Indenture.

 

Section 4.08              Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

 

Section 4.09              Compliance Certificate; Statements as to Defaults. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending on December 31, 2014) and within 14 days of a request from the Trustee an Officers’ Certificate stating whether or not the signers thereof have knowledge of any Default that occurred during the previous year, and, if so, specifying each such failure and the nature thereof.

 

In addition, the Company shall deliver to the Trustee, within 30 days after the Company becomes aware of the occurrence of any Event of Default or Default, an Officers’ Certificate setting forth the details of such Event of Default or Default, its status and the action that the Company proposes to take with respect thereto.

 

Section 4.10              Further Instruments and Acts. Upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture.

 

ARTICLE 5
LISTS OF HOLDERS AND REPORTS BY THE COMPANY AND THE TRUSTEE

 

Section 5.01              Lists of Holders. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semi-annually, not more than 15 days after each February 1 and August 1 in each year beginning with February 1, 2015, and at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the Holders as of a date not more than 15 days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Note Registrar.

 

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Section 5.02              Preservation and Disclosure of Lists. The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the Holders contained in the most recent list furnished to it as provided in Section 5.01 or maintained by the Trustee in its capacity as Note Registrar, if so acting. The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished.

 

ARTICLE 6
DEFAULTS AND REMEDIES

 

Section 6.01              Events of Default. The following events shall be “Events of Default” with respect to the Notes:

 

(a) default in any payment of interest on any Note when due and payable if the default continues for a period of 30 days;

 

(b) default in the payment of principal of any Note when due and payable on the Maturity Date, upon any required repurchase, upon declaration of acceleration or otherwise;

 

(c) failure by the Company to comply with its obligation to convert the Notes in accordance with this Indenture upon exercise of a Holder’s conversion right that continues for five Business Days;

 

(d) failure by the Company to comply with its obligations under Article 11;

 

(e) failure by the Company to issue a Fundamental Change Company Notice in accordance with Section 15.02(c) or a notice of a Make-Whole Fundamental Change in accordance with Section 14.03(b) when due, and such failure continues for a period of five Business Days;

 

(f) failure by the Company for 60 days after written notice from the Trustee or the Holders of at least 25% in principal amount of the Notes then outstanding has been received by the Company to comply with any of its other agreements contained in the Notes or this Indenture;

 

(g) default by the Company or any Subsidiary of the Company with respect to any mortgage, agreement or other instrument under which there may be outstanding, or by which there may be secured or evidenced, any indebtedness for money borrowed in excess of US$30 million in the aggregate of the Company and/or any such Subsidiary, whether such indebtedness now exists or shall hereafter be created (i) resulting in such indebtedness becoming or being declared due and payable or (ii) constituting a failure to pay the principal of, or interest on, any such indebtedness when due and payable at its stated maturity, upon required repurchase, upon declaration or otherwise, in each of clauses (i) and (ii), where such indebtedness is not discharged, or such acceleration is not rescinded or annulled, within a period of 30 days;

 

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(h) a final judgment for the payment of US$30 million or more rendered against the Company or any Subsidiary of the Company if such amount is not covered by insurance or an indemnity and is not discharged or stayed within 30 days after (i) the date on which the right to appeal thereof has expired if no such appeal has commenced, or (ii) the date on which all rights to appeal have been extinguished;

 

(i) the Company or any Significant Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to the Company or any such Significant Subsidiary or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of the Company or any such Significant Subsidiary or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or

 

(j) an involuntary case or other proceeding shall be commenced against the Company or any Significant Subsidiary seeking liquidation, reorganization or other relief with respect to the Company or such Significant Subsidiary or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of the Company or such Significant Subsidiary or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 30 consecutive days.

 

Section 6.02              Acceleration; Rescission and Annulment. In case one or more Events of Default shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), then, and in each and every such case (other than an Event of Default specified in Section 6.01(i) or Section 6.01(j) with respect to the Company), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding determined in accordance with Section 8.04, by notice in writing to the Company (and to the Trustee if given by Holders), may, and the Trustee at the request of such Holders shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the Notes to be due and payable, and upon any such declaration the same shall become and shall automatically be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. If an Event of Default specified in Section 6.01(i) or Section 6.01(j) with respect to the Company occurs and is continuing, 100% of the principal of and accrued and unpaid interest, if any, on all Notes shall become and shall automatically be immediately due and payable.

 

The immediately preceding paragraph, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay installments of accrued and unpaid interest upon all Notes and the principal of any and all Notes that shall have become due otherwise than by acceleration (with interest on overdue installments of accrued and unpaid interest to the extent that payment of such interest is enforceable under applicable law, and on such principal at the rate borne by the Notes, plus one percent at such time) and amounts due to the Trustee pursuant to Section 7.06, and if (1) rescission would not conflict with any judgment or decree of a court of competent jurisdiction and (2) any and all existing Events of Default under this Indenture, other than the nonpayment of the principal of and accrued and unpaid interest, if any, on Notes that shall have become due solely by such acceleration, shall have been cured or waived pursuant to Section 6.09, then and in every such case (except as provided in the immediately succeeding sentence) the Holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all Defaults or Events of Default with respect to the Notes and rescind and annul such declaration and its consequences and such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent Default or Event of Default, or shall impair any right consequent thereon. Notwithstanding the above or anything to the contrary herein, no such waiver or rescission and annulment shall extend to or shall affect any Default or Event of Default resulting from (i) the nonpayment of the principal of, or accrued and unpaid interest on, any Notes, the Tax Redemption Price on the Tax Redemption Date, or the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price (ii) a failure to pay or deliver, as the case may be, the consideration due upon conversion of the Notes in accordance with this Indenture or (iii) in respect of any provision under this Indenture that cannot be modified or amended without the consent of the Holders of each outstanding Note affected.

 

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Section 6.03              Additional Interest. Notwithstanding anything in this Indenture or in the Notes to the contrary, to the extent the Company elects, the sole remedy for Events of Default relating to the Company’s failure to comply with its obligations as set forth in Section 4.06(b) shall after the occurrence of such an Event of Default consist exclusively of the right to receive Additional Interest on the Notes at a rate equal to (a) 0.25% per annum of the principal amount of the Notes outstanding for each day during the 180-day period beginning on, and including, the date on which such an Event of Default first occurs and (b) 0.50% per annum of the principal amount of the Notes outstanding for each day during the 180-day period beginning on, and including, the 181st day following, and including, the occurrence of such an Event of Default during which, in each case, such Event of Default is continuing. Additional Interest payable pursuant to this Section 6.03 shall be in addition to, not in lieu of, any Additional Interest payable pursuant to Section 4.06(d) or Section 4.06(e). If the Company so elects, such Additional Interest shall be payable in the same manner and on the same dates as regular interest on the Notes. On the 361st day after such Event of Default (if the Event of Default relating to the Company’s failure to file is not cured or waived prior to such 361st day), the Notes shall be subject to acceleration as provided in Section 6.02. In the event the Company does not elect to pay Additional Interest following an Event of Default in accordance with this Section 6.03, the Notes shall be subject to acceleration as provided in Section 6.02.

 

In order to elect to pay Additional Interest as the sole remedy during the first 360 days after the occurrence of any Event of Default described in the immediately preceding paragraph, the Company must notify all Holders of the Notes, the Trustee and the Paying Agent of such election prior to the beginning of such 360-day period. Upon the failure to timely give such notice, the Notes shall be immediately subject to acceleration as provided in Section 6.02.

 

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Section 6.04              Payments of Notes on Default; Suit Therefor. If an Event of Default described in clause (a) or (b) of Section 6.01 shall have occurred, the Company shall, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of the Notes, the whole amount then due and payable on the Notes for principal and interest, if any, with interest on any overdue principal and interest, if any, at the rate borne by the Notes, plus one percent at such time, and, in addition thereto, such further amount as shall be sufficient to cover any amounts due to the Trustee under Section 7.06. If the Company shall fail to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Notes, wherever situated.

 

In the event there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the event of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 6.04, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and accrued and unpaid interest, if any, in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents and to take such other actions as it may deem necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due to the Trustee under Section 7.06; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Holders to make such payments to the Trustee, as administrative expenses, and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including agents and counsel fees, and including any other amounts due to the Trustee under Section 7.06, incurred by it up to the date of such distribution. To the extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property that the Holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise.

 

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Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting such Holder or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

 

All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes.

 

In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Notes, and it shall not be necessary to make any Holders of the Notes parties to any such proceedings.

 

In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of any waiver pursuant to Section 6.09 or any rescission and annulment pursuant to Section 6.02 or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Holders, and the Trustee shall, subject to any determination in such proceeding, be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Holders, and the Trustee shall continue as though no such proceeding had been instituted.

 

Section 6.05              Application of Monies Collected by Trustee. Any monies collected by the Trustee pursuant to this Article 6 with respect to the Notes shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid:

 

First, to the payment of all amounts due the Trustee under Section 7.06 and due to the Paying Agents, Conversion Agents and Note Registrar pursuant to the Registrar, Paying, Transfer and Conversion Agency Appointment Letter dated August 6, 2014;

 

Second, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on, and any cash due upon conversion of, the Notes in default in the order of the date due of the payments of such interest and cash due upon conversion, as the case may be, with interest (to the extent that such interest has been collected by the Trustee) upon such overdue payments at the rate borne by the Notes at such time, such payments to be made ratably to the Persons entitled thereto;

 

Third, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount (including, if applicable, the payment of the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) then owing and unpaid upon the Notes for principal and interest, if any, with interest on the overdue principal and, to the extent that such interest has been collected by the Trustee, upon overdue installments of interest at the rate borne by the Notes at such time, plus one percent, and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal (including, if applicable, the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) and interest without preference or priority of principal over interest, or of interest over principal or of any installment of interest over any other installment of interest, or of any Note over any other Note, ratably to the aggregate of such principal (including, if applicable, the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and any cash in lieu of fractional ADSs due upon conversion) and accrued and unpaid interest; and

 

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Fourth, to the payment of the remainder, if any, to the Company.

 

Section 6.06              Proceedings by Holders. Except to enforce the right to receive payment of principal (including, if applicable, the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price) or accrued and unpaid interest, if any, or the right to receive payment or delivery of the consideration due upon conversion, no Holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless:

 

(a) such Holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as herein provided;

 

(b) Holders of at least 25% in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder;

 

(c) such Holders shall have offered to the Trustee such security or indemnity satisfactory in its sole discretion to it against any loss, liability or expense to be incurred therein or thereby;

 

(d) the Trustee for 60 days after its receipt of such notice of the request and offer of security or indemnity satisfactory to it in its sole discretion, shall have neglected or refused to institute any such action, suit or proceeding; and

 

(e) no direction that, in the opinion of the Trustee, is inconsistent with such written request shall have been given to the Trustee by the Holders of a majority in principal amount of the Notes then outstanding within such 60-day period pursuant to Section 6.09,

 

it being understood and intended, and being expressly covenanted by the taker and Holder of every Note with every other taker and Holder and the Trustee that no one or more Holders shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder, or to obtain or seek to obtain priority over or preference to any other such Holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all Holders (except as otherwise provided herein). For the protection and enforcement of this Section 6.06, each and every Holder and the Trustee shall be entitled to such relief as can be given either at law or in equity.

 

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Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any Holder to receive payment or delivery, as the case may be, of (x) the principal (including the Tax Redemption Price on the Tax Redemption Date or the Repurchase Price on the Repurchase Date and the Fundamental Change Repurchase Price, if applicable) of, (y) accrued and unpaid interest, if any, on, and (z) the consideration due upon conversion of, such Note, on or after the respective due dates expressed or provided for in such Note or in this Indenture, or to institute suit for the enforcement of any such payment or delivery, as the case may be, on or after such respective dates against the Company shall not be impaired or affected without the consent of such Holder.

 

Section 6.07              Proceedings by Trustee. In case of an Event of Default the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as are necessary to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.

 

Section 6.08              Remedies Cumulative and Continuing. Except as provided in the last paragraph of Section 2.07, all powers and remedies given by this Article 6 to the Trustee or to the Holders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the Holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any Holder of any of the Notes to exercise any right or power accruing upon any Default or Event of Default shall impair any such right or power, or shall be construed to be a waiver of any such Default or Event of Default or any acquiescence therein; and, subject to the provisions of Section 6.06, every power and remedy given by this Article 6 or by law to the Trustee or to the Holders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Holders.

 

Section 6.09              Direction of Proceedings and Waiver of Defaults by Majority of Holders. The Holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 8.04 shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to Notes; provided, however, that the Trustee may refuse to follow any direction that (i) conflicts with law or with this Indenture, or (ii) that the Trustee determines unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under this Indenture, the Trustee shall be entitled to indemnification satisfactory to the Trustee in its sole discretion against all loses and expenses caused by taking or not taking such action. The Holders of a majority of the aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 8.04 may on behalf of the Holders of all of the Notes, by notice to the Trustee, waive any past Default or Event of Default hereunder and its consequences except a Default or Event of Default (i) in the payment of accrued and unpaid interest, if any, on, or the principal (including any Tax Redemption Price on the Tax Redemption Date or the Repurchase Price on the Repurchase Date or Fundamental Change Repurchase Price) of, the Notes when due that has not been cured pursuant to the provisions of Section 6.01, (ii) arising from a failure by the Company to deliver the consideration due upon conversion of the Notes in accordance with this Indenture or (iii) in respect of any provision hereof which under Article 10 cannot be modified or amended without the consent of each Holder of an outstanding Note affected. Upon any such waiver the Company, the Trustee and the Holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other Default or a Default or Event of Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 6.09, said Default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon.

 

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Section 6.10              Notice of Defaults. The Trustee shall, within 90 days after the occurrence and continuance of a Default of which a Responsible Officer has actual knowledge, mail to all Holders as the names and addresses of such Holders appear upon the Note Register, notice of all Defaults known to a Responsible Officer, unless such Defaults shall have been cured or waived before the giving of such notice; provided that, except in the case of a Default in the payment of the principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable), or accrued and unpaid interest on, any of the Notes or a Default in the payment or delivery of the consideration due upon conversion, the Trustee shall be protected in withholding such notice if and so long as a committee of Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the Holders. The Trustee shall not be deemed to have knowledge of a Default or Event of Default (other than a Default in the payment of principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, as applicable), or accrued and unpaid interest on, any of the Notes) unless a Responsible Officer of the Trustee has received written notice thereof in the manner provided in this Indenture, which notice references the Notes and the Indenture.

 

Section 6.11              Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Note by its acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided that the provisions of this Section 6.11 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Notes at the time outstanding determined in accordance with Section 8.04, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or accrued and unpaid interest, if any, on any Note (including, but not limited to, the Tax Redemption Price with respect to the Notes being redeemed and the Repurchase Price or Fundamental Change Repurchase Price with respect to the Notes being repurchased as provided in this Indenture) on or after the due date expressed or provided for in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article 14.

 

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ARTICLE 7
CONCERNING THE TRUSTEE

 

Section 7.01              Duties and Responsibilities of Trustee. The Trustee, prior to the occurrence of an Event of Default and after the curing or waiver of all Events of Default that may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred that has not been cured or waived the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs; provided that if an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under this Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory in its sole discretion to it against any loss, liability or expense that might be incurred by it in compliance with such request or direction. The Trustee shall be held harmless and have no liability for actions taken at the direction of the requisite Holders.

 

No provision of this Indenture shall be construed to relieve the Trustee from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that:

 

(a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default that may have occurred:

 

(i) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

 

(ii) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions that by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of any mathematical calculations or other facts stated therein);

 

(b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was grossly negligent in ascertaining the pertinent facts;

 

(c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding determined as provided in Section 8.04 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture;

 

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(d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section;

 

(e) the Trustee shall not be liable in respect of any payment (as to the correctness of amount, entitlement to receive or any other matters relating to payment) or notice effected by the Company or any Paying Agent or any records maintained by any co-Note Registrar with respect to the Notes;

 

(f) if any party fails to deliver a notice relating to an event the fact of which, pursuant to this Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its failure to receive such notice as reason to act as if no such event occurred;

 

(g) in the absence of a written agreement executed by the Company and the Trustee and written investment direction from the Company pursuant thereto, all cash received by the Trustee shall be placed in a non-interest bearing trust account, and in no event shall the Trustee be liable for interest thereon, or the selection of investments or for investment losses incurred thereon or for losses incurred as a result of the liquidation of any such investment prior to its maturity date or the failure of the party directing such investments prior to its maturity date or the failure of the party directing such investment to provide timely written investment direction, and the Trustee shall have no obligation to invest or reinvest any amounts held hereunder in the absence of such written investment direction from the Company; and

 

(h) in the event that the Trustee or an affiliate is also acting as Custodian, Note Registrar, Paying Agent, Conversion Agent or transfer agent hereunder, the rights and protections afforded to the Trustee pursuant to this Article 7 (including indemnity) shall also be afforded to such Custodian, Note Registrar, Paying Agent, Conversion Agent or transfer agent.

 

If an Event of Default occurs and is continuing, the Trustee may require the Paying Agent and Conversion Agent to act under its direction.

 

None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers. Where there are any inconsistencies between the Trustee Ordinance (Cap. 29 Laws of Hong Kong) and this Indenture, the provisions of this Indenture shall prevail to the extent provided or permitted by law.

 

Section 7.02              Reliance on Documents, Opinions, Etc. Except as otherwise provided in Section 7.01:

 

(a) the Trustee may conclusively rely and shall be fully protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, Note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties;

 

(b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers’ Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company;

 

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(c) the Trustee may consult with counsel and require an Opinion of Counsel and any advice of such counsel or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;

 

(d) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney at the expense of the Company and shall incur no liability of any kind by reason of such inquiry or investigation;

 

(e) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent, custodian, nominee or attorney appointed by it with due care hereunder; and

 

(f) the permissive rights of the Trustee enumerated herein shall not be construed as duties.

 

In no event shall the Trustee be liable for any special, punitive or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action. The Trustee shall not be charged with knowledge of any Default or Event of Default (other than a Default in the payment of principal of (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable), or accrued and unpaid interest on, any of the Notes) unless a Responsible Officer of the Trustee has received written notice thereof in the manner provided in this Indenture, which notice references the Notes and the Indenture.

 

Section 7.03              No Responsibility for Recitals, Etc. The recitals contained herein and in the Notes (except in the Trustee’s certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture.

 

Section 7.04              Individual Rights or the Trustee, Paying Agents, Conversion Agents or Note Registrar. The Trustee, any Paying Agent, any Conversion Agent or Note Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise engage in business or deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee, Paying Agent, Conversion Agent or Note Registrar. Nothing herein shall obligate the Trustee, the Conversion Agent, the Notes Registrar or the Paying Agent to account for any profits earned from any business or transactional relationship. The Trustee may have interest in or may be providing or may in the future provide financial or other services to other parties. The Conversion Agent, Paying Agent and the Notes Registrar may do the same with like rights.

 

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Section 7.05              Monies and ADSs to Be Held in Trust. All monies and ADSs received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money and ADSs held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money or ADSs received by it hereunder except as may be agreed from time to time by the Company and the Trustee.

 

Section 7.06              Compensation and Expenses of Trustee, Payment Agents, Conversion Agents and Note Registrar. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) as mutually agreed to in writing between and executed by the Trustee and the Company, and the Company will pay or reimburse the Trustee upon its request for all expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture in any capacity thereunder (including the reasonable compensation and the expenses and disbursements of its agents and counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as shall have been caused by its gross negligence, willful misconduct or bad faith. Any payment by the Company to the Trustee shall be made by wire transfer in immediately available funds. The Company also covenants to indemnify the Trustee (which for purposes of this Section 7.06 shall be deemed to include its directors, officers, employees and agents) in any capacity under this Indenture and any other document or transaction entered into in connection herewith and its agents and any authenticating agent for, and to hold them harmless against, any loss, claim, damage, liability or expense incurred without gross negligence, willful misconduct or bad faith on the part of the Trustee, its officers, directors, agents or employees, or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the costs and expenses of defending themselves against any claim of liability in the premises. The obligations of the Company under this Section 7.06 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a senior claim to which the Notes are hereby made subordinate on all money or property held or collected by the Trustee, except, subject to the effect of Section 6.05, funds held in trust herewith for the benefit of the Holders of particular Notes. The Trustee’s right to receive payment of any amounts due under this Section 7.06 shall not be subordinate to any other liability or indebtedness of the Company. The obligation of the Company under this Section 7.06 shall survive the satisfaction and discharge of this Indenture and the earlier resignation or removal or the Trustee. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The indemnification provided in this Section 7.06 shall extend to the officers, directors, agents and employees of the Trustee.

 

Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 6.01(i) or Section 6.01(j) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws.

 

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Section 7.07              Officers’ Certificate as Evidence. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of gross negligence, willful misconduct and bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers’ Certificate and/or an Opinion of Counsel delivered to the Trustee, and such Officers’ Certificate and/or Opinion of Counsel, in the absence of gross negligence, willful misconduct and bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.

 

Section 7.08              Eligibility of Trustee. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least US$50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

 

Section 7.09              Resignation or Removal of Trustee. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof to the Holders at their addresses as they shall appear on the Note Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the Holders, the resigning Trustee may, upon ten Business Days’ notice to the Company and the Holders, petition any court of competent jurisdiction for the appointment of a successor trustee, or any Holder who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 6.11, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee.

 

(b) In case at any time any of the following shall occur:

 

(i) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.08 and shall fail to resign after written request therefor by the Company or by any such Holder, or

 

(ii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

 

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then, in either case, the Company may by a Board Resolution remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 6.11, any Holder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee.

 

(c) The Holders of a majority in aggregate principal amount of the Notes at the time outstanding, as determined in accordance with Section 8.04, may at any time remove the Trustee and nominate a successor trustee that shall be deemed appointed as successor trustee unless within ten days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Holder, upon the terms and conditions and otherwise as in Section 7.09(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee.

 

(d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 7.09 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.10.

 

Section 7.10              Acceptance by Successor Trustee. Any successor trustee appointed as provided in Section 7.09 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 7.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a senior claim to which the Notes are hereby made subordinate on all money or property held or collected by such trustee as such, except for funds held in trust for the benefit of Holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 7.06.

 

No successor trustee shall accept appointment as provided in this Section 7.10 unless at the time of such acceptance such successor trustee shall be eligible under the provisions of Section 7.08.

 

Upon acceptance of appointment by a successor trustee as provided in this Section 7.10, each of the Company and the successor trustee, at the written direction and at the expense of the Company shall mail or cause to be mailed notice of the succession of such trustee hereunder to the Holders at their addresses as they shall appear on the Note Register. If the Company fails to mail such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Company.

 

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Section 7.11              Succession by Merger, Etc. Any corporation or other entity into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation or other entity resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation or other entity succeeding to all or substantially all of the corporate trust business of the Trustee (including the administration of this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided that in the case of any corporation or other entity succeeding to all or substantially all of the corporate trust business of the Trustee such corporation or other entity shall be eligible under the provisions of Section 7.08.

 

In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor trustee or to authenticate Notes in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation.

 

Section 7.12              Trustee’s Application for Instructions from the Company. Any application by the Trustee for written instructions from the Company (other than with regard to any action proposed to be taken or omitted to be taken by the Trustee that affects the rights of the Holders of the Notes under this Indenture) may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer that the Company has indicated to the Trustee should receive such application actually receives such application, unless any such officer shall have consented in writing to any earlier date), unless, prior to taking any such action (or the effective date in the case of any omission), the Trustee shall have received written instructions in accordance with this Indenture in response to such application specifying the action to be taken or omitted.

 

ARTICLE 8
CONCERNING THE HOLDERS

 

Section 8.01              Action by Holders. Whenever in this Indenture it is provided that the Holders of a specified percentage of the aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (b) by the record of the Holders voting in favor thereof at any meeting of Holders duly called and held in accordance with the provisions of Article 9, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Holders, or (d) pursuant to applicable procedures of the Depositary. Whenever the Company or the Trustee solicits the taking of any action by the Holders of the Notes, the Company or the Trustee may fix, but shall not be required to, in advance of such solicitation, a date as the record date for determining Holders entitled to take such action. The record date if one is selected shall be not more than fifteen days prior to the date of commencement of solicitation of such action.

 

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Section 8.02              Proof of Execution by Holders. Subject to the provisions of Section 7.01, Section 7.02 and Section 9.05, proof of the execution of any instrument by a Holder or its agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or the Depositary or in such manner as shall be satisfactory to the Trustee. The holding of Notes shall be proved by the Note Register or by a certificate of the Note Registrar. The record of any Holders’ meeting shall be proved in the manner provided in Section 9.06.

 

Section 8.03              Who Are Deemed Absolute Owners. The Company, the Trustee, any authenticating agent, any Paying Agent, any Conversion Agent and any Note Registrar may deem the Person in whose name a Note shall be registered upon the Note Register to be, and may treat it as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon made by any Person other than the Company or any Note Registrar) for the purpose of receiving payment of or on account of the principal of and (subject to Section 2.03) accrued and unpaid interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any Paying Agent nor any Conversion Agent nor any Note Registrar shall be affected by any notice to the contrary. All such payments or deliveries so made to any Holder for the time being, or upon its order, shall be valid, and, to the extent of the sums or ADSs so paid or delivered, effectual to satisfy and discharge the liability for monies payable or ADSs deliverable upon any such Note. Notwithstanding anything to the contrary in this Indenture or the Notes following an Event of Default, any Holder of a beneficial interest in a Global Note may directly enforce against the Company, without the consent, solicitation, proxy, authorization or any other action of the Depositary or any other Person, such Holder’s right to exchange such beneficial interest for a Note in certificated form in accordance with the provisions of this Indenture.

 

Section 8.04              Company-Owned Notes Disregarded. In determining whether the Holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes that are owned by the Company or by any Affiliate of the Company shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes that a Responsible Officer knows are so owned shall be so disregarded. Notes so owned that have been pledged in good faith may be regarded as outstanding for the purposes of this Section 8.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgee’s right to so act with respect to such Notes and that the pledgee is not the Company or an Affiliate of the Company. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers’ Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described Persons; and, subject to Section 7.01, the Trustee shall be entitled to accept such Officers’ Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination.

 

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Section 8.05              Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the Holders of the percentage of the aggregate principal amount of the Notes specified in this Indenture in connection with such action, any Holder of a Note that is shown by the evidence to be included in the Notes the Holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the Holder of any Note shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Note and of any Notes issued in exchange or substitution therefor or upon registration of transfer thereof, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor or upon registration of transfer thereof.

 

ARTICLE 9
HOLDERS’ MEETINGS

 

Section 9.01              Purpose of Meetings. A meeting of Holders may be called at any time and from time to time pursuant to the provisions of this Article 9 for any of the following purposes:

 

(a) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article 6;

 

(b) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article 7;

 

(c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 10.02; or

 

(d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law.

 

Section 9.02              Call of Meetings by Trustee. The Trustee may at any time call a meeting of Holders to take any action specified in Section 9.01, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Holders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 8.01, shall be mailed to Holders of such Notes at their addresses as they shall appear on the Note Register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty nor more than ninety days prior to the date fixed for the meeting.

 

Any meeting of Holders shall be valid without notice if the Holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the Holders of all Notes then outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice.

 

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Section 9.03              Call of Meetings by Company or Holders. In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% of the aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Holders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Holders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 9.01, by mailing notice thereof as provided in Section 9.02.

 

Section 9.04              Qualifications for Voting. To be entitled to vote at any meeting of Holders a Person shall (a) be a Holder of one or more Notes on the record date pertaining to such meeting or (b) be a Person appointed by an instrument in writing as proxy by a Holder of one or more Notes on the record date pertaining to such meeting. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

 

Section 9.05              Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit.

 

The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders as provided in Section 9.03, in which case the Company or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting.

 

Subject to the provisions of Section 8.04, at any meeting of Holders each Holder or proxyholder shall be entitled to one vote for each US$1,000 principal amount of Notes held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by it or instruments in writing as aforesaid duly designating it as the proxy to vote on behalf of other Holders. Any meeting of Holders duly called pursuant to the provisions of Section 9.02 or Section 9.03 may be adjourned from time to time by the Holders of a majority in aggregate principal amount of Notes represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.

 

Section 9.06              Voting. The vote upon any resolution submitted to any meeting of Holders shall be by written ballot on which shall be subscribed the signatures of the Holders or of their representatives by proxy and the outstanding principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 9.02. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.

 

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Any record so signed and verified shall be conclusive evidence of the matters therein stated.

 

Section 9.07              No Delay of Rights by Meeting. Nothing contained in this Article 9 shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Holders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Holders under any of the provisions of this Indenture or of the Notes.

 

ARTICLE 10
SUPPLEMENTAL INDENTURES

 

Section 10.01          Supplemental Indentures Without Consent of Holders. Without the consent of any Holder, the Company, when authorized by the resolutions of the Board of Directors and the Trustee, at the Company’s expense, may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes:

 

(a) to cure any ambiguity, omission, defect or inconsistency in this Indenture that does not, individually or in the aggregate adversely, affect the rights of any Holder of the Notes in any respect;

 

(b) to provide for the assumption by a Continuing Entity of the obligations of the Company under this Indenture pursuant to Article 11;

 

(c) to add guarantees with respect to the Notes;

 

(d) to secure the Notes;

 

(e) to add to the covenants for the benefit of the Holders or surrender any right or power conferred upon the Company;

 

(f) to make any change that does not, individually or in the aggregate, adversely affect the rights of any Holder in any respect; or

 

(g) to conform the provisions of this Indenture or the Notes to the “Description of Notes” section of the Offering Memorandum.

 

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Upon the written request of the Company, the Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture that affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise.

 

Any supplemental indenture authorized by the provisions of this Section 10.01 may be executed by the Company and the Trustee without the consent of the Holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 10.02.

 

Section 10.02          Supplemental Indentures with Consent of Holders. With the consent (evidenced as provided in Article 8) of the Holders of at least a majority in aggregate principal amount of the Notes then outstanding (determined in accordance with Article 8 and including, without limitation, consents obtained in connection with a purchase of, or tender or exchange offer for, Notes), the Company, when authorized by the resolutions of the Board of Directors and the Trustee, at the Company’s expense, may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the Holders; provided, however, that, without the consent of each Holder of an outstanding Note affected, no such supplemental indenture shall:

 

(a) reduce the percentage in aggregate principal amount of Notes whose Holders must consent to an amendment of this Indenture or waive any past Default;

 

(b) reduce the rate of, or extend the stated time for payment of, interest on any Note;

 

(c) reduce the principal of, or extend the Maturity Date, of any Note;

 

(d) make any change that impairs or adversely affects the conversion rights of any Notes;

 

(e) reduce the Tax Redemption Price on the Tax Redemption Date, the Repurchase Price on the Repurchase Date or the Fundamental Change Repurchase Price of any Note, or amend or modify in any manner adverse to the Holders the Company’s obligation to make such payments, whether through an amendment or waiver of provisions in the covenants, definitions or otherwise;

 

(f) make any Note payable in a currency other than that stated in the Note;

 

(g) change the ranking of the Notes;

 

(h) impair the right of any Holder to receive payment of principal of, and interest on, such Holder’s Notes on or after the due dates therefor, or to institute suit for the enforcement of any payment on or with respect to such Holder’s Notes;

 

(i) change the obligation of the Company to pay Additional Amounts on any Note; or

 

(j) make any change in this Article 10 that requires each Holder’s consent or in the waiver provisions in Section 6.02 or Section 6.09.

 

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Upon the written request of the Company, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid and subject to Section 10.05, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee’s own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.

 

Holders do not need under this Section 10.02 to approve the particular form of any proposed supplemental indenture. It shall be sufficient if such Holders approve the substance thereof. After any supplemental indenture becomes effective under Section 10.01 or this Section 10.02, the Company shall mail to the Holders a notice briefly describing such supplemental indenture. However, the failure to give such notice to all the Holders, or any defect in the notice, will not impair or affect the validity of the supplemental indenture.

 

Section 10.03          Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article 10, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the Holders shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.

 

Section 10.04          Notation on Notes. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article 10 may, at the Company’s expense, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company’s expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 17.11) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding.

 

Section 10.05          Evidence of Compliance of Supplemental Indenture to Be Furnished Trustee. In addition to the documents required by Section 17.06, the Trustee shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article 10 and is permitted or authorized by this Indenture.

 

ARTICLE 11
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE

 

Section 11.01          Company May Consolidate, Etc. on Certain Terms. Subject to the provisions of Section 11.02, the Company shall not consolidate with, merge with or into, or sell, convey, transfer or lease all or substantially all of its properties and assets to another Person, unless:

 

(a) the resulting, surviving or transferee Person (the “Continuing Entity”), if not the Company, shall be a corporation organized and existing under the laws of any State of the United States of America or the District of Columbia, or a company organized and existing under the laws of the Cayman Islands, and the Continuing Entity (if not the Company) shall expressly assume, by supplemental indenture all of the obligations of the Company under the Notes and this Indenture (including, for the avoidance of doubt, the obligation to pay Additional Amounts pursuant to Section 4.07(a));

 

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(b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing under this Indenture; and

 

(c) if, pursuant to Section 14.07, upon the occurrence of any such consolidation, merger, sale, conveyance, transfer or lease the Notes would become convertible into securities issued by an issuer other than the Continuing Entity, such other issuer shall fully and unconditionally guarantee on a senior basis the resulting Continuing Entity’s obligations under the Notes.

 

For purposes of this Section 11.01, the sale, conveyance, transfer or lease of all or substantially all of the properties and assets of one or more Subsidiaries of the Company to another Person, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the sale, conveyance, transfer or lease of all or substantially all of the properties and assets of the Company to another Person.

 

Section 11.02          Successor Corporation to Be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or lease and upon the assumption by the Continuing Entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and accrued and unpaid interest on all of the Notes (including, for the avoidance of doubt, any Additional Amounts), the due and punctual delivery or payment, as the case may be, of any consideration due upon conversion of the Notes (including, for the avoidance of doubt, any Additional Amounts) and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such Continuing Entity (if not the Company) shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, except in the case of a lease of all or substantially all of the Company’s properties and assets. Such Continuing Entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such Continuing Entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes that previously shall have been signed and delivered by the Officers of the Company to the Trustee for authentication, and any Notes that such Continuing Entity thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale, conveyance or transfer (but not in the case of a lease), upon compliance with this Article 11 the Person named as the “Company” in the first paragraph of this Indenture (or any successor that shall thereafter have become such in the manner prescribed in this Article 11) may be dissolved, wound up and liquidated at any time thereafter and, except in the case of a lease, such Person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture and the Notes.

 

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In case of any such consolidation, merger, sale, conveyance, transfer or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate.

 

Section 11.03          Opinion of Counsel to Be Given to Trustee. No consolidation, merger, sale, conveyance, transfer or lease shall be effective unless the Trustee shall receive an Officers’ Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or lease and any such assumption and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with the provisions of this Article 11.

 

ARTICLE 12
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS

 

Section 12.01          Indenture and Notes Solely Corporate Obligations. No recourse for the payment of the principal of or accrued and unpaid interest on any Note, nor for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, nor because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, Officer or director or Subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes.

 

ARTICLE 13
INTENTIONALLY OMITTED

 

ARTICLE 14
CONVERSION OF NOTES

 

Section 14.01          Conversion Privilege. Subject to and upon compliance with the provisions of this Article 14, each Holder of a Note shall have the right, at such Holder’s option, at any time prior to the close of business on the third Business Day immediately preceding the Maturity Date, to convert all or any portion (if the portion to be converted is US$1,000 principal amount or an integral multiple thereof) of such Note at an initial conversion rate of 8.2799 ADSs (subject to adjustment as provided in Section 14.04, the “Conversion Rate”) per US$1,000 principal amount of Notes (subject to the settlement provisions of Section 14.02, the “Conversion Obligation”).

 

Section 14.02          Conversion Procedure; Settlement Upon Conversion.

(a)                            Upon conversion of any Note, the Company shall cause to be delivered to the converting Holder, in respect of each US$1,000 principal amount of Notes being converted, a number of ADSs equal to the Conversion Rate, together with a cash payment, if applicable, in lieu of any fractional ADS in accordance with subsection (j) of this Section 14.02, on the third Business Day immediately following the relevant Conversion Date.

 

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(b) Subject to Section 14.02(e), before any Holder of a Note shall be entitled to convert a Note as set forth above, such Holder shall (i) in the case of a Global Note, comply with the procedures of the Depositary in effect at that time for book-entry transfer to the Conversion Agent through the facilities of the Depositary and, if required, pay funds to the Issuer directly equal to interest payable on the next Interest Payment Date to which such Holder is not entitled as set forth in Section 14.02(i) and, if required, pay documentary, stamp or similar issue or transfer tax, if any, and provide an original signed notice of conversion with a medallion guaranty stamp on the reverse side of the Note as set forth in the Form of Notice of Conversion (a “Notice of Conversion”) and/or other appropriate clearing agency message and effect book-entry transfer or delivery of the Notes, together with necessary endorsements and (ii) in the case of a Physical Note (1) complete and manually sign Notice of Conversion or a facsimile of the Notice of Conversion, (2) deliver the original Notice of Conversion with a medallion guaranty stamp and/or appropriate clearing agency message, which is irrevocable, and the Note to the Conversion Agent and state in writing therein the principal amount of Notes to be converted and the name or names (with addresses) in which such Holder wishes the certificate or certificates for any ADSs to be delivered upon settlement of the Conversion Obligation to be registered, (3) furnish appropriate endorsements and transfer documents, and, ADS delivery instructions and pay applicable Depositary fees directly, (4) if required, pay to the Issuer directly funds equal to interest payable on the next Interest Payment Date to which such Holder is not entitled as set forth in Section 14.02(i) and (5) if required, pay any tax or duty which may be payable in respect of any transfer involving the issue or delivery of the ADSs in the name of a Person other than such Holder. The Trustee (and if different, the Conversion Agent) shall notify the Company of any conversion pursuant to this Article 14 on the Conversion Date for such conversion. No Notice of Conversion with respect to any Notes may be surrendered by a Holder thereof if such Holder has also delivered a Repurchase Notice or Fundamental Change Repurchase Notice to the Company in respect of such Notes and not validly withdrawn such Repurchase Notice or Fundamental Change Repurchase Notice in accordance with Section 15.03.

 

If more than one Note shall be surrendered for conversion at one time by the same Holder, the Conversion Obligation with respect to such Notes shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted thereby) so surrendered.

 

(c) A Note shall be deemed to have been converted immediately prior to the close of business on the date (the “Conversion Date”) that the Holder has complied with the requirements set forth in subsection (b) above, provided that such procedures must be complied with on or prior to 2:00 PM (New York time) on a Business Day in order for the conversion to be processed on the same date. The Company shall issue or cause to be issued, and deliver to such Holder, or such Holder’s nominee or nominees, certificates or a book-entry transfer through the Depositary for the full number of ADSs to which such Holder shall be entitled in satisfaction of the Conversion Obligation.

 

(d) In case any Note shall be surrendered for partial conversion, the Company shall execute and the Trustee shall authenticate and deliver to or upon the written order of the Holder of the Note so surrendered a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note, without payment of any service charge by the converting Holder but, if required by the Company or Trustee, with payment of a sum sufficient to cover any transfer tax or similar governmental charge required by law or that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such conversion being different from the name of the Holder of the old Notes surrendered for such conversion.

 

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(e) If a Holder submits a Note for conversion, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of the ADSs upon conversion, unless the tax is due because the Holder requests such ADSs to be issued in a name other than the Holder’s name, in which case the Holder shall pay that tax. The ADS Depositary may refuse to deliver the certificates representing the ADSs being issued in a name other than the Holder’s name until the ADS Depositary receives a sum sufficient to pay any tax that is due by such Holder in accordance with the immediately preceding sentence. The Holder shall pay to the ADS Depositary the applicable fees and expenses of the ADS Depositary for the issuance of all ADSs deliverable upon conversion.

 

(f) The Company shall undertake to maintain, as long as the Notes are outstanding, the effectiveness of a registration statement on Form F-6 relating to the ADSs and an adequate number of ADSs available for issuance thereunder such that ADSs can be delivered in accordance with the terms of this Indenture, the Notes and the Deposit Agreement upon conversion of the Notes.

 

(g) Except as provided in Section 14.04, no adjustment shall be made for dividends on any ADSs issued upon the conversion of any Note as provided in this Article 14.

 

(h) Upon the conversion of an interest in a Global Note, the Trustee, or the Custodian at the direction of the Trustee, shall make a notation on such Global Note as to the reduction in the principal amount represented thereby. The Company shall notify the Trustee in writing of any conversion of Notes effected through any Conversion Agent other than the Trustee.

 

(i) Upon conversion, a Holder shall not receive any separate cash payment or any Additional ADSs accrued and unpaid interest, if any, except as set forth below. The Company’s settlement of the Conversion Obligation shall be deemed to satisfy in full its obligation to pay the principal amount of the Note and accrued and unpaid interest, if any, to, but not including, the Conversion Date. As a result, accrued and unpaid interest, if any, to, but not including, the Conversion Date shall be deemed to be paid in full rather than cancelled, extinguished or forfeited. Notwithstanding the foregoing, if Notes are converted after the close of business on a Regular Record Date, Holders of such Notes as of the close of business on such Regular Record Date will receive the full amount of interest payable on such Notes on the corresponding Interest Payment Date notwithstanding the conversion. Notes surrendered for conversion during the period from the close of business on any Regular Record Date to the open of business on the immediately following Interest Payment Date must be accompanied by funds equal to the amount of interest payable on the Notes so converted; provided that no such payment shall be required (1) for Notes converted after the close of business on the Regular Record Date immediately preceding the Maturity Date and before the close of business on the third Business Day immediately preceding the Maturity Date; (2) if the Company has specified a Tax Redemption Date that is after a Regular Record Date and on or prior to the Scheduled Trading Day immediately following the corresponding Interest Payment Date; (3) if the Company has specified a Fundamental Change Repurchase Date that is after a Regular Record Date and on or prior to the Scheduled Trading Day immediately following the corresponding Interest Payment Date; or (4) to the extent of any Defaulted Amounts, if any Defaulted Amounts exist at the time of conversion with respect to such Note.

 

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(j) The Person in whose name the certificate for any ADSs delivered upon conversion is registered shall be deemed to become the holder of record of such ADSs as of the close of business on the relevant Conversion Date. Upon a conversion of Notes, such Person shall no longer be a Holder of such Notes surrendered for conversion.

 

(k) The Company shall not cause to be delivered any fractional ADSs upon conversion of the Notes and shall instead pay cash in lieu of any fractional ADS issuable upon conversion based on the Last Reported Sale Price of the ADSs on the relevant Conversion Date.

 

Section 14.03          Increased Conversion Rate Applicable to Certain Notes Surrendered in Connection with Make-Whole Fundamental Changes or Tax Redemptions. (a) If (i) either (X) a Make-Whole Fundamental Change occurs prior to the Maturity Date or (Y) the Company delivers a Tax Redemption Notice, and in each case, (ii) a Holder elects to convert its Notes in connection with such Make-Whole Fundamental Change or such Tax Redemption, then the Company shall, under the circumstances described below, increase the Conversion Rate for the Notes so surrendered for conversion by a number of additional ADSs (the “Additional ADSs”), as described below. A conversion of Notes shall be deemed for these purposes to be “in connection with” such Make-Whole Fundamental Change if the relevant Notice of Conversion is received by the Conversion Agent from, and including, the Effective Date of the Make-Whole Fundamental Change to, and including, the third Business Day immediately prior to the related Fundamental Change Repurchase Date (or, in the case of a Make-Whole Fundamental Change that would have been a Fundamental Change but for the proviso in clause (b) of the definition thereof, the 35th Trading Day immediately following the Effective Date of such Make-Whole Fundamental Change). A conversion of Notes shall be deemed for these purposes to be “in connection with” a Tax Redemption if the relevant Notice of Conversion is received by the Conversion Agent from, and including, the date the Company delivers a Tax Redemption Notice to, and including, the Business Day immediately prior to the related Tax Redemption Date (or if the Company fails to pay the Tax Redemption Price (such later date on which the Company pays the Tax Redemption Price)).

 

(b) Upon surrender of Notes for conversion in connection with a Make-Whole Fundamental Change, the Company cause to be delivered ADSs, including the Additional ADSs, in accordance with Section 14.02; provided, however, that if, at the effective time of a Make-Whole Fundamental Change described in clause (b) of the definition of Fundamental Change, the Reference Property is composed entirely of cash, for any conversion of Notes following the Effective Date of such Make-Whole Fundamental Change, the Conversion Obligation shall be calculated based solely on the ADS Price for the transaction and shall be deemed to be an amount of cash per US$1,000 principal amount of converted Notes equal to the Conversion Rate (including any adjustment for Additional ADSs), multiplied by such ADS Price. The Company shall notify the Holders of Notes, the Trustee, the Conversion Agent and the Paying Agent of the Effective Date of any Make-Whole Fundamental Change and issue a press release announcing such Effective Date no later than five Business Days after such Effective Date.

 

(c) The number of Additional ADSs, if any, by which the Conversion Rate shall be increased shall be determined by reference to the table below, based on (i) the date on which the Make-Whole Fundamental Change occurs or becomes effective or, in the case of a Tax Redemption, the date on which the Company delivers a Tax Redemption Notice (in each case, the “Effective Date”) and (ii) in the case of a Make-Whole Fundamental Change, the price paid (or deemed to be paid) per ADS in connection with such Make-Whole Fundamental Change or, in the case of a Tax Redemption, the average of the Last Reported Sale Prices of the ADSs over the five Trading-Day period ending on, and including, the Trading Day immediately preceding the date on which the Company delivers a Tax Redemption Notice (in each case, the “ADS Price”). If the holders of ADSs receive only cash in a Make-Whole Fundamental Change described in clause (b) of the definition of Fundamental Change, the ADS Price shall be the cash amount paid per share. Otherwise, the ADS Price shall be the average of the Last Reported Sale Prices of the ADSs for each Trading Day during the five Trading-Day period ending on, and including, the Trading Day immediately preceding the Effective Date of the Make-Whole Fundamental Change. The Board of Directors shall make appropriate adjustments to the ADS Price, in its good faith determination, to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Ex-Dividend Date of the event occurs, during such five consecutive Trading-Day period.

 

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(d) The ADS Prices set forth in the column headings of the table below shall be adjusted as of any date on which the Conversion Rate of the Notes is otherwise adjusted. The adjusted ADS Prices shall equal the ADS Prices applicable immediately prior to such adjustment, multiplied by a fraction, the numerator of which is the Conversion Rate immediately prior to such adjustment giving rise to the ADS Price adjustment and the denominator of which is the Conversion Rate as so adjusted. The number of Additional ADSs set forth in the table below shall be adjusted in the same manner and at the same time as the Conversion Rate as set forth in Section 14.04.

 

(e) The following table sets forth the number of Additional ADSs to be added to the Conversion Rate pursuant to this Section 14.03 for each ADS Price and Effective Date set forth below:

 

Effective Date

ADS Price

US$91.15 US$100.00 US$110.00 US$120.00 US$120.77 US$130.00 US$140.00 US$150.00 US$175.00 US$200.00 US$250.00 US$300.00
August 6, 2014 2.6910 2.2202 1.8064 1.4840 1.4619 1.2289 1.0243 0.8583 0.5611 0.3718 0.1623 0.0639
August 15, 2015 2.6910 2.2715 1.8330 1.4937 1.4706 1.2271 1.0148 0.8438 0.5412 0.3520 0.1474 0.0545
August 15, 2016 2.6910 2.3092 1.8425 1.4846 1.4603 1.2060 0.9864 0.8114 0.5068 0.3209 0.1267 0.0425
August 15, 2017 2.6910 2.3201 1.8206 1.4427 1.4173 1.1529 0.9278 0.7511 0.4512 0.2748 0.0990 0.0278
August 15, 2018 2.6910 2.2783 1.7402 1.3432 1.3169 1.0464 0.8219 0.6499 0.3691 0.2124 0.0661 0.0123
August 15, 2019 2.6910 2.0256 1.5083 1.1409 1.1166 0.8679 0.6632 0.5085 0.2640 0.1363 0.0298 0.0042
August 15, 2020 2.6910 1.8808 1.3189 0.9203 0.8947 0.6393 0.4423 0.3048 0.1173 0.0417 0.0051 0.0021
August 15, 2021 2.6910 1.7201 0.8110 0.0534 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
                           

The exact ADS Prices and Effective Dates may not be set forth in the table above, in which case:

 

(i) if the ADS Price is between two ADS Prices in the table above or the Effective Date is between two Effective Dates in the table, the number of Additional ADSs shall be determined by a straight-line interpolation between the number of Additional ADSs set forth for the higher and lower ADS Prices and the earlier and later Effective Dates based on a 365-day year, as applicable;

 

(ii) if the ADS Price is greater than US$300.00 per share (subject to adjustment in the same manner as the ADS Prices set forth in the column headings of the table above pursuant to subsection (d) above), no Additional ADSs shall be added to the Conversion Rate; and

 

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(iii) if the ADS Price is less than US$91.15 per share (subject to adjustment in the same manner as the ADS Prices set forth in the column headings of the table above pursuant to subsection (d) above), no Additional ADSs shall be added to the Conversion Rate.

 

Notwithstanding the foregoing, in no event shall the total number of ADSs issuable upon conversion exceed 10.9709 per US$1,000 principal amount of Notes, subject to adjustment in the same manner as the Conversion Rate pursuant to Section 14.04.

 

(f) Nothing in this Section 14.03 shall prevent an adjustment to the Conversion Rate pursuant to Section 14.04 in respect of a Make-Whole Fundamental Change.

 

Section 14.04          Adjustment of Conversion Rate. If the number of Class A Ordinary Shares represented by the ADSs is changed for any reason other than one or more of the events described in this Section 14.04, the Company shall make an appropriate adjustment to the Conversion Rate such that the number of Class A Ordinary Shares represented by the ADSs deliverable upon conversion of any Notes is not affected by such change.

 

Notwithstanding the adjustment provisions described in this Section 14.04, if the Company distributes to all or substantially all holders of the Ordinary Shares any cash, rights, options, warrants, shares of capital stock or similar equity interest, evidences of indebtedness or other assets or property of the Company (but excluding Expiring Rights) and, in lieu of a corresponding distribution to holders of the ADSs, the ADSs shall instead represent, in addition to Class A Ordinary Shares, such cash, rights, options, warrants, shares of capital stock or similar equity interest, evidences of indebtedness or other assets or property of the Company, then an adjustment to the Conversion Rate described in this Section 14.04 shall not be made unless and until a corresponding distribution (if any) is made to holders of the ADSs, and in which case such adjustment to the Conversion Rate shall be based on the distribution made to the holders of the ADSs and not on the distribution made to the holders of the Ordinary Shares. However, in the event that the Company issues or distributes to all or substantially all holders of the Ordinary Shares any Expiring Rights, notwithstanding the immediately preceding sentence, the Company shall adjust the Conversion Rate pursuant to Section 14.04(b) (in the case of Expiring Rights entitling holders of the Ordinary Shares for a period of not more than 45 calendar days after the announcement date of such issuance to subscribe for or purchase Ordinary Shares or ADSs) or Section 14.04(c) (in the case of all other Expiring Rights). “Expiring Rights” means any rights, options or warrants to purchase Ordinary Shares or ADSs that expire on or prior to the Maturity Date.

 

For the avoidance of doubt, if any event described in this Section 14.04(a) to 14.04(c) (inclusive) results in a change to the number of Class A Ordinary Shares represented by the ADSs, then such a change shall be deemed to satisfy the Company’s obligation to adjust the Conversion Rate on account of such event to the extent, but only to the extent, that such change reflects the adjustment to the Conversion Rate that would otherwise have been required on account of such event.

 

Subject to the foregoing, the Conversion Rate shall be adjusted from time to time by the Company if any of the following events occurs, except that the Company shall not make any adjustments to the Conversion Rate if Holders of the Notes participate (other than in the case of a share split or share combination), at the same time and upon the same terms as holders of the ADSs and solely as a result of holding the Notes, in any of the transactions described in this Section 14.04, without having to convert their Notes, as if they held a number of ADSs equal to the Conversion Rate in effect immediately prior to the effective time for such adjustment, multiplied by the principal amount (expressed in thousands) of Notes held by such Holder.

 

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(a) If the Company exclusively issues Ordinary Shares as a dividend or distribution on its Ordinary Shares, or if the Company effects a share split or share combination, the Conversion Rate shall be adjusted based on the following formula:

 

CR1 = CR0 x OS1
OS0

 

 

where,

 

CR0= the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution, or immediately prior to the open of business on the Adjustment Effective Date of such share split or combination, as applicable;
   
CR1 = the Conversion Rate in effect immediately after the close of business on such Record Date or immediately after the open of business on such Adjustment Effective Date, as applicable;
   
OS0 = the number of Ordinary Shares outstanding immediately prior to the close of business on such Record Date or immediately prior to the open of business on such Adjustment Effective Date, as applicable; and
   
OS1 = the number of Ordinary Shares outstanding immediately after giving effect to such dividend, distribution, share split or share combination.

 

Any adjustment made under this Section 14.04(a) shall become effective immediately after the close of business on the Record Date for such dividend or distribution, or immediately after the open of business on the Adjustment Effective Date for such share split or share combination, as applicable. If any dividend or distribution of the type described in this Section 14.04(a) is declared but not so paid or made, the Conversion Rate shall be immediately readjusted, effective as of the date the Board of Directors determines not to pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” and “OS1” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

(b) If the Company issues to all or substantially all holders of its Ordinary Shares or ADSs any rights, options or warrants entitling them for a period of not more than 45 calendar days after the announcement date of such issuance to subscribe for or purchase Ordinary Shares or ADSs at a price per Ordinary Share or ADS less than the average of the Last Reported Sale Prices of ADSs (in the case of any rights, options or warrants entitling holders thereof to subscribe for or purchase Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of such issuance, the Conversion Rate shall be increased based on the following formula:

 

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CR1 = CR0 x OS0 + X
OS0 + Y

  

where,

 

CR0 = the Conversion Rate in effect immediately prior to the close of business on the Record Date for such issuance;
   
CR1 = the Conversion Rate in effect immediately after the close of business on such Record Date;
   
OS0 = the number of Ordinary Shares outstanding immediately prior to the close of business on such Record Date;
   
X = the total number of Ordinary Shares issuable pursuant to such rights, options or warrants or, in the case of any rights, options or warrants entitling holders thereof to subscribe for or purchase ADSs, the total number of Class A Ordinary Shares represented by the total number of ADSs issuable pursuant to such rights, options or warrants; and
   
Y = the number of Ordinary Shares equal to the aggregate price payable to exercise such rights, options or warrants, divided by the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of the issuance of such rights, options or warrants.

 

Any increase made under this Section 14.04(b) shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the close of business on the Record Date for such issuance. To the extent that the Ordinary Shares or ADSs, as the case may be, are not delivered after the expiration of such rights, options or warrants, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect had the increase with respect to the issuance of such rights, options or warrants been made on the basis of delivery of only the number of Ordinary Shares or ADSs, as the case may be, actually delivered. If such rights, options or warrants are not so issued, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect if such Record Date for such issuance had not occurred. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

For purposes of this Section 14.04(b), in determining whether any rights, options or warrants entitle the holders to subscribe for or purchase Ordinary Shares or ADSs at less than such average of the Last Reported Sale Prices of the ADSs (in the case of any rights, options, warrants entitling holders thereof to subscribe for or purchase Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the date of announcement of such issuance, and in determining the aggregate offering price of such Ordinary Shares or ADSs, as the case may be, there shall be taken into account any consideration received by the Company for such rights, options or warrants and any amount payable on exercise or conversion thereof, the value of such consideration, if other than cash, to be reasonably determined by the Board of Directors or a committee thereof in good faith.

 

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(c) If the Company distributes shares of its Capital Stock, evidences of its indebtedness, other assets or property or rights, options or warrants to acquire its Capital Stock or other securities, to all or substantially all holders of the Ordinary Shares, excluding (i) dividends, rights, options or warrants as to which an adjustment has been effected pursuant to Section 14.04(a) or Section 14.04(b), (ii) dividends or distributions paid exclusively in cash as to which an adjustment has been effected pursuant to Section 14.04(d) or Section 14.04(e), and (iii) Spin-Offs (as defined below) as to which the provisions set forth below in this Section 14.04(c) shall apply (any of such shares of Capital Stock, evidences of indebtedness, other assets or property or rights, options or warrants to acquire Capital Stock or other securities of the Company, the “Distributed Property”), then the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x SP0
SP0 - FMV

 

 

where,

 

CR0 = the Conversion Rate in effect immediately prior to the close of business on the Record Date for such distribution;
   
CR1 = the Conversion Rate in effect immediately after the close of business on such Record Date;
   
SP0= the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex- Dividend Date for such distribution; and
   
FMV = the fair market value (as reasonably determined by the Board of Directors or a committee thereof in good faith) of the Distributed Property with respect to each outstanding Ordinary Share on the Ex-Dividend Date for such distribution.

 

Any increase made under the portion of this Section 14.04(c) above shall become effective immediately after the close of business on the Record Date for such distribution. If such distribution is not so paid or made, the Conversion Rate shall be decreased to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

 

If the Board of Directors determines the “FMV” (as defined above) of any distribution for purposes of this Section 14.04(c) by reference to the actual or when-issued trading market for any securities, in doing so it shall consider the prices in such market over the same period used in computing the Last Reported Sale Prices of the ADSs over the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex-Dividend Date for such distribution.

 

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Notwithstanding the foregoing, if “FMV” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of a Note shall receive, in respect of each US$1,000 principal amount thereof, at the same time and upon the same terms as holders of the ADSs receive the Distributed Property, the amount of Distributed Property such Holder would have received if such Holder owned a number of ADSs equal to the Conversion Rate in effect on the Record Date for the distribution.

 

With respect to an adjustment pursuant to this Section 14.04(c) where there has been a payment of a dividend or other distribution on the Ordinary Shares of shares of Capital Stock of any class or series, or similar equity interest, of or relating to a Subsidiary or other business unit of the Company, where such Capital Stock or similar equity interest is listed or quoted (or will be listed or quoted upon consummation of the Spin-Off) on a U.S. national or regional securities exchange (a “Spin-Off”), the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x FMV0 + MP0
MP0

 

 

where,

CR0 = the Conversion Rate in effect immediately prior to the end of the Valuation Period;
   
CR1 = the Conversion Rate in effect immediately after the end of the Valuation Period;
   
FMV0= the average of the Last Reported Sale Prices of the Capital Stock or similar equity interest distributed to holders of the Ordinary Shares applicable to one Ordinary Share (determined for purposes of the definition of Last Reported Sale Price as set forth in Section 1.01 as if such Capital Stock or similar equity interest were ADSs) for each Trading Day during the first 10 consecutive Trading-Day period beginning on, and including, the Ex- Dividend Date of the Spin-Off (the “Valuation Period”); and
   
MP0 = the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) over the Valuation Period.

 

 

The increase to the Conversion Rate under the preceding paragraph shall be determined on the last Trading Day of the Valuation Period but will be given effect immediately after the open of business on the Ex-Dividend Date for the Spin-Off; provided that in respect of any conversion during the Valuation Period, references in the portion of this Section 14.04(c) related to Spin-Offs to 10 Trading Days shall be deemed to be replaced with such lesser number of Trading Days as have elapsed from, and including, the Ex-Dividend Date of such Spin-Off to, and including, the Conversion Date in determining the Conversion Rate.

 

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For purposes of this Section 14.04(c) (and subject in all respect to Section 14.11), rights, options or warrants distributed by the Company to all holders of its Ordinary Shares entitling them to subscribe for or purchase shares of the Company’s Capital Stock, including Ordinary Shares (either initially or under certain circumstances), which rights, options or warrants, until the occurrence of a specified event or events (“Trigger Event”): (i) are deemed to be transferred with such Ordinary Shares; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Ordinary Shares, shall be deemed not to have been distributed for purposes of this Section 14.04(c) (and no adjustment to the Conversion Rate under this Section 14.04(c) will be required) until the occurrence of the earliest Trigger Event, whereupon such rights, options or warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Rate shall be made under this Section 14.04(c). If any such right, option or warrant, including any such existing rights, options or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights, options or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and Record Date with respect to new rights, options or warrants with such rights (in which case the existing rights, options or warrants shall be deemed to terminate and expire on such date without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights, options or warrants, or any Trigger Event or other event (of the type described in the immediately preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Rate under this Section 14.04(c) was made, (1) in the case of any such rights, options or warrants that shall all have been redeemed or purchased without exercise by any holders thereof, upon such final redemption or purchase (x) the Conversion Rate shall be readjusted as if such rights, options or warrants had not been issued and (y) the Conversion Rate shall then again be readjusted to give effect to such distribution, deemed distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per Ordinary Share redemption or purchase price received by a holder or holders of Ordinary Shares with respect to such rights, options or warrants (assuming such holder had retained such rights, options or warrants), made to all holders of Ordinary Shares as of the date of such redemption or purchase, and (2) in the case of such rights, options or warrants that shall have expired or been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights, options and warrants had not been issued.

 

For purposes of Section 14.04(a), Section 14.04(b) and this Section 14.04(c), any dividend or distribution to which this Section 14.04(c) is applicable that also includes one or both of:

 

(A) a dividend or distribution of Ordinary Shares to which Section 14.04(a) is applicable (the “Clause A Distribution”); or

 

(B) a dividend or distribution of rights, options or warrants to which Section 14.04(b) is applicable (the “Clause B Distribution”),

 

then (1) such dividend or distribution, other than the Clause A Distribution and the Clause B Distribution, shall be deemed to be a dividend or distribution to which this Section 14.04(c) is applicable (the “Clause C Distribution”) and any adjustment to the Conversion Rate required by this Section 14.04(c) with respect to such Clause C Distribution shall then be made, and (2) the Clause A Distribution and Clause B Distribution shall be deemed to immediately follow the Clause C Distribution and any adjustment to the Conversion Rate required by Section 14.04(a) and Section 14.04(b) with respect thereto shall then be made, except that, if determined by the Company (I) the “Record Date” of the Clause A Distribution and the Clause B Distribution shall be deemed to be the Record Date of the Clause C Distribution and (II) any Ordinary Shares included in the Clause A Distribution or Clause B Distribution shall be deemed not to be “outstanding immediately prior to the close of business on such Record Date or immediately after the open of business on such Adjustment Effective Date, as applicable” within the meaning of Section 14.04(a) or “outstanding immediately prior to the close of business on such Record Date” within the meaning of Section 14.04(b).

 

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(d) If any cash dividend or distribution is made to all or substantially all holders of the Ordinary Shares, the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x SP0
SP0 - C

 

 

where,

 

CR0 = the Conversion Rate in effect immediately prior to the close of business on the Record Date for such dividend or distribution;
   
CR1 = the Conversion Rate in effect immediately after the close of business on the Record Date for such dividend or distribution;
   
SP0 = the average of the Last Reported Sale Prices of the ADSs (divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period ending on, and including, the Trading Day immediately preceding the Ex- Dividend Date for such dividend or distribution; and
   
C = the amount in cash per Ordinary Share the Company distributes to holders of its Ordinary Shares.

 

Any increase made under this Section 14.04(d) shall become effective immediately after the close of business on the Record Date for such dividend or distribution. If such dividend or distribution is not so paid, the Conversion Rate shall be decreased, effective as of the date the Board of Directors determines not to make or pay such dividend or distribution, to the Conversion Rate that would then be in effect if such dividend or distribution had not been declared.

 

Notwithstanding the foregoing, if “C” (as defined above) is equal to or greater than “SP0” (as defined above), in lieu of the foregoing increase, each Holder of a Note shall receive, for each US$1,000 principal amount of Notes, at the same time and upon the same terms as holders of ADSs, the amount of cash that such Holder would have received if such Holder owned a number of ADSs equal to the Conversion Rate on the Record Date for such cash dividend or distribution.

 

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(e) If the Company or any of its Subsidiaries makes a payment in respect of a tender or exchange offer for the Ordinary Shares or ADSs, if the cash and value of any other consideration included in the payment per Ordinary Share or ADS exceeds the average of the Last Reported Sale Prices of the ADSs (in the case of a tender or exchange offer for Ordinary Shares, divided by the number of Class A Ordinary Shares then represented by one ADS) for each Trading Day during the 10 consecutive Trading-Day period beginning on, and including, the Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer, the Conversion Rate shall be increased based on the following formula:

 

CR1 = CR0 x AC + (SP1 + OS1)
OS0 x SP1

 

 

Where,

 

CR0 = the Conversion Rate in effect immediately prior to the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires;
   
CR1 = the Conversion Rate in effect immediately after the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires;
   
AC = the aggregate value of all cash and any other consideration (as reasonably determined by the Board of Directors or a committee thereof in good faith) paid or payable for all Ordinary Shares or ADSs, as the case may be, purchased in such tender or exchange offer;
   
OS0 = the number of Ordinary Shares outstanding immediately prior to the date such tender or exchange offer expires (prior to giving effect to the purchase of all Ordinary Shares and ADSs accepted for purchase or exchange in such tender or exchange offer);
   
OS1 = the number of Ordinary Shares outstanding immediately after the date such tender or exchange offer expires (after giving effect to the purchase of all Ordinary Shares and ADSs accepted for purchase or exchange in such tender or exchange offer); and
   
SP1 = the average of the Last Reported Sale Prices of the ADSs (divided by the number of Ordinary Shares then represented by one ADS) over the 10 consecutive Trading-Day period immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires.

 

The adjustment to the Conversion Rate under this Section 14.04(e) shall be determined at the close of business on the 10th Trading Day immediately following, and including, the Trading Day next succeeding the date such tender or exchange offer expires but will be given effect immediately after the open of business on the Trading Day next succeeding the date such tender or exchange offer expires; provided that in respect of any conversion within the 10 Trading Days immediately following, and including, the Trading Day next succeeding the expiration date of any tender or exchange offer, references in this Section 14.04(e) with respect to 10 Trading Days shall be deemed to be replaced with such lesser number of Trading Days as have elapsed from, and including, the Trading Day next succeeding the expiration date of such tender or exchange offer to, and including, the Conversion Date in determining the Conversion Rate. For the avoidance of doubt, the references to “Ordinary Shares” in “OS0” and “OS1” above include without limitation both Class A Ordinary Shares and Class B Ordinary Shares.

 

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(f) Except as stated herein, the Company shall not adjust the Conversion Rate for the issuance of Ordinary Shares or ADSs, any securities convertible into or exchangeable for Ordinary Shares or ADSs, or the right to purchase Ordinary Shares or ADSs or such convertible or exchangeable securities. Notwithstanding the foregoing, if any Conversion Rate adjustment becomes effective as described in this Section 14.04, and a Holder that has converted any Notes with a Conversion Date occurring on or after the date such Conversion Rate adjustment becomes effective will participate, at the same time and upon the same terms as Holders of ADSs and solely as a result of holding the ADSs issuable upon conversion of such Notes, in the transaction or event giving rise to such Conversion Rate adjustment, then such Conversion Rate adjustment will not be made with respect to such Notes.

 

(g) In addition to those adjustments required by clauses (a), (b), (c), (d) and (e) of this Section 14.04, and to the extent permitted by law and the rules of The New York Stock Exchange or any other securities exchange on which any of the securities of the Company are then listed, the Company from time to time may increase the Conversion Rate by any amount for a period of at least 20 Business Days if the Board of Directors determines that such increase would be in the Company’s best interest (which determination shall be conclusive). In addition, the Company may (but is not required to) increase the Conversion Rate to avoid or diminish income tax to holders of Ordinary Shares or ADSs or rights to purchase Ordinary Shares or ADSs in connection with a dividend or distribution of Ordinary Shares or ADSs (or rights to acquire Ordinary Shares or ADSs) or similar event. Whenever the Conversion Rate is increased pursuant to either of the preceding two sentences, the Company shall mail to the Holder of each Note at its last address appearing on the Note Register a notice of the increase at least 15 days prior to the date the increased Conversion Rate takes effect, and such notice shall state the increased Conversion Rate and the period during which it will be in effect.

 

(h) Notwithstanding anything to the contrary in this Article 14, the Conversion Rate shall not be adjusted:

 

(i) upon the issuance of any Ordinary Shares or ADSs pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Company’s securities and the investment of additional optional amounts in Ordinary Shares or ADSs under any plan;

 

(ii) upon the issuance of any Ordinary Shares or ADSs or options or rights to purchase those Ordinary Shares or ADSs pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Company or any of the Company’s Subsidiaries;

 

(iii) upon the issuance of any Ordinary Shares or ADSs pursuant to any option, warrant, right or exercisable, exchangeable or convertible security not described in clause (ii) of this subsection and outstanding as of the date the Notes were first issued;

 

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(iv) a change solely in the par value of the Ordinary Shares; or

 

(v) for accrued and unpaid interest, if any.

 

(i) All calculations and other determinations under this Article 14 shall be made by the Company and shall be made to the nearest one-ten thousandth (1/10,000) of an ADS. The Company shall not be required to make an adjustment to the Conversion Rate unless the adjustment would require a change of at least 1% in the Conversion Rate. However, the Company shall carry forward any adjustments that are less than 1% of the Conversion Rate and make such carried-forward adjustments, regardless of whether the aggregate adjustment is less than 1%, on (x) December 31 of each calendar year and (y) the Conversion Date for any conversion of Notes.

 

(j) Whenever the Conversion Rate is adjusted as herein provided, the Company shall promptly notify the Trustee, the Conversion Agent and the Paying Agent of such adjustment to the Conversion Rate and file with the Trustee, the Conversion Agent and the Paying Agent an Officers’ Certificate setting forth the Conversion Rate after such adjustment and a brief statement of the facts requiring such adjustment, and the Trustee, the Conversion Agent and the Paying Agent may conclusively rely on the accuracy of such adjustment to the Conversion Rate provided by the Company in such Officers’ Certificate. Unless and until a Responsible Officer of the Trustee shall have received such Officers’ Certificate, neither the Trustee, the Conversion Agent nor the Paying Agent shall be deemed to have knowledge of any such adjustment of the Conversion Rate and may assume without inquiry that the last Conversion Rate of which it has been notified by the Company is still in effect. Promptly after providing such notice and delivery of such Officers’ Certificate to the Trustee, the Conversion Agent and the Paying Agent, the Company shall prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion Rate and the date on which each adjustment becomes effective and shall mail within 5 Business Days of the date on which such adjustment of the Conversion Rate is made to each Holder at its last address appearing on the Note Register of this Indenture. Failure by the Company to deliver such notice shall not affect the legality or validity of any such Conversion Rate adjustment.

 

(k) For purposes of this Section 14.04, the number of Ordinary Shares or ADSs at any time outstanding shall not include Ordinary Shares or ADSs held in the treasury of the Company so long as the Company does not pay any dividend or make any distribution on Ordinary Shares or ADSs held in the treasury of the Company, but shall include Ordinary Shares or ADSs issuable in respect of scrip certificates issued in lieu of fractions of Ordinary Shares or ADSs.

 

(l) Notwithstanding the foregoing, if (1) an adjustment to the Conversion Rate in respect of any dividend or distribution described in this Section 14.04 does not become effective prior to the Conversion Date for any Notes such that the relevant converting Holder receives, upon conversion, a number ADSs that does not reflect such adjustment to the Conversion Rate, and (2) the Record Date in respect of the ADSs due upon conversion for such dividend or distribution has occurred prior to the relevant Conversion Date, then, notwithstanding anything to contrary herein, the Company shall pay or deliver to the relevant converting Holder, at the same time and upon the same terms as holders of the ADSs, the dividend or distribution that such converting Holder would have received had it held, on such Record Date, a number of ADSs equal to the Conversion Rate, multiplied by the principal amount (expressed in thousands) of Notes converted by such Holder.

 

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Section 14.05          Adjustments of Prices. Whenever any provision of this Indenture requires the Company to calculate the Last Reported Sale Prices (including the ADS Prices for purposes of a Make-Whole Fundamental Change or a Tax Redemption) over a span of multiple days, the Board of Directors shall make appropriate adjustments to each to account for any adjustment to the Conversion Rate that becomes effective, or any event requiring an adjustment to the Conversion Rate where the Record Date of the event occurs, at any time during the period when such Last Reported Sale Prices or ADS Prices are to be calculated.

 

Section 14.06          Ordinary Shares to Be Fully Paid. The Company shall provide, free from preemptive rights, out of its authorized but unissued Ordinary Shares or Ordinary Shares held in treasury, a sufficient number of Ordinary Shares that corresponds to the number of ADSs due upon conversion of the Notes from time to time as such Notes are presented for conversion (assuming that at the time of computation of such number of Ordinary Shares, all such Notes would be converted by a single Holder).

 

Section 14.07          Effect of Recapitalizations, Reclassifications and Changes of the Ordinary Shares.

 

(a) In the event of:

 

(i) any recapitalization, reclassification or change of the Ordinary Shares (other than changes resulting from a subdivision or combination);

 

(ii) any consolidation, merger or combination involving the Company;

 

(iii) any sale, lease or other transfer to another Person of all or substantially all of the property and assets of the Company; or

 

(iv) any statutory share exchange,

 

in each case, as a result of which the ADSs would be converted into, or exchanged for, stock, other securities or other property or assets (including cash or any combination thereof) (any such event, a “Merger Event”), then, at and after the effective time of such Merger Event, the right to convert each US$1,000 principal amount of Notes shall be changed into a right to convert such principal amount of Notes into the kind and amount of shares of stock, other securities or other property or assets (including cash or any combination thereof) that a holder of a number of ADSs equal to the Conversion Rate immediately prior to such Merger Event would have owned or been entitled to receive (the “Reference Property”, with each “unit of Reference Property” meaning the kind and amount of Reference Property that a holder of one ADS is entitled to receive in such Merger Event) upon such Merger Event and, prior to or at the effective time of such Merger Event, the Company or the successor or purchasing Person, as the case may be, shall execute with the Trustee a supplemental indenture permitted under Section 10.01(f) providing for such change in the right to convert each US$1,000 principal amount of Notes; provided, however, that at and after the effective time of the Merger Event the number of ADSs otherwise deliverable upon conversion of the Notes in accordance with Section 14.02 shall instead be deliverable in the amount and type of Reference Property that a holder of that number of ADSs would have received in such Merger Event.

 

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If the Merger Event causes the ADSs to be converted into, or exchanged for, the right to receive more than a single type of consideration (determined based in part upon any form of stockholder election), then (i) the Reference Property into which the Notes will be convertible shall be deemed to be the weighted average of the types and amounts of consideration received by the holders of the ADSs that affirmatively make such an election, and (ii) the unit of Reference Property for purposes of the immediately preceding paragraph shall refer to the consideration referred to in clause (i) attributable to one ADS. The Company shall notify Holders, the Trustee and the Conversion Agent (if other than the Trustee) of such weighted average as soon as practicable after such determination is made.

 

Such supplemental indenture described in the second immediately preceding paragraph shall provide for adjustments that shall be as nearly equivalent as is possible to the adjustments provided for in this Article 14. If, in the case of any Merger Event, the Reference Property includes shares of stock, securities or other property or assets (including cash or any combination thereof) of a Person other than the successor or purchasing corporation, as the case may be, in such Merger Event, then such supplemental indenture shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holders of the Notes as the Board of Directors shall reasonably consider necessary by reason of the foregoing, including to the extent required by the Board of Directors and practicable the provisions providing for the purchase rights set forth in Article 15.

 

(b) In the event the Company shall execute a supplemental indenture pursuant to subsection (a) of this Section 14.07, the Company shall promptly file with the Trustee, the Conversion Agent and the Paying Agent an Officers’ Certificate briefly stating the reasons therefore, the kind or amount of cash, securities or property or asset that will comprise the Reference Property after any such Merger Event, any adjustment to be made with respect thereto and that all conditions precedent have been complied with, and shall promptly mail notice thereof to all Holders. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder, at its address appearing on the Note Register provided for in this Indenture, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture.

 

(c) The Company shall not become a party to any Merger Event unless its terms are consistent with this Section 14.07. None of the foregoing provisions shall affect the right of a holder of Notes to convert its Notes into ADSs as set forth in Section 14.01 and Section 14.02 prior to the effective date of such Merger Event.

 

(d) The above provisions of this Section shall similarly apply to successive Merger Events.

 

Section 14.08          Certain Covenants. (a) The Company covenants that all ADSs issued upon conversion of Notes and all Class A Ordinary Shares represented by such ADSs will be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof.

 

(b) The Company covenants that, if any ADSs to be provided for the purpose of conversion of Notes hereunder or any Class A Ordinary Shares represented by such ADSs require registration with or approval of any governmental authority under any federal or state law before such ADSs may be validly issued upon conversion, the Company will, to the extent then permitted by the rules and interpretations of the Commission, secure such registration or approval, as the case may be.

 

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(c) The Company further covenants that if at any time the ADSs shall be listed on any securities exchange or automated quotation system the Company will list and keep listed, so long as the ADSs shall be so listed on such exchange or automated quotation system, any ADSs issuable upon conversion of the Notes.

 

Section 14.09          Responsibility of Trustee. The Trustee, the Conversion Agent, the Paying Agent and any other Conversion Agent other than Citibank, N.A. shall not at any time be under any duty or responsibility to any Holder to perform calculations or to determine the Conversion Rate (or any adjustment thereto) or whether any facts exist that may require any adjustment (including any increase) of the Conversion Rate, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. None of the Trustee, the Paying Agent nor the Conversion Agent shall be accountable with respect to the validity or value (or the kind or amount) of any ADSs, or of any securities or other property, that may at any time be issued or delivered upon the conversion of any Note; and the Trustee, the Paying Agent and the Conversion Agent make no representations with respect thereto in this Indenture. None of the Trustee, the Paying Agent nor any Conversion Agent shall be responsible for any failure of the Company to issue, transfer or deliver any ADSs, or the Class A Ordinary Shares represented thereby, or share certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Indenture. Without limiting the generality of the foregoing, none of the Trustee, the Paying Agent nor any Conversion Agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 14.07 relating either to the kind or amount of ADSs or securities or property (including cash) receivable by Holders upon the conversion of their Notes after any event referred to in such Section 14.07 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 7.01, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers’ Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) and Opinion of Counsel with respect thereto. None of the Trustee, the Paying Agent nor any Conversion Agent has any duty to determine how or when any adjustment described in Section 14.04 should be made. None of the Trustee, the Paying Agent nor any Conversion Agent shall be responsible for the failure of the Company to comply with this Indenture.

 

Section 14.10          Notice to Holders Prior to Certain Actions. In case of any: (a) action by the Company or one of its Subsidiaries that would require an adjustment in the Conversion Rate pursuant to Section 14.04 or Section 14.11;

 

(b) Merger Event; or

 

(c) voluntary or involuntary dissolution, liquidation or winding-up of the Company or any of its Subsidiaries;

 

then, in each case (unless notice of such event is otherwise required pursuant to another provision of this Indenture), the Company shall cause to be filed with the Trustee and the Conversion Agent (if other than the Trustee) and to be mailed to each Holder at its address appearing on the Note Register, as promptly as possible but in any event at least 20 days prior to the applicable date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such action by the Company or one of its Subsidiaries or, if a record is not to be taken, the date as of which the holders of Ordinary Shares or ADSs, as the case may be, of record are to be determined for the purposes of such action by the Company or one of its Subsidiaries, or (ii) the date on which such Merger Event, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Ordinary Shares or ADSs, as the case may be, of record shall be entitled to exchange their Ordinary Shares or ADSs, as the case may be, for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such action by the Company or one of its Subsidiaries, Merger Event, dissolution, liquidation or winding-up.

 

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Section 14.11          Stockholder Rights Plans. To the extent that the Company has a rights plan in effect upon conversion of the Notes, each ADS issued upon such conversion shall be entitled to receive the appropriate number of rights, if any, and the certificates representing the ADSs issued upon such conversion shall bear such legends, if any, in each case as may be provided by the terms of any such stockholder rights plan, as the same may be amended from time to time. If prior to any conversion, however, the rights have separated from the Ordinary Shares in accordance with the provisions of the applicable stockholder rights plan so that converting Holders would not be entitled to receive any rights in respect of ADSs issuable upon conversion of the Notes, the Conversion Rate shall be adjusted at the time of separation as if the Company distributed Distributed Property to all holders of Ordinary Shares as provided in Section 14.04(c), subject to readjustment in the event of the expiration, termination or redemption of such rights.

 

Section 14.12          Termination of Depositary Receipt Program. If the Class A Ordinary Shares cease to be represented by American Depositary Shares issued under a depositary receipt program sponsored by the Company, all references in this Indenture to the ADSs shall be deemed to have been replaced by a reference to the number of Class A Ordinary Shares (and other property, if any) represented by the ADSs on the last day on which the ADSs represented the Class A Ordinary Shares and as if the Class A Ordinary Shares and the other property had been distributed to holders of the ADSs on that day.

 

ARTICLE 15
REPURCHASE OF NOTES AT OPTION OF HOLDERS

 

Section 15.01          Repurchase at Option of Holders. (a) Each Holder shall have the right, at such Holder’s option, to require the Company to repurchase for cash on August 15, 2019 (the “Repurchase Date”) all of such Holder’s Notes, or any portion thereof that is an integral multiple of US$1,000 principal amount, at a repurchase price (the “Repurchase Price”) that is equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the Repurchase Date; provided that the Company shall pay the full amount of such accrued and unpaid interest not to the Holders submitting the Notes for repurchase on the Repurchase Date but instead to the Holders of such Notes at the close of business on the Regular Record Date immediately preceding the Repurchase Date. Not later than 20 Business Days immediately preceding the Repurchase Date, the Company shall mail a notice (the “Company Notice”) by first class mail to the Trustee, to the Paying Agent and to each Holder at its address shown in the Note Register of the Note Registrar (and to beneficial owners as required by applicable law). The Company Notice shall include a form of Repurchase Notice to be completed by a holder and shall state:

 

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(i) the last date on which a Holder may exercise its repurchase right pursuant to this Section 15.01 (the “Repurchase Expiration Time”);

 

(ii) the Repurchase Price;

 

(iii) the name and address of the Conversion Agent and Paying Agent;

 

(iv) that the Notes with respect to which a Repurchase Notice has been delivered by a Holder may be converted only if the Holder withdraws the Repurchase Notice in accordance with the terms of this Indenture;

 

(v) that the Holder shall have the right to withdraw any Notes surrendered prior to the Repurchase Expiration Time; and

 

(vi) the procedures a Holder must follow to exercise its repurchase rights under this Section 15.01 and a brief description of those rights.

 

At the Company’s request, the Trustee shall give such notice in the Company’s name and at the Company’s expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company.

 

Simultaneously with providing the Company Notice, the Company shall publish a notice containing the information included in the Company Notice in a newspaper of general circulation in The City of New York or publish such information on the Company’s website or through such other public medium as the Company may use at that time.

 

No failure of the Company to give the foregoing notices and no defect therein shall limit the Holders’ repurchase rights or affect the validity of the proceedings for the repurchase of the Notes pursuant to this Section 15.01.

 

To effect a repurchase of Notes under this Section 15.01, the Holder thereof must:

 

(A) deliver to the Paying Agent a duly completed notice (the “Repurchase Notice”) in the form set forth in Attachment 3 to the Form of Note attached hereto as Exhibit A, if the Notes are Physical Notes, or in compliance with the Depositary’s procedures for surrendering interests in Global Notes, if the Notes are Global Notes, in each case during the period beginning at any time from the open of business on the date that is 20 Business Days prior to the relevant Repurchase Date until the close of business on the third Business Day immediately preceding the Repurchase Date; and

 

(B) deliver the Notes, if the Notes are Physical Notes, to the Paying Agent at any time after delivery of the Repurchase Notice (together with all necessary endorsements) at the office of the Paying Agent located in New York, New York, or effect book-entry transfer of the Notes, if the Notes are Global Notes, in compliance with the procedures of the Depositary, in each case such delivery being a condition to receipt by the Holder of the Repurchase Price therefor.

 

Each Repurchase Notice shall state:

 

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(1) in the case of Physical Notes, the certificate numbers of the Notes to be delivered for repurchase or, if Global Notes, the Repurchase Notice must comply with appropriate Depositary procedures;

 

(2) the portion of the principal amount of the Notes to be repurchased, which must be US$1,000 or an integral multiple thereof; and

 

(3) that the Notes are to be repurchased by the Company pursuant to the applicable provisions of the Notes and this Indenture.

 

Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Repurchase Notice contemplated by this Section 15.01 shall have the right to withdraw, in whole or in part, such Repurchase Notice at any time prior to the close of business on the third Business Day immediately preceding the Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 15.03.

 

The Paying Agent shall promptly notify the Company of the receipt by it of any Repurchase Notice or written notice of withdrawal thereof.

 

No Repurchase Notice with respect to any Notes may be surrendered by a Holder thereof if such Holder has also surrendered a Fundamental Change Repurchase Notice and not validly withdrawn such Fundamental Change Repurchase Notice in accordance with Section 15.03.

 

(b) Notwithstanding the foregoing, no Notes may be repurchased by the Company at the option of the Holders on the Repurchase Date if the principal amount of the Notes has been accelerated, and such acceleration has not been rescinded, on or prior to such Repurchase Date (except in the case of an acceleration resulting from a Default by the Company in the payment of the Repurchase Price with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Physical Notes held by it during the acceleration of the Notes (except in the case of an acceleration resulting from a Default by the Company in the payment of the Repurchase Price with respect to such Notes), or any instructions for book-entry transfer of the Notes in compliance with the procedures of the Depositary shall be deemed to have been cancelled, and, upon such return or cancellation, as the case may be, the Repurchase Notice with respect thereto shall be deemed to have been withdrawn.

 

Section 15.02          Repurchase at Option of Holders Upon a Fundamental Change. (a) If a Fundamental Change occurs at any time, each Holder shall have the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes, or any portion thereof that is equal to US$1,000 or an integral multiple of US$1,000, on the date (the “Fundamental Change Repurchase Date”) specified by the Company that is not less than 20 calendar days or more than 35 calendar days following the date of the Fundamental Change Company Notice at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon to, but excluding, the Fundamental Change Repurchase Date (the “Fundamental Change Repurchase Price”), unless the Fundamental Change Repurchase Date falls after a Regular Record Date but on or prior to the Interest Payment Date to which such Regular Record Date relates, in which case the Company shall instead pay the full amount of accrued and unpaid interest to Holders of record as of such Regular Record Date, and the Fundamental Change Repurchase Price shall be equal to 100% of the principal amount of Notes to be repurchased pursuant to this Article 15.

 

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(b) To effect a repurchase of Notes under this Section 15.02, the Holder thereof must:

 

(i) deliver to the Paying Agent a duly completed notice (the “Fundamental Change Repurchase Notice”) in the form set forth in Attachment 2 to the Form of Note attached hereto as Exhibit A, if the Notes are Physical Notes, or in compliance with the Depositary’s procedures for surrendering interests in Global Notes, if the Notes are Global Notes, in each case on or before the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date; and

 

(ii) deliver the Notes, if the Notes are Physical Notes, to the Paying Agent at any time after delivery of the Fundamental Change Repurchase Notice (together with all necessary endorsements for transfer) at the office of the Paying Agent located in New York, New York, or effect book-entry transfer of the Notes, if the Notes are Global Notes, in compliance with the procedures of the Depositary, in each case such delivery being a condition to receipt by the Holder of the Fundamental Change Repurchase Price therefor.

 

The Fundamental Change Repurchase Notice in respect of any Notes to be repurchased shall state:

 

(i) in the case of Physical Notes, the certificate numbers of the Notes to be delivered for repurchase;

 

(ii) the portion of the principal amount of Notes to be repurchased, which must be US$1,000 or an integral multiple thereof; and

 

(iii) that the Notes are to be repurchased by the Company pursuant to the applicable provisions of the Notes and this Indenture;

 

provided, however, that if the Notes are Global Notes, the Fundamental Change Repurchase Notice must comply with appropriate Depositary procedures.

 

Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Repurchase Notice contemplated by this Section 15.02 shall have the right to withdraw, in whole or in part, such Fundamental Change Repurchase Notice at any time prior to the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 15.03.

 

The Paying Agent shall promptly notify the Company of the receipt by it of any Fundamental Change Repurchase Notice or written notice of withdrawal thereof.

 

(c) On or before the 20th calendar day after the occurrence of a Fundamental Change, the Company shall provide to all Holders of Notes and the Trustee, the Conversion Agent and the Paying Agent (in the case of a Paying Agent other than the Trustee) a notice (the “Fundamental Change Company Notice”) of the occurrence of the Fundamental Change and of the repurchase right at the option of the Holders arising as a result thereof. Such notice shall be by first class mail or, in the case of Global Notes, in accordance with the applicable procedures of the Depositary. Simultaneously with providing such notice, the Company shall publish a notice containing the information set forth in the Fundamental Change Company Notice in a newspaper of general circulation in The City of New York or publish such information on the Company’s website or through such other public medium as the Company may use at that time. Each Fundamental Change Company Notice shall specify, among other things:

 

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(i) the events causing the Fundamental Change;

 

(ii) the effective date of the Fundamental Change;

 

(iii) the last date on which a Holder may exercise the repurchase right pursuant to this Article 15;

 

(iv) the Fundamental Change Repurchase Price;

 

(v) the Fundamental Change Repurchase Date;

 

(vi) if applicable, the name and address of the Paying Agent and the Conversion Agent;

 

(vii) if applicable, the Conversion Rate and any adjustments to the Conversion Rate;

 

(viii) if applicable, that the Notes with respect to which a Fundamental Change Repurchase Notice has been delivered by a Holder may be converted only if the Holder withdraws the Fundamental Change Repurchase Notice in accordance with the terms of this Indenture; and

 

(ix) the procedures that Holders must follow to require the Company to repurchase their Notes.

 

No failure of the Company to give the foregoing notices and no defect therein shall limit the Holders’ repurchase rights or affect the validity of the proceedings for the repurchase of the Notes pursuant to this Section 15.02.

 

At the Company’s request, the Trustee shall give such notice in the Company’s name and at the Company’s expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company.

 

(d) Notwithstanding the foregoing, no Notes may be repurchased by the Company on any date at the option of the Holders upon a Fundamental Change if the principal amount of the Notes has been accelerated, and such acceleration has not been rescinded, on or prior to such date (except in the case of an acceleration resulting from a Default by the Company in the payment of the Fundamental Change Repurchase Price with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Physical Notes held by it during the acceleration of the Notes (except in the case of an acceleration resulting from a Default by the Company in the payment of the Fundamental Change Repurchase Price with respect to such Notes), or any instructions for book-entry transfer of the Notes in compliance with the procedures of the Depositary shall be deemed to have been cancelled, and, upon such return or cancellation, as the case may be, the Fundamental Change Repurchase Notice with respect thereto shall be deemed to have been withdrawn.

 

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Section 15.03          Withdrawal of Repurchase Notice or Fundamental Change Repurchase Notice. (a) A Repurchase Notice or Fundamental Change Repurchase Notice may be withdrawn (in whole or in part) by means of a written notice of withdrawal delivered to the office of the Paying Agent located in New York, New York at in accordance with this Section 15.03 at any time prior to the close of business on the third Business Day immediately preceding the Repurchase Date or prior to the close of business on the third Business Day immediately preceding the Fundamental Change Repurchase Date, as the case may be, specifying:

 

(i) the principal amount of the Notes with respect to which such notice of withdrawal is being submitted,

 

(ii) if Physical Notes have been issued, the certificate number of the Note in respect of which such notice of withdrawal is being submitted, and

 

(iii) the principal amount, if any, of such Note that remains subject to the original Repurchase Notice or Fundamental Change Repurchase Notice, as the case may be, which portion must be in principal amounts of US$1,000 or an integral multiple of US$1,000;

 

provided, however, that if the Notes are Global Notes, the notice must comply with appropriate procedures of the Depositary.

 

Section 15.04          Deposit of Repurchase Price or Fundamental Change Repurchase Price. (a) The Company will deposit with the Trustee by wire transfer in immediately available funds (or other Paying Agent appointed by the Company, or if the Company is acting as its own Paying Agent, set aside, segregate and hold in trust as provided in Section 4.04) on or prior to 10:00 a.m., New York City time, on the Business Day immediately preceding the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, an amount of money sufficient to repurchase all of the Notes to be repurchased at the appropriate Repurchase Price or Fundamental Change Repurchase Price. Any deposit by the Company with the Paying Agent shall be made by wire transfer in immediately available funds. Subject to receipt of funds and/or Notes by the Trustee (or other Paying Agent appointed by the Company), payment for Notes surrendered for repurchase (and not withdrawn in accordance with Article 15) will be made on the later of (i) the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, with respect to such Note (provided the Holder has satisfied the conditions in Section 15.01 or Section 15.02, as the case may be) and (ii) the time of book-entry transfer or the delivery of such Note to the Trustee (or other Paying Agent appointed by the Company) by the Holder thereof in the manner required by Section 15.01 or Section 15.02, as applicable, by mailing checks for the amount payable to the Holders of such Notes entitled thereto as they shall appear in the Note Register; provided, however, that payments to the Depositary shall be made by wire transfer of immediately available funds to the account of the Depositary or its nominee. The Trustee shall, promptly after such payment and upon written demand by the Company, return to the Company any funds in excess of the Repurchase Price or Fundamental Change Repurchase Price, as the case may be.

 

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(b) If by 10:00 a.m. New York City time, on the Business Day immediately preceding the Repurchase Date or Fundamental Change Repurchase Date, as the case may be, the Trustee (or other Paying Agent appointed by the Company) holds money sufficient to make payment on all the Notes or portions thereof that are to be repurchased on such Repurchase Date or Fundamental Change Repurchase Date, as the case may be, then on such Repurchase Date or Fundamental Change Repurchase Date, as the case may be, (i) such Notes will cease to be outstanding and interest will cease to accrue on such Notes (whether or not book-entry transfer of the Notes has been made or the Notes have been delivered to the Trustee or Paying Agent) and (ii) all other rights of the Holders of such Notes will terminate (other than the right to receive the Repurchase Price or Fundamental Change Repurchase Price, as the case may be, upon delivery or book-entry transfer of such Notes).

 

(c) Upon surrender of a Note that is to be repurchased in part pursuant to Section 15.01 or Section 15.02, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Note in an authorized denomination equal in principal amount to the unrepurchased portion of the Note surrendered.

 

Section 15.05          Covenant to Comply with Applicable Laws Upon Repurchase of Notes. In connection with any repurchase of Notes on the Repurchase Date or in connection with any repurchase offer pursuant to a Fundamental Change Repurchase Notice, the Company will, if required:

 

(a) comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act;

 

(b) file a Schedule TO or any successor or similar schedule; and

 

(c) otherwise comply with all federal and state securities laws in connection with any offer by the Company to repurchase the Notes;

 

in each case, so as to permit the rights and obligations under this Article 15 to be exercised in the time and in the manner specified in this Article 15.

 

ARTICLE 16
TAX REDEMPTION

 

Section 16.01          Redemption for Taxation Reasons

 

If as a result of any change in or amendment to the statutes (or any rules or regulations thereunder) of a Relevant Taxing Jurisdiction, or any amendment to or change in an official interpretation, administration or application of such statutes, rules or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective or, in the case of a change in official interpretation, is announced on or after August 6, 2014 or, if the Relevant Taxing Jurisdiction has changed after August 6, 2014, the date on which such change occurred, the Company or its successor is, or will become, obligated to pay Additional Amounts as described under Section 4.07, the Company or its successor may, at its option, redeem all, but not less than all, of the Notes, for cash at a price (the “Tax Redemption Price”) equal to 100% of their principal amount, together with accrued and unpaid interest to, but excluding, the Tax Redemption Date and Additional Amounts, if any, upon giving irrevocable notice in writing to each of the Holder of Notes not less than 20 calendar days nor more than 60 calendar days prior to the Tax Redemption Date (the “Tax Redemption Notice” and such redemption, a “Tax Redemption”). However, if the Tax Redemption Date occurs after a Regular Record Date and on or prior to the corresponding Interest Payment Date, the Company will pay the full amount of accrued and unpaid interest due on such payment date to the record Holder on the Regular Record Date corresponding to such Interest Payment Date, and the Tax Redemption Price payable to the Holder who presents the Note for redemption will be 100% of the principal amount of such Note and Additional Amounts, if any. No Tax Redemption Notice may be given earlier than 60 calendar days prior to the earliest date on which the Company or any such successor would, but for such Tax Redemption, be obligated to pay the Additional Amounts. Notwithstanding the foregoing, the Company or any such successor shall not have the right to so redeem the Notes unless it has taken reasonable measures to avoid the obligation to pay Additional Amounts.

 

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In the event that the Company or any successor elects to so redeem the notes, it shall deliver to the Trustee: (1) a certificate, signed in the Company’s name or its successor’s name by any two of its executive officers stating that it is entitled to redeem the Notes pursuant to their terms and setting forth a statement of facts showing that the condition or conditions precedent to its right or the right of any successor to so redeem have occurred or been satisfied including, that it cannot avoid payment of such Additional Amounts by taking reasonable measures available to it and that all governmental requirements necessary for the Company or any successor to effect the redemption have been complied with; and (2) an Opinion of Counsel, who is acceptable to the Trustee, to the effect that the Company or its successor has or will become obligated to pay Additional Amounts as a result of the change or amendment.

 

Notwithstanding the foregoing, if the Company or its successor has given a Tax Redemption Notice, each Holder of Notes shall have the right to elect that such Holder’s Notes will not be subject to such Tax Redemption. If a Holder elects not to be subject to a Tax Redemption, the Company or its successor will not be required to pay Additional Amounts with respect to payments made in respect of such Holder’s Notes following the Tax Redemption Date, and all subsequent payments in respect of such Holder’s Notes will be subject to any tax required to be withheld or deducted under the laws of a Relevant Taxing Jurisdiction. The obligation to pay Additional Amounts to any electing Holder for periods up to the Tax Redemption Date will remain subject to the exceptions set forth under Section 4.07. Holders must exercise their option to elect to avoid a Tax Redemption by written notice to the Trustee no later than the 15th calendar day prior to the Tax Redemption Date.

 

In the case of such Tax Redemption, Holders shall have the right to elect to convert the Notes at any time until the close of business on the second Business Day preceding the Tax Redemption Date.

 

Section 16.02                Effect of Tax Redemption Notice

 

The Tax Redemption Notice having been given as provided in Section 16.01 hereof, the Notes to be redeemed shall, on the Tax Redemption Date, become due and payable at the Tax Redemption Price therein specified, and from and after such date (unless the Company shall Default in the payment of the Tax Redemption Price and any interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with such Tax Redemption Notice, such Note shall be paid by the Company at the Tax Redemption Price.

 

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If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal shall, until paid, bear interest from the Tax Redemption Date.

 

Section 16.03                Deposit and Payment of Tax Redemption Price

 

Not later than 10:00 a.m. New York time on the Business Day prior to any Tax Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent an amount of money in immediately available funds sufficient to pay the Tax Redemption Price and interest in respect of all the Notes to be redeemed on that Tax Redemption Date from the last Interest Payment Date to but not including the Tax Redemption Date, other than any Notes called for redemption on that date which have been converted prior to the date of such deposit, and accrued and unpaid interest on such Notes. The Trustee and Paying Agent shall then cause such funds to be paid to the Holders of the Notes being redeemed in accordance with this Article 16.

 

If any Note delivered for redemption shall not be so redeemed by payment to the Holders thereof on the Tax Redemption Date, the principal amount of such Note shall, until it is redeemed, bear interest on the Tax Redemption Date to but not including the actual date of redemption at the applicable interest rate, and each such Note shall remain convertible into ADSs pursuant to Article 14 until such Note shall have been so redeemed.

 

If any Note called for redemption is converted, any money deposited with the Trustee or with a Paying Agent or so segregated and held in trust for the redemption of such Note shall be paid to the Company upon request by the Company or, if then held by the Company, shall be discharged from such trust.

 

ARTICLE 17 MISCELLANEOUS PROVISIONS

 

Section 17.01          Provisions Binding on Company’s Successors. All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not.

 

Section 17.02          Official Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or Officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation or other entity that shall at the time be the lawful sole successor of the Company.

 

Section 17.03          Addresses for Notices, Etc. Any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders on the Company shall be deemed to have been sufficiently given or made, for all purposes if given or served in writing, in the English language, signed and transmitted by facsimile or by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Qihoo 360 Technology Co. Ltd., Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China, Attention: Alex Zuoli Xu, Fax No. +86-10-5682-2000. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by facsimile or by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office.

 

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The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications.

 

Any notice or communication mailed to a Holder shall be mailed to it by first class mail, postage prepaid, at its address as it appears on the Note Register or transmitted in accordance with the Depositary’s applicable procedures, and shall be sufficiently given to it if so mailed or otherwise transmitted within the time prescribed In the case of a Global Note, a notice shall be sufficiently given if transmitted by the Trustee to the Depositary for dispatch to Holders.

 

Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it.

 

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

 

Section 17.04          Governing Law. THIS INDENTURE AND EACH NOTE, AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS INDENTURE AND EACH NOTE, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

Section 17.05          Submission to Jurisdiction; Service of Process. Each of the parties hereto hereby submits to the non-exclusive jurisdiction of the federal and state courts in the Borough of Manhattan in the City of New York in any suit or proceeding arising out of or relating to this Indenture or the Notes or any transaction contemplated hereby or thereby. Each of the parties hereto irrevocably and unconditionally waives any objection to the laying of venue of any suit or proceeding arising out of or relating to this Indenture or the Notes or any transaction contemplated hereby or thereby in federal and state courts in the Borough of Manhattan in the City of New York and irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such suit or proceeding in any such court has been brought in an inconvenient forum. The Company irrevocably appoints Corporation Service Company as its authorized agent in the Borough of Manhattan in the City of New York upon which process may be served in any such suit or proceeding, and agrees that service of process upon such agent, and written notice of said service to the Company by the person serving the same to Qihoo 360 Technology Co. Ltd., Building No. 2, 6 Jiuxianqiao Road, Chaoyang District, Beijing 100015, People’s Republic of China, Attention: Alex Zuoli Xu, shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. The Company further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for a period of seven years from the date of this Indenture. If for any reason such agent shall cease to be such agent for service of process, the Company shall forthwith appoint a new agent of recognized standing for service of process in the State of New York and deliver to the Trustee a copy of the new agent’s acceptance of that appointment within 30 days. Nothing herein shall affect the right of the Trustee, any agent or any Holder to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other court of competent jurisdiction.

 

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Section 17.06          Evidence of Compliance with Conditions Precedent; Certificates and Opinions of Counsel to Trustee. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, including Section 2.04, the Company shall, if requested by the Trustee, furnish to the Trustee an Officers’ Certificate and/or an Opinion of Counsel, as the case may be, stating that such action is permitted by the terms of this Indenture.

 

Each Officers’ Certificate and Opinion of Counsel provided for, by or on behalf of the Company in this Indenture and delivered to the Trustee with respect to compliance with this Indenture (other than the Officers’ Certificates provided for in Section 4.09) shall include (a) a statement that the Person making such certificate is familiar with the requested action and this Indenture; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statement contained in such certificate is based; (c) a statement that, in the judgment of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed judgment as to whether or not such action is permitted by this Indenture; and (d) a statement as to whether or not, in the judgment of such Person, such action is permitted by this Indenture.

 

Notwithstanding anything to the contrary in this Section 17.06, if any provision in this Indenture specifically provides that the Trustee shall or may receive an Opinion of Counsel in connection with any action to be taken by the Trustee or the Company hereunder, the Trustee shall be entitled to, or entitled to request, such Opinion of Counsel.

 

Section 17.07          Legal Holidays. In any case where any Interest Payment Date, Fundamental Change Repurchase Date, Conversion Date, Repurchase Date, Tax Redemption Date or Maturity Date is not a Business Day, then any action to be taken on such date need not be taken on such date, but may be taken on the next succeeding Business Day with the same force and effect as if taken on such date, and no interest shall accrue in respect of the delay.

 

Section 17.08          No Security Interest Created. Nothing in this Indenture or in the Notes, expressed or implied, shall be construed to constitute a security interest under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction.

 

Section 17.09          Benefits of Indenture. Nothing in this Indenture or in the Notes, expressed or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Conversion Agent, any authenticating agent, any Note Registrar and their successors hereunder or the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

 

Section 17.10          Table of Contents, Headings, Etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.

 

Section 17.11          Authenticating Agent.

 

The Trustee may appoint an authenticating agent that shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Section 2.04, Section 2.05, Section 2.06, Section 2.07, Section 2.08, Section 10.04 and Section 15.04 as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes “by the Trustee” and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee’s certificate of authentication. Such authenticating agent shall at all times be a Person eligible to serve as trustee hereunder pursuant to Section 7.08.

 

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Any corporation or other entity into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation or other entity resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation or other entity succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation or other entity is otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation or other entity.

 

Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee may appoint a successor authenticating agent (which may be the Trustee), shall give written notice of such appointment to the Company and shall mail notice of such appointment to all Holders as the names and addresses of such Holders appear on the Note Register.

 

The Company agrees to pay to the authenticating agent from time to time reasonable compensation for its services although the Company may terminate the authenticating agent, if it determines such agent’s fees to be unreasonable.

 

The provisions of Section 7.02, Section 7.03, Section 7.04, Section 8.03 and this Section 17.11 shall be applicable to any authenticating agent.

 

If an authenticating agent is appointed pursuant to this Section, the Notes may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

 

__________________________,

 

as Authenticating Agent, certifies that this is one of the Notes described in the within-named Indenture.

 

By: ____________________

 

Authorized Officer

 

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Section 17.12          Execution in Counterparts.

 

This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.

 

Section 17.13          Severability. In the event any provision of this Indenture or in the Notes shall be invalid, illegal or unenforceable, then (to the extent permitted by law) the validity, legality or enforceability of the remaining provisions shall not in any way be affected or impaired.

 

Section 17.14          Waiver of Jury Trial. EACH OF THE COMPANY AND THE TRUSTEE HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE, THE NOTES OR THE TRANSACTION CONTEMPLATED HEREBY.

 

Section 17.15          Force Majeure. In no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation, strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; it being understood that the Trustee shall use reasonable efforts that are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances.

 

Section 17.16          Calculations. Except as otherwise provided herein, the Company shall be responsible for making all calculations called for under the Notes. These calculations include, but are not limited to, determinations of the Last Reported Sale Prices of the ADSs, accrued interest payable on the Notes, the number of Additional ADSs to be added to the Conversion Rate upon a Make-Whole Fundamental Change or a Tax Redemption, if any, and the Conversion Rate of the Notes. The Company shall make all these calculations in good faith and, absent manifest error, the Company’s calculations shall be final and binding on Holders of Notes. The Company shall provide a schedule of its calculations to each of the Trustee, the Paying Agent and the Conversion Agent, and each of the Trustee, the Paying Agent and the Conversion Agent is entitled to rely conclusively upon the accuracy of the Company’s calculations without independent verification. The Trustee will forward the Company’s calculations to any Holder of Notes upon the request of that Holder at the sole cost and expense of the Company.

 

Section 17.17          Information Sharing. The Trustee will treat information relating to Company as confidential, but (unless consent is prohibited by law) the Company consents to the transfer and disclosure by the Trustee of any information relating to the Company to and between branches, subsidiaries, representative offices, affiliates and agents of the Trustee and third parties selected by it, wherever situated, for confidential use (including in connection with the provision of any service and for data processing, statistical and risk analysis purposes) solely in connection with its appointment as a Trustee, the exercise of its rights, powers and discretions and/or the performance of its duties and compliance with its obligations under this Indenture and in connection with the Notes. The Trustee and any branch, subsidiary, representative office, affiliate, agent or third party may transfer and disclose any such information as required by any law, court regulator or legal process or regulator or examining authority (whether governmental or otherwise) including any auditor of a party (and may use and its performance will be subject to the rules of) any communications, clearing or payment intermediary bank or other system.

 

87
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above.

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

 

By: /s/ Alex Zuoli Xu_________________

Name: Alex Zuoli Xu

Title: Co-Chief Financial Officer

 

 
 

 

CITICORP INTERNATIONAL LIMITED,

as Trustee

 

 

By: /s/ Vanessa Loh____________________

Name: Vanessa Loh

Title: Vice President

 

 
 

 

EXHIBIT A

 

[FORM OF FACE OF NOTE]

 

[INCLUDE FOLLOWING LEGEND IF A GLOBAL NOTE]

 

[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

 

[INCLUDE FOLLOWING LEGEND IF A RESTRICTED SECURITY]

 

[THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY AND THE CLASS A ORDINARY SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER:

 

(1)REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS A NON-U.S. PERSON LOCATED OUTSIDE THE UNITED STATES (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT), AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, AND

 

(2)AGREES FOR THE BENEFIT OF QIHOO 360 TECHNOLOGY CO. LTD. (THE “COMPANY”) THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY, THE AMERICAN DEPOSITARY SHARES ISSUABLE UPON CONVERSION OF THIS SECURITY, OR THE CLASS A ORDINARY SHARES REPRESENTED THEREBY, OR ANY BENEFICIAL INTEREST HEREIN OR THEREIN PRIOR TO THE DATE THAT IS THE LATER OF (X) ONE YEAR AFTER THE LAST ORIGINAL ISSUE DATE HEREOF OR SUCH SHORTER PERIOD OF TIME AS PERMITTED BY RULE 144 UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THERETO AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAW, EXCEPT:

 

(A)TO THE COMPANY OR ANY SUBSIDIARY THEREOF;

 

A-1
 

 

(B)THROUGH OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT;

 

(C)PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OF THE COMPANY THAT COVERS THE RESALE OF THIS SECURITY OR SUCH AMERICAN DEPOSITARY SHARES AND CLASS A ORDINARY SHARES;

 

(D)TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT; OR

 

(E)PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH CLAUSE (2)(E) ABOVE, THE COMPANY, THE DEPOSITARY AND THE TRUSTEE RESERVE THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.

 

NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS SECURITY EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.]

 

NO AFFILIATE (WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT (‘‘RULE 144’’)) OF QIHOO 360 TECHNOLOGY CO. LTD. OR ANY PERSON THAT IS NOT AN AFFILIATE OF QIHOO 360 TECHNOLOGY CO. LTD., BUT WAS AN AFFILIATE (WITHIN THE MEANING OF RULE 144) OF QIHOO 360 TECHNOLOGY CO. LTD. DURING THE THREE IMMEDIATELY PRECEDING MONTHS, OTHER THAN QIHOO 360 TECHNOLOGY CO. LTD., OR ANY SUBSIDIARY OF QIHOO 360 TECHNOLOGY CO. LTD., MAY PURCHASE, OTHERWISE ACQUIRE OR OWN THE NOTES EVIDENCED HEREBY, THE AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION THEREOF OR THE CLASS A ORDINARY SHARES OF QIHOO 360 TECHNOLOGY CO. LTD. REPRESENTED BY SUCH AMERICAN DEPOSITARY SHARES ISSUED UPON CONVERSION OF THESE NOTES OR A BENEFICIAL INTEREST THEREIN.

 

A-2
 

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

1.75% Convertible Senior Note due 2021

 

No. ______________ Initially US$______________
CUSIP No.  
ISIN No.  

 

Qihoo 360 Technology Co. Ltd., an exempted limited liability company duly organized and validly existing under the laws of the Cayman Islands (the “Company,” which term includes any successor company or corporation or other entity under the Indenture referred to on the reverse hereof), for value received hereby promises to pay to CEDE & CO., or registered assigns, the principal sum as set forth in the “Schedule of Exchanges of Notes” attached hereto, which amount, taken together with the principal amounts of all other outstanding Notes, shall not, unless permitted by the Indenture, exceed US$450,000,000 in aggregate at any time, in accordance with the rules and procedures of the Depositary, on August 15, 2021, and interest thereon as set forth below.

 

This Note shall bear interest at the rate of 1.75% per year from August 6, 2014, or from the most recent date to which interest had been paid or provided for to, but excluding, the next scheduled Interest Payment Date until August 15, 2021. Interest is payable semi-annually in arrears on each February 15 and August 15, commencing on February 1, 2015, to Holders of record at the close of business on the preceding February 1 and August 1 (whether or not such day is a Business Day), respectively. Additional Interest will be payable as set forth in Section 4.06(d), Section 4.06(e) and Section 6.03 of the within-mentioned Indenture, and any reference to interest on, or in respect of, any Note therein shall be deemed to include Additional Interest if, in such context, Additional Interest is, was or would be payable pursuant to any of such Section 4.06(d), Section 4.06(e) or Section 6.03 and any express mention of the payment of Additional Interest in any provision therein shall not be construed as excluding Additional Interest in those provisions thereof where such express mention is not made.

 

Any Defaulted Amounts shall accrue interest per annum at the rate borne by the Notes, plus one percent, subject to the enforceability thereof under applicable law, from, and including, the relevant payment date to, but excluding, the date on which such Defaulted Amounts shall have been paid by the Company, at its election, in accordance with Section 2.03(c) of the Indenture.

 

The Company shall pay the principal of and interest on this Note, so long as such Note is a Global Note, in immediately available funds to the Depositary or its nominee, as the case may be, as the registered Holder of such Note. As provided in and subject to the provisions of the Indenture, the Company shall pay the principal of any Notes (other than Notes that are Global Notes) at the office or agency designated by the Company for that purpose. The Company has initially designated Citibank, N.A. as its Paying Agent, Transfer Agent, Conversion Agent and Note Registrar in respect of the Notes. Notes may be presented for payment, conversion or for registration of transfer or exchange at the offices of the Paying Agent and Transfer Agent in the Borough of Manhattan, The City of New York.

 

Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions giving the Holder of this Note the right to convert this Note into ADSs on the terms and subject to the limitations set forth in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place.

 

A-3
 

 

This Note, and any claim, controversy or dispute arising under or related to this Note, shall be construed in accordance with and governed by the laws of the State of New York.

 

In the case of any conflict between this Note and the Indenture, the provisions of the Indenture shall control and govern.

 

This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture.

 

[Remainder of page intentionally left blank]

 

A-4
 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

By: ______________________________

Name:

Title:

 

Dated:

 

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

CITICORP INTERNATIONAL LIMITED

as Trustee, certifies that this is one of the Notes described

in the within-named Indenture.

 

By: _______________________________

Authorized Officer

 

A-5
 

 

[FORM OF REVERSE OF NOTE]

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

1.75% Convertible Senior Note due 2021

 

This Note is one of a duly authorized issue of Notes of the Company, designated as its 1.75% Convertible Senior Notes due 2021 (the “Notes”), limited to the aggregate principal amount of US$450,000,000 all issued under and pursuant to an Indenture dated as of August 6, 2014 (the “Indenture”), between the Company and Citicorp International Limited (the “Trustee”), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the Holders of the Notes. Additional Notes may be issued in an unlimited aggregate principal amount, subject to certain conditions specified in the Indenture.

 

In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of, and interest on, all Notes may be declared, by either the Trustee or Holders of at least 25% in aggregate principal amount of Notes then outstanding, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions and certain exceptions set forth in the Indenture.

 

Subject to the terms and conditions of the Indenture, the Company will make all payments and deliveries in respect of the Tax Redemption Price, the Repurchase Price, the Fundamental Change Repurchase Price and the principal amount on the Maturity Date, as the case may be, to the Holder who surrenders a Note to a Paying Agent to collect such payments in respect of the Note. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts.

 

Subject to the terms, exceptions and conditions of the Indenture, in the event any withholding or deduction of taxes, duties, assessments or governmental charges is imposed or levied by a Relevant Taxing Jurisdiction in connection with any payments and deliveries made by the Company or any successor to the Company under or with respect to the Indenture and the Notes, including, but not limited to, payments of principal, payments of interest and deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) upon conversion, Additional Amounts will be paid to ensure that the net amount received by the beneficial owner after any applicable withholding or deduction (and after deducting any taxes on the Additional Amounts) will equal the amount that would have been received by such beneficial owner had no such withholding or deduction been required. References to principal, interest or deliveries of ADSs (together with cash payments in lieu of any fractional ADSs) in respect of the Notes shall be deemed also to refer to any Additional Amounts which may be payable.

 

The Indenture contains provisions permitting the Company and the Trustee in certain circumstances, without the consent of the Holders of the Notes, and in certain other circumstances, with the consent of the Holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures modifying the terms of the Indenture and the Notes as described therein. It is also provided in the Indenture that, subject to certain exceptions, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the Holders of all of the Notes waive any past Default or Event of Default under the Indenture and its consequences.

 

A-6
 

 

No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal (including the Tax Redemption Price, the Repurchase Price and the Fundamental Change Repurchase Price, if applicable) of and accrued and unpaid interest on this Note at the place, at the respective times, at the rate and in the lawful money herein prescribed.

 

The Notes are issuable in registered form without coupons in minimum denominations of US$200,000 principal amount and integral multiples of US$1,000 thereof. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations, without payment of any service charge but, if required by the Company or Trustee, with payment of a sum sufficient to cover any documentary, stamp or similar issue or transfer taxes, if any, that may be imposed in connection therewith as a result of the name of the Holder of the new Notes issued upon such exchange of Notes being different from the name of the Holder of the old Notes surrendered for such exchange.

 

Subject to the terms and conditions of the Indenture, the Notes may only be redeemed, in whole but not in part, at the Company’s option, at a redemption price equal to 100% of the aggregate principal amount of the Notes to be redeemed, plus accrued interest to, but excluding, the Tax Redemption Date, if, as a result of any change in, or amendment to, the statutes (or any rules or regulations thereunder) of a Relevant Taxing Jurisdiction or any amendment to or change in an official interpretation, administration or application of such statutes, rules or regulations (including a holding by a court of competent jurisdiction), which change or amendment becomes effective or, if in the case of a change in official interpretation, is announced on or after August 6, 2014 or, if the Relevant Taxing Jurisdiction has changed after August 6, 2014, the date on which such change occurred, the Company is, or its successor, is, or would be, obligated on the next succeeding due date to pay Additional Amounts and such obligation cannot be avoided by the use of reasonable measures available to the Company or its successor in accordance with the Indenture.

 

The Holder has the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes or any portion thereof (in principal amounts of US$1,000 or integral multiples thereof) on the Repurchase Date at a price equal to the Repurchase Price.

 

Upon the occurrence of a Fundamental Change, the Holder has the right, at such Holder’s option, to require the Company to repurchase for cash all of such Holder’s Notes or any portion thereof (in principal amounts of US$1,000 or integral multiples thereof) on the Fundamental Change Repurchase Date at a price equal to the Fundamental Change Repurchase Price.

 

Subject to the provisions of the Indenture, the Holder hereof has the right, at its option, prior to the close of business on the third Business Day immediately preceding the Maturity Date, to convert any Notes or portion thereof that is US$1,000 or an integral multiple thereof, into ADSs at the Conversion Rate specified in the Indenture, as adjusted from time to time as provided in the Indenture.

 

Terms used in this Note and defined in the Indenture are used herein as therein defined.

 

A-7
 

 

ABBREVIATIONS

 

The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations:

 

TEN COM = as tenants in common

 

UNIF GIFT MIN ACT = Uniform Gifts to Minors Act

 

CUST = Custodian

 

TEN ENT = as tenants by the entireties

 

JT TEN = joint tenants with right of survivorship and not as tenants in common

 

Additional abbreviations may also be used though not in the above list.

 

A-8
 

 

 

 

SCHEDULE A

 

SCHEDULE OF EXCHANGES OF NOTES*

 

QIHOO 360 TECHNOLOGY CO. LTD.

 

1.75% Convertible Senior Notes due 2021

 

The initial principal amount of this Global Note is _______ DOLLARS (US$_________). The following increases or decreases in this Global Note have been made:

 

Date of exchange

  

Amount of decrease in principal amount of this Global Note

  

Amount of increase in principal amount of this Global Note

  

Principal amount of this Global Note following such decrease or increase

  

Signature of authorized signatory of Trustee or Custodian

                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 
                 

 

 

__________________________

* To be included for Global Notes only.

 

A-9
 

 

ATTACHMENT 1

 

[FORM OF NOTICE OF CONVERSION]

 

To: QIHOO 360 TECHNOLOGY CO. LTD.
   
  THE BANK OF NEW YORK MELLON, as depositary for the ADSs
   
  CITIBANK, N.A., as Conversion Agent
   
Re: 1.75% Convertible Senior Note due 2021

 

The undersigned registered owner of this Note hereby exercises the option to convert this Note, or the portion hereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, into ADSs in accordance with the terms of the Indenture referred to in this Note, and directs that any cash payable and any ADSs issuable and deliverable upon such conversion, together with any cash payable for any fractional ADSs, and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered Holder hereof unless a different name has been indicated below. If any ADSs or any portion of this Note not converted are to be issued in the name of a Person other than the undersigned, the undersigned will pay all documentary, stamp or similar issue or transfer taxes, if any, in accordance with Section 14.02(d) and Section 14.02(e) of the Indenture. Any amount required to be paid to the undersigned on account of interest accompanies this Note.

 

The undersigned hereby certifies that it (or if it is acting for the account of one or more persons, that each such person) is not, and has not been, during the three months immediately preceding the date hereof, an affiliate of the Company (within the meaning of Rule 144 under the Securities Act of 1933, as amended).

 

[The undersigned further certifies:

 

1. The undersigned acknowledges (and if the undersigned is acting for the account of another person, that person has confirmed that it acknowledges) that the Restricted Securities received upon conversion of this Note represented thereby have not been and are not expected to be registered under the Securities Act of 1933, as amended (the “Act”).

 

2. The undersigned certifies that the undersigned, and any account for which it is acting, (a) is a qualified institutional buyer (as defined in Rule 144A under the Act) or (b) is a non-U.S. person located outside the United States (within the meaning of Regulation S under the Securities Act), and the undersigned is (or such account or accounts are) the sole beneficial owner(s) of the Restricted Securities to be received upon conversion of the Notes.

 

3. The undersigned certifies that the undersigned is not (and if the undersigned is acting for the account of another person, that person has confirmed that it is not) an affiliate (within the meaning of Rule 144 under the Act) of the Company and the undersigned acknowledges that the undersigned (and any such other account) may not continue to hold or retain any interest in Restricted Securities received upon conversion of this Note if the undersigned (or such other account) becomes an affiliate of the Company.

 

4. The undersigned agrees (and if the undersigned is acting for the account of another person, that person has confirmed that it agrees) that, unless and until the undersigned (or such other account) is notified by the Depositary that the restrictive legend on such Restricted Security has been removed from such security, the undersigned (and such other account) will not offer, sell, pledge or otherwise transfer the Restricted Security (or securities represented by such Restricted Security) except in accordance with the restrictions set forth in that legend and any applicable securities laws of any state of the United States.]1

 

 

 ___________________________

1Include bracketed language in Conversion Notice if the Note being converted is a Restricted Security.

 

A-10
 

 

[For Global Notes, please use:]

 

Fill in the following information for the Notes to be converted:

 

Principal amount to be converted: (US$______,000)

 

 

________________________________

DTC/ Euroclear/ Clearstream Participant Number

 

________________________________

(Account Name)

 

________________________________

(Account Number)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

 

________________________________

(Phone Number)

 

 

Fill in the following information for delivery of ADSs if to be issued:

 

________________________________

DTC account/custodian DTC account number for ADSs

 

________________________________

(Name)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

 

________________________________

(Phone Number)

 

A-11
 

 

________________________________

Social Security or Other Taxpayer Identification Number

 

 

Dated: _____________________ ________________________________
   
   
  ________________________________
  Signature(s)

 

 

________________________________

Signature Guarantee

 

Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if ADSs are to be issued, or Notes are to be delivered, other than to and in the name of the registered holder.

 

 

[For Physical Notes, please use:]

 

Dated: _____________________

Principal amount to be converted (if less than all): US$______,000

 

Principal amount not being converted (if less than all of the principal amount is being converted): US$______,000

 

________________________________

Signature(s)

 

________________________________

Social Security or Other Taxpayer

Identification Number

 

A-12
 

 

NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

 

________________________________

Signature Guarantee

 

Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if ADSs are to be issued, or Notes are to be delivered, other than to and in the name of the registered holder.

 

Fill in for delivery of ADSs if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder:

 

________________________________

(Name)

 

________________________________

(Street Address)

 

________________________________

(City, State and Zip Code)

Please print name and address

 

A-13
 

 

******

 

 

Important Information for converting Holder:

 

 

Address of the Conversion Agent is:

 

Citibank, N.A.

480 Washington Boulevard, 30th Floor

Jersey City, NJ 07310

USA

 

Attention: Agency and Trust Conversion Unit

SWIFT= CITIUS33FADR

 

 

Holders must submit an original Conversion Notice with the Medallion Guaranty Stamp to the Conversion Agent to complete the DWAC (DTC Procedure).

 

Reg S Holders may request a Euroclear or Clearstream SWIFT Message of the Conversion Notice to be sent to the Conversion Agent at CITIUS33FADR in lieu of the original Conversion Notice with a Medallion Guaranty Stamp.

 

2. Payment to the Company pursuant to Section 14 of the Indenture shall be made to Qihoo 360 Technology Co. Ltd. Contact Helen Wu, +86 10 58781574, wujing@360.cn for specific instructions.

 

3. Fees of the ADS Depositary for issuance of the ADSs shall be made to The Bank of New York Mellon by wire transfer or DTC payment against delivery. Contact Anita Sung, +1 212 815 8161, anita.sung@bnymellon.com for specific instructions. U.S. legal opinion to the ADS Depositary shall be addressed to: The Bank of New York Mellon.

 

A-14
 

 

ATTACHMENT 2

 

  [FORM OF FUNDAMENTAL CHANGE REPURCHASE NOTICE]
   
To: QIHOO 360 TECHNOLOGY CO. LTD.
   
  CITIBANK, N.A., as Paying Agent

 

The undersigned registered owner of this Note hereby acknowledges receipt of a notice from Qihoo 360 Technology Co. Ltd. (the “Company”) as to the occurrence of a Fundamental Change with respect to the Company and specifying the Fundamental Change Repurchase Date and requests and instructs the Company to pay to the registered holder hereof in accordance with Section 15.02 of the Indenture referred to in this Note (1) the entire principal amount of this Note, or the portion thereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, and (2) if such Fundamental Change Repurchase Date does not fall during the period after a Regular Record Date and on or prior to the corresponding Interest Payment Date, accrued and unpaid interest, if any, thereon to, but excluding, such Fundamental Change Repurchase Date.

 

In the case of Physical Notes, the certificate numbers of the Notes to be repurchased are as set forth below:

 

Certificate Number(s): ___________________

 

Dated: ________________________________

 

 

________________________________

Signature(s)

 

________________________________

Social Security or Other Taxpayer Identification Number

 

Principal amount to be repaid (if less than all): US$______,000

 

NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

A-15
 

 

ATTACHMENT 3

 

[FORM OF REPURCHASE NOTICE]

 

To: QIHOO 360 TECHNOLOGY CO. LTD.
   
  CITIBANK, N.A., as Paying Agent

 

The undersigned registered owner of this Note hereby acknowledges receipt of a notice from Qihoo 360 Technology Co. Ltd. (the “Company”) regarding the right of Holders to elect to require the Company to repurchase the entire principal amount of this Note, or the portion thereof (that is US$1,000 principal amount or an integral multiple thereof) below designated, in accordance with Section 15.01 of the Indenture referred to in this Note, at the Repurchase Price to the registered Holder hereof.

 

In the case of Physical Notes, the certificate numbers of the Notes to be purchased are as set forth below:

 

Certificate Number(s): ___________________

 

Dated: ________________________________

 

 

________________________________

Signature(s)

 

________________________________

Social Security or Other Taxpayer Identification Number

 

Principal amount to be repaid (if less than all): US$______,000

 

NOTICE: The above signature(s) of the Holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

A-16
 

 

ATTACHMENT 4

 

[FORM OF ASSIGNMENT]

 

To: QIHOO 360 TECHNOLOGY CO. LTD.
   
  CITIBANK, N.A., as Note Registrar

 

 

Re: 1.75% Convertible Senior Notes due 2021

 

For value received ____________________________ hereby sell(s), assign(s) and transfer(s) unto _________________ (Please insert social security or Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints _____________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises.

 

A-17
 

 

   
Dated: _____________________ ________________________________
   
  ________________________________
  Signature(s)

 

 

 

________________________________

Signature Guarantee

 

Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if Notes are to be delivered, other than to and in the name of the registered holder.

 

NOTICE: The signature on the assignment must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever.

 

A-18
 

 

EXHIBIT B

 

[FORM OF CERTIFICATE OF TRANSFER]

 

To: QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Note Registrar

 

 

Re: 1.75% Convertible Senior Notes due 2021

 

Reference is hereby made to the Indenture, dated as of August 6, 2014 (the “Indenture”), between Qihoo 360 Technology Co. Ltd., as issuer (the “Company”), and Citicorp International Limited, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.

 

___________________, (the “Transferor”) owns and proposes to transfer the Note[s] or interest in such Note[s] specified in Annex A hereto, in the principal amount of US$___________ in such Note[s] or interests (the “Transfer”), to ___________________________ (the “Transferee”), as further specified in Annex A hereto. In connection with the Transfer, the Transferor hereby certifies that:

 

[CHECK ALL THAT APPLY]

 

1. ¨ Check if Transferee will take delivery of a beneficial interest in the Rule 144A Global Note or a Restricted Physical Note pursuant to Rule 144A. The Transfer is being effected pursuant to and in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and, accordingly, the Transferor hereby further certifies that the beneficial interest in the Rule 144A Global Note or Physical Note is being transferred to a Person that the Transferor reasonably believes is purchasing the beneficial interest in the Rule 144A Global Note or Physical Note for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a “qualified institutional buyer” within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A, and such Transfer is in compliance with any applicable blue sky securities laws of any state of the United States. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest in the Rule 144A Global Note or Physical Note will be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Rule 144A Global Note and/or the Restricted Physical Note and in the Indenture and the Securities Act.

 

2. ¨ Check if Transferee will take delivery of a beneficial interest in the Regulation S Global Note or a Restricted Physical Note pursuant to Regulation S under the Securities Act. The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and, accordingly, the Transferor hereby further certifies that (i) the Transfer is not being made to a Person in the United States and (x) at the time the buy order was originated, the Transferee was outside the United States or such Transferor and any Person acting on its behalf reasonably believed and believes that the Transferee was outside the United States or (y) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither such Transferor nor any Person acting on its behalf knows that the transaction was prearranged with a buyer in the United States, (ii) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, (iii) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act and (iv) the transfer is not being made to a U.S. Person or for the account or benefit of a U.S. Person. Upon consummation of the proposed transfer in accordance with the terms of the Indenture, the transferred beneficial interest in the Regulation S Global Note or Physical Note will be subject to the restrictions on Transfer enumerated in the Securities Act Legend printed on the Regulation S Global Note and/or the Restricted Physical Note and in the Indenture and the Securities Act.

 

B-1
 

 

3. ¨ Check and complete if Transferee will take delivery of a beneficial interest in the Global Note or a Restricted Physical Note pursuant to any provision of the Securities Act other than Rule 144A or Regulation S. The Transfer is being effected in compliance with the transfer restrictions applicable to beneficial interests in Restricted Global Notes and Restricted Physical Notes and pursuant to and in accordance with the Securities Act and any applicable blue sky securities laws of any state of the United States, and accordingly the Transferor hereby further certifies that (check one):

 

(a) ¨ such Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act;

 

or

 

(b) ¨ such Transfer is being effected to the Company or a subsidiary thereof;

 

or

 

(c) ¨ such Transfer is being effected pursuant to an effective registration statement under the Securities Act and in compliance with the prospectus delivery requirements of the Securities Act.

 

4.¨ Check and complete if Transferee will take delivery of a beneficial interest in an Unrestricted Global Note or of an Unrestricted Physical Note.

 

(a) ¨Check if Transfer is pursuant to Rule 144. (i) The Transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes or on the Restricted Physical Notes and in the Indenture.

 

(b)¨ Check if Transfer is Pursuant to Regulation S. (i) The Transfer is being effected pursuant to and in accordance with Rule 903 or Rule 904 under the Securities Act and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any state of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes, or on the Restricted Physical Notes and in the Indenture.

 

B-2
 

 

(c) ¨ Check if Transfer is Pursuant to Other Exemption. (i) The Transfer is being effected pursuant to and in compliance with an exemption from the registration requirements of the Securities Act other than Rule 144, Rule 903 or Rule 904 and in compliance with the transfer restrictions contained in the Indenture and any applicable blue sky securities laws of any State of the United States and (ii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act. Upon consummation of the proposed Transfer in accordance with the terms of the Indenture, the transferred beneficial interest or Physical Note will no longer be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Global Notes or Restricted Physical Notes and in the Indenture.

 

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

______________________________________________
[Insert Name of Transferor]



By: ______________________________________________
       Name:
       Title:

 

Dated: _______________________

 

B-3
 

 

ANNEX A TO CERTIFICATE OF TRANSFER

 

1. The Transferor owns and proposes to transfer the following:

 

[CHECK ONE OF (a) OR (b)]

 

(a)    ¨ a beneficial interest in the:

 

(i) ¨ Rule 144A Global Note (CUSIP _________; ISIN _________), or

 

(ii) ¨Regulation S Global Note (CUSIP _________; ISIN _________), or

 

(b)   ¨ a Restricted Physical Note.

 

2. After the Transfer the Transferee will hold:

 

[CHECK ONE]

 

(a) ¨ a beneficial interest in the:

 

(i) ¨ Rule 144A Global Note (CUSIP _________; ISIN _________), or

 

(ii) ¨ Regulation S Global Note (CUSIP _________; ISIN _________), or

 

(iii) ¨ Unrestricted Global Note (CUSIP _________; ISIN _________); or

 

(b) ¨ a Restricted Physical Note; or

 

(c) ¨ an Unrestricted Physical Note,

 

in accordance with the terms of the Indenture.

 

B-4
 

 

EXHIBIT C

 

[FORM OF CERTIFICATE OF EXCHANGE]

 

To:QIHOO 360 TECHNOLOGY CO. LTD.

 

CITIBANK, N.A., as Note Registrar

 

 

Re: 1.75% Convertible Senior Notes due 2021

 

(CUSIP _________; ISIN _________)

 

Reference is hereby made to the Indenture, dated as of August 6, 2014 (the “Indenture”), between Qihoo 360 Technology Co. Ltd., as issuer (the “Company”) and Citicorp International Limited, as trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture.

 

__________________________, (the “Owner”) owns and proposes to exchange the Note[s] or interest in such Note[s] specified herein, in the principal amount of $____________ in such Note[s] or interests (the “Exchange”). In connection with the Exchange, the Owner hereby certifies that:

 

1. Exchange of Restricted Physical Notes or Beneficial Interests in a Restricted Global Note for Unrestricted Physical Notes or Beneficial Interests in an Unrestricted Global Note

 

(a) ¨ Check if Exchange is from beneficial interest in a Restricted Global Note to beneficial interest in an Unrestricted Global Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for a beneficial interest in an Unrestricted Global Note in an equal principal amount, the Owner hereby certifies (i) the beneficial interest is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the Securities Act of 1933, as amended (the “Securities Act”), (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the beneficial interest in an Unrestricted Global Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

(b) ¨ Check if Exchange is from beneficial interest in a Restricted Global Note to Unrestricted Physical Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for an Unrestricted Physical Note, the Owner hereby certifies (i) the Physical Note is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to the Restricted Global Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the Physical Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

C-1
 

 

(c) ¨ Check if Exchange is from Restricted Physical Note to Unrestricted Physical Note. In connection with the Owner’s Exchange of a Restricted Physical Note for an Unrestricted Physical Note, the Owner hereby certifies (i) the Unrestricted Physical Note is being acquired for the Owner’s own account without transfer, (ii) such Exchange has been effected in compliance with the transfer restrictions applicable to Restricted Physical Notes and pursuant to and in accordance with the Securities Act, (iii) the restrictions on transfer contained in the Indenture and the Securities Act Legend are not required in order to maintain compliance with the Securities Act and (iv) the Unrestricted Physical Note is being acquired in compliance with any applicable blue sky securities laws of any state of the United States.

 

2. Exchange of Restricted Physical Notes or Beneficial Interests in Restricted Global Notes for Restricted Physical Notes or Beneficial Interests in Restricted Global Notes

 

¨ Check if Exchange is from beneficial interest in a Restricted Global Note to Restricted Physical Note. In connection with the Exchange of the Owner’s beneficial interest in a Restricted Global Note for a Restricted Physical Note with an equal principal amount, the Owner hereby certifies that the Restricted Physical Note is being acquired for the Owner’s own account without transfer. Upon consummation of the proposed Exchange in accordance with the terms of the Indenture, the Restricted Physical Note issued will continue to be subject to the restrictions on transfer enumerated in the Securities Act Legend printed on the Restricted Physical Note and in the Indenture and the Securities Act.

 

This certificate and the statements contained herein are made for your benefit and the benefit of the Company.

 

______________________________________________
[Insert Name of Transferor]



By: ______________________________________________
       Name:
       Title:

 

Dated: _______________________

 

C-2

 



 

Exhibit 4.71

 

SHARE SUBSCRIPTION AGREEMENT

 

BY AND AMONG

 

Coolpad E-commerce Inc.

 

Coolpad Group Limited

 

AND

 

TECH TIME DEVELOPMENT LIMITED

 

December 16, 2014

 

 
 

 

TABLE OF CONTENTS

 

Page

 

Article I Purchase Transactions 1
1.1   Subscription of Company Shares 1
1.2   Closing 1
1.3   Withholding 2
Article II Representations and Warranties Regarding the PARENT GROUP COMPANIES 2
2.1   Organization and Corporate Power 2
2.2   Share Capital and Related Matters 3
2.3   Indebtedness 4
2.4   No Breach; Authorization; Execution & Enforceability 4
2.5   Financial Statements 5
2.6   Absence of Undisclosed Liabilities 5
2.7   Products and Services Warranty 5
2.8   No Material Adverse Effect 5
2.9   Absence of Certain Developments 6
2.10   Assets 9
2.11   Real Property 9
2.12   Tax Matters 10
2.13   Contracts and Commitments 12
2.14   Intellectual Property Rights and IT Infrastructure 14
2.15   Government Licenses and Permits 16
2.16   Litigation, etc 16
2.17   Brokerage 16
2.18   Insurance 17
2.19   Employees 17
2.20   Employee Benefits Matters 18
2.21   Compliance with Laws 18
2.22   Affiliate Transactions 20
2.23   Suppliers and Customers 20
2.24   Officers and Directors; Bank Accounts 21
2.25   Product and Media Liability 21
2.26   Privacy and Security 21
2.27   Disclosure 22
2.28   Maintenance of Relationship 22
Article III Representations and Warranties Regarding the Purchaser 22
3.1   Organization; Power and Authority 22
3.2   Authorization; No Breach 22
3.3   Litigation 22
3.4   Brokerage 23
Article IV Survival; Indemnification 23
4.1   Survival of Representations and Warranties 23
4.2   Indemnification 23
4.3   Remedies 27

 

-i-
 

 

TABLE OF CONTENTS (Continued)

 

Article V Pre-Closing Covenants and Agreements 28
5.1   Conduct of Business 28
5.2   Further Assurances 30
5.3   Notices and Consents 30
5.4   Delivery of Monthly Financial Statements 31
5.5   Access 31
5.6   Notification of Certain Matters 31
5.7   Exclusivity 31
Article VI Closing Conditions 32
6.1   Conditions Precedent to Each Party’s Obligations 32
6.2   Additional Conditions Precedent to Obligations of the Purchaser 32
6.3   Additional Conditions Precedent to Obligations of the Company 34
Article VII Termination 34
7.1   Terminations 34
7.2   Effect of Termination 35
Article VIII Additional Agreements 35
8.1   Press Releases and Announcements 35
8.2   Further Actions 35
8.3   Maintenance of Relationships 35
8.4   Confidentiality 35
8.5   Expenses 36
8.6   Waivers of Breaches 36
8.7   Restructuring and IP Licenses. 36
Article IX Definitions; Cross-References to Other Defined Terms 37
9.1   Definitions 37
9.2   Cross-References 43
Article X Miscellaneous 45
10.1   Arbitration 45
10.2   Consent to Amendments 45
10.3   Successors and Assigns 45
10.4   Counterparts 45
10.5   Descriptive Headings; Interpretation 45
10.6   Governing law 46
10.7   Notices 46
10.8   No Strict Construction 47
10.9   Entire Agreement 47
10.10   Severability 47
10.11   No Third-Party Beneficiaries 47
10.12   Schedules 47

 

-ii-
 

 

INDEX OF EXHIBITS

 

Exhibit A Capitalization Table

 

-iii-
 

 

SHARE SUBSCRIPTION AGREEMENT

 

THIS SHARE SUBSCRIPTION AGREEMENT (this “Agreement”) is made as of December 16, 2014, by and among TECH TIME DEVELOPMENT LIMITED, a limited liability company incorporated in the British Virgin Islands (the “Purchaser”), COOLPAD E-COMMERCE INC., an exempted company incorporated in the Cayman Islands (the “Company”), and COOLPAD GROUP LIMITED, an exempted company incorporated in the Cayman Islands (the “Parent”). The Purchaser, the Company and the Parent are referred to herein collectively as the “Parties” and individually as a “Party.” Capitalized terms used herein, but not defined herein, are defined in Article IX below.

 

WHEREAS, the authorized share capital of the Company consist of, immediately prior to the Closing, 5,000,000 ordinary shares with a par value of US$0.01 each (the “Company Shares”), of which 1,100 are issued and outstanding;

 

WHEREAS, the Parent directly owns all of the issued and outstanding Company Shares;

 

WHEREAS, the Parent Group Companies are conducting the Restructuring, which will be completed before the Closing and as a result of which the Company and its Subsidiaries will own and operate the business in connection with (a) all and any Internet terminal products under the brand of“大神” (Dazen) and other Internet terminal products (including but not limited to mobile devices, intelligent hardware and accessories) developed by the Parent Group Companies that are distributed through Internet as the primary channel, but excluding the “Coolpad” series of products developed for mobile network operators, the “IVVI” series of products developed for the open market; and (b) the research, development, operating and provision of services for the key components and/or applications of the Internet terminal products described in (a) (collectively, the “Internet Terminal and Related Business”);

 

WHEREAS, upon the terms and subject to the conditions set forth herein, the Purchaser desires to purchase and subscribe from the Company, and the Company desires to issue and sell to the Purchaser, 900 Company Shares, representing 45% of all the issued and outstanding Company Shares immediately after the Closing (the “Acquired Shares”);

 

NOW, THEREFORE, in consideration of the premises and of the mutual representations, warranties and covenants which are to be made and performed by the respective Parties, the receipt and sufficiency of which are hereby acknowledged, each of the Parties hereto, intending to be legally bound, hereby agrees as follows:

 

Article I

 

Purchase Transactions

 

1.1  Subscription of Company Shares. On the basis of the representations, warranties, covenants and other agreements contained herein and in the other Transaction Documents, and subject to the terms and conditions of this Agreement, at the Closing, the Purchaser shall purchase and subscribe from the Company, and the Company shall sell, allot and issue to the Purchaser, free and clear of all Encumbrances, all of the Acquired Shares for an aggregate consideration of US$409,050,000 (the “Subscription Price”).

 

 

1.2  Closing.

  

1.2.1        The closing of the subscription of the Acquired Shares contemplated by this Agreement (the “Closing”) shall take place at the offices of Kirkland & Ellis, 26/F Gloucester Tower, The Landmark, 15 Queen’s Road Central, Central, Hong Kong, at 10:00 a.m., Hong Kong time, on the date that is seven Business Days after all of the conditions to the Closing set forth in Article VI (other than those to be satisfied at the Closing) are satisfied or waived in accordance with the terms herein, or at such other time or place as is mutually agreeable to the Parties. The date and time of the Closing are referred to herein as the “Closing Date.”

 

-1-
 

 

1.2.2        At the Closing, the Purchaser shall pay to the Company the Subscription Price by wire transfer of immediately available funds in U.S. dollars or, at the option of the Purchaser, in RMB based on the Applicable Exchange Rate, to a bank account designated by the Company no later than three Business Day before the Closing Date.

 

1.2.3        At the Closing, the Company will make entries in its register of members to record and give effect to the issue and allotment of the Acquired Shares, credited as fully paid, to the Purchaser, and will deliver to the Purchaser (i) a certified copy of the register of members of the Company (certified as true and correct by the registered office provider or share registrar of the Company) evidencing the Acquired Shares as having been registered in the name of the Purchaser, (ii) free and clear of Encumbrances, one or more certificates representing the Acquired Shares, and (iii) a receipt for payment of the Subscription Price.

 

1.3  Withholding. Notwithstanding any other provision in this Agreement, the Purchaser (and any other Person that has any withholding obligation with respect to any payment made pursuant to this Agreement) shall be entitled to deduct and withhold from the payments to be made pursuant to this Agreement an amount or amounts equal to any Taxes required to be deducted and withheld with respect to the making of such payments under any applicable provision of law. To the extent that amounts are so withheld and deducted pursuant to this Section 1.3, such withheld amounts shall be treated for all purposes of this Agreement as having been paid by such Person in respect of which such deduction and withholding was made.

 

Article II

 

Representations and Warranties Regarding the PARENT GROUP COMPANIES

 

As a material inducement to the Purchaser to enter into this Agreement and to subscribe the Acquired Shares in accordance with the terms hereof, except as set forth in the disclosure schedule delivered by the Parent and the Company to the Purchaser on the date hereof (the “Company Disclosure Schedule”), each of the Parent and the Company hereby jointly and severally represents and warrants to the Purchaser as of the date hereof and as of the Closing Date as follow that:

 

2.1  Organization and Corporate Power.

 

2.1.1        Section 2.1.1 of the Company Disclosure Schedule contains (i) a complete and accurate list of each Person in which any Group Company owns or holds the right to acquire any Share Capital, and (ii) a complete and accurate list for each Group Company of its name, its jurisdiction of incorporation or organization, other jurisdictions in which it is authorized to do business and its capitalization (including the identity of each shareholder or equity holder and the number of shares or other equity interests held by each such shareholder or equity holder).

 

2.1.2        Each of the Parent and the Company is an exempted company duly incorporated, validly existing and in good standing under the laws of the Cayman Islands. Each of the Group Companies is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation set forth on Section 2.1.1 of the Company Disclosure Schedule. Each of the Parent and the Group Companies has full corporate power and authority to conduct its businesses as it is now being conducted, to own or use its properties and assets that each purports to own or use and to perform its obligations under the contracts to which each is a party. Each of the Parent and the Group Companies is duly qualified to do business as an organization, and is in good standing, under the laws of each jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification.

 

-2-
 

 

2.1.3        The Parent (or the Company on its behalf) has delivered to the Purchaser correct and complete copies of the certificates of incorporation, the memorandum and articles of association (or analogous governing documents), business licenses, certificates of approval (as applicable) of each Group Company, which documents reflect all amendments made thereto at any time before the date hereof. Such documents are in full force and effect and will remain in full force and effect following the transactions contemplated by this Agreement, except as amended by the Restated Articles. Correct and complete copies of the minute books containing the records of meetings of the shareholders and boards of directors (or analogous parties), the share certificate books and the share record books (or equivalent documents) of each Group Company have been furnished to the Purchaser. No Group Company is in default under or in violation of any provision of its memorandum or articles of association (or analogous governing documents).

 

2.2  Share Capital and Related Matters.

 

2.2.1        Section 2.2.1 of the Company Disclosure Schedule sets forth the authorized Share Capital of each Group Company, the name of each Person holding any such Share Capital (including any options, warrants or other rights to purchase any equity securities or Share Capital) and any securities convertible or exchangeable into any equity securities or Share Capital of any Group Company and the amount and type of such securities held by such Persons as of the date hereof and as of the Closing Date. The capitalization tables included in Exhibit A hereof set forth the issued and outstanding Share Capital of the Company and the number of shares held by and the shareholding percentage of each shareholder of the Company immediately before and after the Closing. The Parent is the record owner and beneficial owner of 1,100 Company Shares, representing 100% of the issued and outstanding Share Capital of the Company as of the date hereof. The Acquired Shares, when issued in accordance with terms of this Agreement, will be duly authorized and validly issued, fully paid and non-assessable, free of any Encumbrance and not subject to any restrictions on transfer other than restrictions on transfer under the memorandum and articles of association of the Company, the Shareholders Agreement and any applicable securities or corporate laws. No Group Company has outstanding any shares or securities convertible or exchangeable for any Share Capital or other ownership interest or containing any profit participation features, nor does any Group Company have outstanding any rights or options to subscribe for or to purchase its Share Capital or other ownership interest or any shares or securities convertible into or exchangeable for its Share Capital or other ownership interest or any share appreciation rights or phantom share plans. No Group Company is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of its Share Capital or other ownership interest or any warrants, options or other rights to acquire its Share Capital. Except for the issued and outstanding Company Shares the Parent owns as of the date hereof, the Parent does not own or have direct or indirect interest in any other Share Capital of any Group Company or is a party to any option, warrant, right, contract, call, put or other agreement or commitment providing for the acquisition or disposition of any Share Capital of any Group Company (other than this Agreement). The Parent is not a party to any voting trust, proxy or other agreement or understanding with respect to the voting of any Share Capital of any Group Company.

 

2.2.2        There are no statutory or contractual preemptive rights, rights of first refusal or similar rights or restrictions with respect to the issuance of any Acquired Shares hereunder. The Company has not violated any applicable securities or other laws in connection with the offer, sale or issuance of any of its Share Capital, and the offer and issuance of the Acquired Shares hereunder does not require any registration or any other filing under any applicable securities or other laws. Other than the Shareholders Agreement, there are no agreements between the shareholders of the Company with respect to the voting or transfer of the Company’s Share Capital or with respect to any other aspect of the Company’s affairs.

 

-3-
 

 

2.2.3        Neither any Parent Group Company nor any Affiliate, representative, officer, employee, director or agent of any Parent Group Company is a party to or is bound by any agreement (other than this Agreement) with respect to any Acquisition Proposal.

 

2.2.4        No Person who holds any Share Capital (including options, warrants, convertible securities or otherwise) in the Parent has or shall have the right, and neither the Purchaser, any Group Company, nor the Parent has or shall have the obligation, to convert or otherwise transfer such Share Capital in the Parent into Share Capital of any Group Company or Affiliates (including, after the Closing, the Purchaser) as a result of the transactions contemplated by this Agreement.

 

2.2.5        All Share Capital (whether registered or otherwise) of each Group Company has been fully paid in accordance with the terms of the applicable investment documents, the articles of association (or equivalent documents) of each such Group Company and applicable law (including, if applicable, PRC law), as evidenced by true and complete copies of capital verification reports or other equivalent documents certifying to such effect issued by a certified accountant and by the accounting firm employing such accountant.

 

2.3  Indebtedness. No Group Company has any Indebtedness.

 

2.4  No Breach; Authorization; Execution & Enforceability.

 

2.4.1        The execution and delivery by each of the Parent and the Company of this Agreement and any other Transaction Documents to which it is a party, and its fulfillment of and compliance with the respective terms thereof do not and will not, (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under (whether with or without the giving of notice, the passage of time or both), (iii) result in the creation of any Lien upon its assets or Encumbrance upon its Share Capital (including, with respect to the Company, any of the Company Shares) pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any permit, authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency (except for filings and clearance with the HKSE in connection with the announcement and the shareholder circular of the Parent regarding the transactions contemplated hereby, if required) pursuant to, (a) any law, statute, rule or regulation to which such party is subject, (b) the constitutional documents of such party, or (c) any instrument, contract, lease, license, order, judgment, decree or other agreement to which such party is subject.

 

2.4.2        Each of the Parent and the Group Companies possesses full power, legal capacity and authority to execute and deliver each Transaction Document to which it is a party and any and all instruments necessary or appropriate in order to fully effectuate the terms and conditions of each such Transaction Document and to perform and consummate the transactions contemplated hereby and thereby.

 

2.4.3        Each of the Parent and the Group Companies’ execution, delivery and performance of each Transaction Document to which it is a party has been duly and validly authorized by all necessary action on the part of such party and such party’s stockholders. Each Transaction Document to which the Parent or a Group Company is a party has been duly and validly executed and delivered by such party and constitutes, or upon its execution and delivery will constitute, a valid and legally binding obligation of such party, enforceable against such party in accordance with its terms and conditions, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity).

 

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2.5  Financial Statements. The Parent has delivered to the Purchaser the audited balance sheets and related statements of income and cash flows of the Parent for the fiscal years ended December 31, 2012 and 2013 (including in each case the notes thereto and the accompanied auditors report, the “Audited Financial Statements”), and (ii) the management accounts with respect to the financial performance of the Parent Group Companies for the nine months ended September 30, 2014 (the “Management Accounts”, and together with the Audited Financial Statements, collectively, the “Financial Statements”). Each of the Audited Financial Statements (including in all cases the notes thereto, if any) is accurate and complete in all material respects, is consistent with the books and records of the Parent Group Companies (which, in turn, are accurate and complete in all material respects), has been prepared in accordance with HKFRs consistently applied throughout the periods covered thereby and presents fairly the financial condition, results of operations, shareholders’ equity and cash flows of the Parent Group Companies, as of the dates and for the periods referred to therein in accordance with HKFRs. The Management Accounts have been prepared in accordance with HKFRs, applied on a consistent basis, and shows a true and fair view of the state of affairs, assets and liabilities, financial position and profit or loss of the Parent Group Companies as of the dates shown and for the periods covered thereby and are not affected by any unusual or non-recurring items not covered therein. Each Parent Group Company maintains and, for all periods covered by the Financial Statements, has maintained (i) books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of such Parent Group Company and (ii) a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with HKFRs.

 

2.6  Absence of Undisclosed Liabilities. Each Group Company has no obligation or liability (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to the Company, whether due or to become due and regardless of when asserted) arising out of transactions entered into at or prior to the date hereof, or any action or inaction at or prior to the date hereof, or any state of facts existing at or prior to the date hereof (including any oral agreements), other than liabilities set forth in the Financial Statements.

 

2.7  Products and Services Warranty. All products and services licensed, sold or delivered by the Group Companies, or by the Retained Parent Group Companies in connection with the Internet Terminal and Related Business, have been in conformity in all material respects with all applicable contractual commitments and all express and implied warranties, and no Parent Group Company has any liability (or has received written notice of any action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any such liability) for replacement thereof or other damages in connection therewith. No products licensed, sold or delivered and no services rendered by any Group Company, or by the Retained Parent Group Companies in connection with the Internet Terminal and Related Business, are subject to any guarantee, warranty or other indemnity beyond the applicable industry standard terms and conditions of such sale or service.

 

 

2.8  No Material Adverse Effect.

 

Since the Latest Balance Sheet Date, there has occurred no fact, event or circumstance which has had, or could reasonably be expected to have, a Material Adverse Effect, and each of the Group Companies has conducted its business only in the Ordinary Course.

 

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2.9  Absence of Certain Developments.

 

2.9.1        Except as expressly contemplated by this Agreement and the Restructuring Contracts, since the Latest Balance Sheet Date, no Group Company has:

 

(a)                issued or otherwise sold any notes, bonds or other debt securities or any Share Capital or other equity securities or any securities convertible, exchangeable or exercisable into any Share Capital or other equity securities;

 

(b)               borrowed any amount or incurred or become subject to any Indebtedness or other liabilities, except current liabilities incurred in the Ordinary Course and liabilities under contracts entered into in the Ordinary Course;

 

(c)                discharged or satisfied any Lien or paid any obligation or liability, other than current liabilities paid in the Ordinary Course;

 

(d)               declared, set aside or made any dividend, payment or distribution of Cash or other property to any of the holders of its Share Capital with respect to such share or purchased, redeemed or otherwise acquired, directly or indirectly, any Share Capital or any outstanding rights or securities exercisable or exchangeable for or convertible into its Share Capital or other equity securities (including, without limitation, any warrants, options or other rights to acquire its Share Capital);

 

(e)                mortgaged or pledged any of its properties or assets or subjected them to any Encumbrances;

 

(f)                sold, assigned, leased, licensed or transferred any of its tangible assets, except the sale of inventory in the Ordinary Course, or canceled any debts or claims;

 

(g)                sold, assigned, leased, licensed, transferred or otherwise encumbered any Intellectual Property Rights or other intangible assets, or disclosed any material proprietary confidential information to any Person, or abandoned or permitted to lapse any Intellectual Property Rights or other intangible asset;

 

(h)               suffered any extraordinary losses or waived any rights of material value, whether or not in the Ordinary Course;

 

(i)                 delayed or postponed the payment, or modified the payment terms, of any accounts or commissions payable or any other liability or obligations or agreed or negotiated with any party to extend the payment date of any accounts or commissions payable or accelerated the collection of any notes, accounts or commissions receivable;

 

(j)                 made capital expenditures in an amount materially less than the budgeted amount of capital expenditures for such period or made capital expenditures or commitments for capital expenditures that aggregate in excess of US$1,000,000;

 

(k)               made any charitable contributions or pledges;

 

(l)                 suffered any damage, destruction or loss or waived any rights of material value, whether or not in the Ordinary Course, exceeding in the aggregate US$200,000 (whether or not covered by insurance);

 

(m)             made any loans or advances to, Investment in, or guarantees for the benefit of, any Person or taken steps to incorporate any Subsidiary;

 

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(n)               made any change in any method of accounting or accounting policies, other than those required by US GAAP or PRC GAAP and disclosed in writing to the Purchaser;

 

(o)               entered into any employment or consulting contract (written or oral) or changed the employment terms for any employee or agent or made or granted any bonus (including any one-time bonus) or any wage, salary or compensation increase to any director, officer or senior manager, or made or granted any increase in any employee benefit plan or arrangement, or amended or terminated any existing employee benefit plan, incentive arrangement or other benefit covering any of the employees of any Parent Group Company or adopted any new employee benefit plan, incentive arrangement or other benefit covering any of the employees of any Parent Group Company;

 

(p)               entered into any contract, agreement or arrangement (i) outside of the Ordinary Course or (ii) prohibiting or restricting it from freely engaging in any business or otherwise restricting the conduct of its business (including, without limitation, any contract, agreement or arrangement containing any exclusivity, noncompetition, most favored pricing or bartering terms to which any Parent Group Company is subject);

 

(q)               amended its memorandum and articles of association or other organizational documents;

 

(r)                 made or changed any Tax election, changed any annual accounting period, adopted or changed any accounting method, filed any amended Tax Return, entered into any agreement with any taxing authority, settled any Tax claim or assessment relating to any Group Company, surrendered any right to claim a refund of Taxes, consented to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to any Group Company, or took any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of any Group Company for any period ending after the Closing Date or decreasing any Tax attribute of any Group Company existing on the Closing Date;

 

(s)                (i) entered into any transaction other than the transactions contemplated under the Transaction Documents or in the Ordinary Course, (ii) entered into any other material transactions, whether or not in the Ordinary Course, or (iii) materially changed any business practice;

 

(t)                 suffered any adverse change in its business, customers or customer relations, suppliers or supplier relations;

 

(u)               organized any new Subsidiary or branch, or acquired any Share Capital, shares or equity interests in the business, of any other company

 

(v)               adopted a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, or other reorganization; or

 

(w)              agreed, resolved or otherwise committed, whether orally or in writing, to do any of the foregoing.

 

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2.9.2        Except as expressly contemplated by this Agreement, since the Latest Balance Sheet Date, in connection with the Internet Terminal and Related Business, no Retained Parent Group Company has:

 

(a)                mortgaged or pledged any of its properties or assets or subjected them to any Encumbrances;

 

(b)               sold, assigned, leased, licensed or transferred any of its tangible assets, except in the Ordinary Course, or canceled any debts or claims exceeding US$1,000,000;

 

(c)                sold, assigned, leased, licensed, transferred or otherwise encumbered any Intellectual Property Rights or other intangible assets, or disclosed any material proprietary confidential information to any Person, or abandoned or permitted to lapse any Intellectual Property Rights or other intangible asset;

 

(d)               made any charitable contributions or pledges;

 

(e)                made any loans or lending to, Investment in, or guarantees for the benefit of, any Person or taken steps to incorporate any Subsidiary;

 

(f)                made or changed any Tax election, changed any annual accounting period, adopted or changed any accounting method, filed any amended Tax Return, entered into any agreement with any taxing authority, settled any Tax claim or assessment relating to any Retained Parent Group Company, surrendered any right to claim a refund of Taxes, consented to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to any Retained Parent Group Company, or took any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of any Retained Parent Group Company for any period ending after the Closing Date or decreasing any Tax attribute of any Retained Parent Group Company existing on the Closing Date;

 

(g)                (i) entered into any transaction other than the transactions contemplated under the Transaction Documents or in the Ordinary Course, (ii) entered into any other material transactions, whether or not in the Ordinary Course, or (iii) materially changed any business practice;

 

(h)               suffered any material adverse change in its business, customers or customer relations, suppliers or supplier relations;

 

(i)                 organized any new Subsidiary or branch, or acquired any Share Capital, shares or equity interests in the business, of any other company;

 

(j)                 adopted a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, or other reorganization; or

 

(k)               agreed, resolved or otherwise committed, whether orally or in writing, to do any of the foregoing.

 

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2.10             Assets.

 

2.10.1    Each Group Company has good and marketable title to the Acquired Assets and has good and marketable title, or a valid leasehold interest in, or a valid license to use, all other properties and assets, tangible or intangible, used by any Group Company (such other properties and assets and the Acquired Assets, collectively, the “Transferred Assets”), in each case free and clear of all Encumbrances.

 

2.10.2    All of the equipment and other tangible assets (whether owned or leased) of any Group Company are in good condition and are fit for use in the Ordinary Course. As of the Closing, each Group Company shall own, or have a valid leasehold interest in, or a valid license to use, all the assets and rights necessary for the conduct of the Company’s and each Group Company’s respective businesses as presently conducted. All items included in the inventories on hand of the Group Companies including those that have been transferred to the Group Companies under the Restructuring (collectively, the “Inventories”) consist of a quality and quantity saleable in the Ordinary Course of the Parent Group Companies in connection with the Internet Terminal and Related Business, except for obsolete items and items of below-standard quality, all of which have been written off or written down to net realizable value in the Financial Statements. Inventories now on hands that were purchased after the Latest Balance Sheet Date were purchased in the Ordinary Course at a cost not exceeding market prices prevailing at the time of purchase. The Transferred Assets constitute all of the assets owned or used by the Group Companies in their respective businesses and will enable the Group Companies to continue to operate their respective businesses after the Closing in the same manner as operated by the Parent Group Companies in connection with the Internet Terminal and Related Business prior to the Restructuring.

 

2.11             Real Property.

 

2.11.1    Leased Properties. Section 2.11.1 of the Company Disclosure Schedule sets forth a list of all of the leases, licenses and subleases of real property to which any Group Company is a party to or bound by (each a “Lease” and, collectively, the “Leases”) and each leased, licensed and subleased parcel of real property in which any Group Company has a leasehold or subleasehold interest (the “Leased Real Property”). Each Group Company holds a valid and existing leasehold or subleasehold interest under each of the Leases. With respect to each Lease listed on Section 2.11.1 of the Company Disclosure Schedule: (a) there are no disputes, oral agreements or forbearance programs in effect as to such Lease and no Group Company has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in such Lease; (b) the Lease is legal, valid, binding, enforceable and in full force and effect and will continue to be so on substantially identical terms immediately following the Closing; (c) neither any Group Company nor any other party to any Lease is in breach or default, and no event has occurred which, with notice or lapse of time or both, would constitute a breach or default or permit termination, modification or acceleration under the Lease or sublease; (d) such Lease has not been amended or modified in any respect; (e) neither any Group Company nor the Parent has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold, license agreement or subleasehold; (f) all buildings, improvements and other property leased, licensed or subleased thereunder are supplied with utilities and other services necessary for the operation thereof (including gas, electricity, water, telephone, sanitary and storm sewer, and access to public roads); (g) if required by applicable law or regulation, all of Leases required to be set forth on Section 2.11.1 of the Company Disclosure Schedule have been registered with the competent lease registration authority in the jurisdiction in which such Leases are entered into in accordance with applicable laws and regulations and (h) the transactions contemplated by this Agreement will not require the consent of any landlord, licensor or sublandlord or the Parent will provide such consent prior to the Closing.

 

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2.11.2    Real Property Disclosure. No Group Company owns any real property, and the Leased Real Property represents all of the real property necessary to operate the business of the Group Companies as presently conducted and as presently proposed to be conducted, in each case in the Ordinary Course.

 

2.11.3    Current Use. There is no known violation of any covenant, condition, restriction, easement, agreement or order of any governmental authority having jurisdiction over any Leased Real Property that affects such real property or the use or occupancy thereof. No damage or destruction has occurred with respect to any of the Leased Real Property that, individually or in the aggregate, has had or resulted in, or will have or result in, a significant adverse effect on the operation of the business of any Group Company. No current use by any Group Company of any Leased Real Property is dependent on a nonconforming use or other approval from a governmental authority, the absence of which would limit the use of any of the properties or assets in the operation of any Group Company’s business.

 

2.11.4    Condition and Operation of Improvements. All buildings and all components of all buildings, structures and other improvements included within the Leased Real Property (the “Improvements”) are in good condition and repair and are adequate to operate such facilities as currently used. All utilities and other similar systems serving the Leased Real Property are installed and operating and are sufficient to enable the Leased Real Property to continue to be used and operated in the manner currently being used and operated.

 

2.12             Tax Matters.

 

2.12.1    Each Group Company has, and in connection with the Internet Terminal and Related Business, each Retained Group Company has, filed or caused to be filed on a timely basis all Tax Returns required to be filed by or with respect to such Parent Group Company (in the case of any Retained Parent Group Company, only to the extent related to the Internet Terminal and Related Business, and all such Tax Returns have been prepared in compliance with all applicable laws and regulations and are true and accurate in all respects. No reporting position was taken on any such Tax Return which has not been disclosed to the appropriate Tax authority or in such Tax Return, as may be required by law. All records relating to such Tax Returns or to the preparation thereof required by applicable laws to be maintained by each Parent Group Company have been duly maintained. All Taxes due and payable by any Parent Group Company (in the case of any Retained Parent Group Company, only to the extent related to the Internet Terminal and Related Business) have been timely paid in full (whether or not such Taxes are shown or required to be shown on a Tax Return) and each Parent Group Company has duly and timely withheld and fully paid over to the appropriate taxing authority all Taxes which it was required to withhold in connection with any amounts paid or owed to any employee, independent contractor, shareholder, creditor or other third party (in the case of any Retained Parent Group Company, only to the extent related to the Internet Terminal and Related Business). No Group Company, and to the extent related to the Internet Terminal and Related Business, no Retained Parent Group Company, is currently the beneficiary of any extension of time within which to file any Tax Return. In connection with the Internet Terminal and Related Business, no claim has ever been made by an authority in a jurisdiction where any Parent Group Company does not file Tax Returns that any Parent Group Company is or may be subject to taxation by that jurisdiction. There are no Liens for Taxes (other than Taxes not yet due and payable) in connection with the Internet Terminal and Related Business upon any of the assets of any Parent Group Company.

 

2.12.2    No PRC (including any subdivision, municipality, province or locality of the PRC), U.S. federal, state, local, or other non-U.S. Tax audits or administrative or judicial Tax Proceedings are pending or being conducted with respect to any Group Company, or, in connection with the Internet Terminal and Related Business, any Retained Parent Group Company. No Parent Group Company has received from any PRC (including any subdivision, municipality, province or locality of the PRC), U.S. federal, state, local, or non-U.S. taxation authority (including jurisdictions where the Parent Group Companies have not filed Tax Returns in connection with the Internet Terminal and Related Business) any (i) written notice indicating an intent to open an audit or other review or Proceeding, (ii) request for information related to Tax matters or (iii) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted, or assessed by any Taxing authority against any Parent Group Company in connection with the Internet Terminal and Related Business.

 

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2.12.3    No Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.

 

2.12.4    No Group Company is a party to or bound by any Tax allocation or sharing agreement. No Group Company (i) has been a member of an Affiliated Group filing a consolidated Tax Return, or (ii) has any liability for the Taxes of any Person (other than any Group Company) as a result of any Group Company being part of or owned by, or ceasing to be party of or owned by, any affiliated, combined, consolidated, unitary or other similar group prior to the Closing, as a transferee or successor, by contract or otherwise.

 

2.12.5    The unpaid Taxes of any Group Company (i) did not, as of the Latest Balance Sheet Date, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth in the Financial Statements, and (ii) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of such Company in filing its Tax Returns. Since the Latest Balance Sheet Date, no Group Company has, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company has, incurred any liability for Taxes arising from any transactions outside of the Ordinary Course.

 

2.12.6    No Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a taxable period ending on or prior to the Closing Date, (ii) agreement with any taxing authority executed on or prior to the Closing Date, (iii) installment sale or open transaction disposition made on or prior to the Closing Date, or (iv) prepaid amount received on or prior to the Closing Date.

 

2.12.7    No Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, is resident for Tax purposes or has a branch, permanent establishment, agency of other taxable presence in any jurisdiction other than its jurisdiction of organization.

 

2.12.8    The prices and terms for the provision of any property or services undertaken by the Group Companies, or by the Retained Parent Group Company in connection with the Internet Terminal and Related Business, are arm’s length for purposes of the relevant transfer pricing laws, and all related material documentation required by such laws has been timely prepared or obtained and, if necessary, retained.

 

2.12.9    Each Group Company, and in connection with the Internet Terminal and Related Business, each Retained Parent Group Company, has complied with all statutory provisions, rules, regulations, orders and directions in respect of any value added or similar Tax on consumption, has promptly submitted accurate returns, maintains full and accurate records, and has never been subject to any interest, forfeiture, surcharge or penalty and is not a member of a group or consolidation with any other company for the purposes of value added Taxation.

 

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2.12.10 No Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, has granted any power of attorney with respect to any matters related to Taxes that is currently in force.

 

2.12.11 Section 2.12.11 of the Company Disclosure Schedule contains details of any concession, agreements (including agreements for the deferred payment of any Tax liability) or other formal or informal arrangement with any taxation authority relating to the Group Companies and, in connection with the Internet Terminal and Related Business, the Retained Parent Group Companies.

 

2.12.12 All Tax credits (including without limitation Tax refunds and rebates) and Tax holidays enjoyed by any Parent Group Companies in connection with the Internet Terminal and Related Business established under the laws of the PRC under applicable laws since its establishment have been in compliance with all applicable laws and is not subject to reduction, revocation, cancellation or any other changes (including retroactive changes) in the future, except through change in applicable laws published by relevant Government Entity. Neither the Parent nor any Parent Group Company has received any notice in relation to or is aware of any event that may result in repeal, cancellation, revocation, or return of any such Tax credits or Tax holidays.

 

2.12.13 No Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, has been a party to or otherwise knowingly involved in any transaction or series of transactions which, or any part of which, is intended to avoid, or unlawfully reduce or delay any Tax, including but not limited to using or presenting any invalid, untrue or false invoices or receipts to claim for deduction of business expenses for Tax purposes.

 

2.13             Contracts and Commitments.

 

2.13.1    Except as expressly contemplated by this Agreement, no Group Company, and in connection with the Internet Terminal and Related Business no Retained Parent Group Company, is a party to or bound by any of the following written or oral Contracts (the “Material Contracts”) other than the Material Contracts listed in Section 2.13.1 of the Company Disclosure Schedule and the Restructuring Contracts:

 

(a)                any Contract involving payment obligations (contingent or otherwise) in excess of, US$10 million individually or in the aggregate per annum;

 

(b)               any Contract relating to the sale, issuance, grant, exercise, award, purchase, repurchase or redemption of any Share Capital;

 

(c)                any Contract requiring the consent of any party thereto upon a change in control of any Parent Group Company, containing any provision which could result in a modification of any rights or obligations of any party thereunder upon a change in control of any Parent Group Company or which would provide any party any remedy (including rescission or liquidated damages) in the event of a change in control of any Parent Group Company;

 

(d)               any Contract involving any provisions providing exclusivity, “most favored nations”, rights of first refusal or first negotiation or similar rights;

 

(e)                any Contract involving the lease, license, sale, use, disposition or acquisition of a material amount of assets or of a material business;

 

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(f)                any Contract involving the waiver, compromise, or settlement of any material Legal Proceeding;

 

(g)                any Contract involving the ownership or lease of, title to, use of, or any leasehold or other interest in, any real or personal property (except for personal property leases involving payments of less than US$1 million per annum),

 

(h)               any employment Contract (other than employment Contracts for at-will employment relationships that by their terms do not require such Parent Group Company to make any severance payments except as required by PRC law); in each case that provides for the payment of any cash or other compensation in excess of US$1 million annually;

 

(i)                 any Contract under which such Parent Group Company is obligated or will become obligated to make any severance payment or bonus compensation payment by reason of this Agreement or the consummation of the transactions contemplated hereunder;

 

(j)                 any Contract by such Parent Group Company relating to such Parent Group Company’s purchase, sale or lease of supplies, goods or products or for the furnishing or receipt of services, in each case, the performance of which will extend over a period of more than one year and which provides for annual payments to or by such Parent Group Company that exceed US$1 million annually;

 

(k)               any Contract under which such Parent Group Company has advanced or loaned monies to any other Person or otherwise agreed to advance, loan or invest any funds involving an amount in excess of US$1 million individually or US$1 million in the aggregate;

 

(l)                 any Contract for Indebtedness involving an amount in excess of US$1 million individually or in the aggregate or the mortgaging, pledging or otherwise placing of a Lien on any asset or group of assets of such Parent Group Company or any material letter of credit arrangements;

 

(m)             any Contract for the license of any Intellectual Property Rights of such Parent Group Company which provides for annual payments to or by such Group Company that exceed US$1 million annually;

 

(n)               any Contract pursuant to which such Parent Group Company has granted a power of attorney, agency or similar authority to a third party;

 

(o)               any Contract prohibiting such Group Company from freely engaging in any business or competing anywhere in the world;

 

(p)               any Contract involving the establishment, contribution to, or operation of a partnership, joint venture, franchise or involving a sharing of profits or losses, or any investment in, loan to or acquisition or sale of the securities, equity interests or assets of any Person;

 

(q)               any Contract with a Government Entity or state owned enterprise;

 

(r)                 Contract involving any Affiliate Transactions; or

 

(s)                Contract which contains restrictions with respect to payment of dividends or any other distribution in respect of its Share Capital, partnership interests or membership interests;

 

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2.13.2    Section 2.13.1 of the Company Disclosure Schedule contains a true and complete list of all of the Material Contracts. All of the Material Contracts set forth on Section 2.13.1 of the Company Disclosure Schedule are, and all of the Restructuring Contracts will be when entered into, valid, binding and enforceable in accordance with their respective terms and shall be in full force and effect without penalty in accordance with their terms upon consummation of the transactions contemplated hereby. Each Group Company, and in connection with the Internet Terminal and Related Business, each Retained Parent Group Company, has performed all obligations required to be performed by it under such Contracts and is not in default under or in breach of, nor in receipt of any claim of default or breach under, any Contract to which such Parent Group Company is subject; no event has occurred which it is foreseeable with the passage of time or the giving of notice or both could result in a default, breach or event of noncompliance by any Parent Group Company under any contract, agreement or instrument to which any Parent Group Company is subject in connection with the Internet Terminal and Related Business; no Group Company has a present expectation or intention of not fully performing all such obligations on a timely basis; the Parent has no knowledge of any breach or anticipated breach by the other parties to any contract, agreement, instrument or commitment to which any Parent Group Company is a party in connection with the Internet Terminal and Related Business; and no Parent Group Company is a party to any contract or commitment in connection with the Internet Terminal and Related Business that might reasonably be expected to have a Material Adverse Effect.

 

2.13.3    The Purchaser has been supplied with a true and correct copy of each of the written Material Contracts and an accurate written description of each of the oral Material Contracts that are referred to on Section 2.13.1 of the Company Disclosure Schedule, together with all amendments, waivers or other changes thereto, and the Purchaser will have been supplied with a true and correct copy of each of the Restructuring Contracts together with all amendments, waivers or other changes thereto before the Closing.

 

2.14             Intellectual Property Rights and IT Infrastructure.

 

2.14.1    Section 2.14.1 of the Company Disclosure Schedule contains a true, complete and correct list of all of the Intellectual Property Rights that are owned by any of the Parent Group Companies and used or held for use exclusively in the Internet Terminal and Related Business prior to the Restructuring (the “Acquired Intellectual Property Rights”), and that are: (i) patented or registered Intellectual Property Rights, (ii) pending patent applications and applications for registration of other Intellectual Property Rights, (iii) computer software material to the conduct of the business of the Parent Group Companies, (iv) trade or corporate names and Internet domain names, and (v) material unregistered trademarks and service marks.

 

2.14.2    The Group Companies (i) own all right, title and interest in and to, free and clear of all Encumbrances, all Acquired Intellectual Property Rights, and (ii) own all right, title and interest in and to, or have the valid and enforceable right to use pursuant to a license set forth on Section 2.13.1 of the Company Disclosure Schedule and the IP Licenses, free and clear of all Encumbrances, all Licensed Intellectual Property Rights used in or held for use or necessary to operate the Internet Terminal and Related Business of the Parent Group Companies as conducted prior to the Restructuring and as currently proposed to be conducted by the Group Companies after the Closing (together with the Acquired Intellectual Property Rights, collectively, the “Company Intellectual Property Rights”). The patented or registered Company Intellectual Property Rights owned by the Group Companies are valid, enforceable and subsisting and the patented or registered Company Intellectual Property Rights contemplated to be transferred to the Group Companies under the Restructuring will be valid, enforceable and subsisting after the completion of the transfer thereof, and no loss, other than by expiration of patents at the end of their respective statutory terms (but not as a result of any act or omission by any Parent Group Company), of any of the Company Intellectual Property Rights is threatened or pending. All commercially reasonable, customary or necessary action, including the payment of all fees and taxes (to the extent applicable), have been taken by the Parent Group Companies to maintain and protect the Intellectual Property Rights.

 

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2.14.3    (i) There are no claims against any Group Company, or in connection with the Internet Terminal and Related Business, against any Retained Parent Group Company, that were either made within the past five years or are presently pending contesting the validity, use, enforceability, ownership or registrability of any of the Company Intellectual Property Rights owned by any Parent Group Company, and to the knowledge of the Parent, there is no reasonable basis for any such claim, (ii) no Group Company, and in connection with the Internet Terminal and Related Business, no Retained Parent Group Company, has infringed, misappropriated or otherwise conflicted with, and the operation of the business of any Group Company, and in connection with the Internet Terminal and Related Business, any Retained Parent Group Company, as currently conducted, does not infringe, misappropriate or otherwise conflict with, any Intellectual Property Rights of any other Persons and neither any Parent Group Company nor the Parent has any knowledge of any facts or circumstances that indicate a likelihood of the foregoing, (iii) neither any Parent Group Company nor the Parent has received any notices (including cease-and-desist letters or offers to license) alleging infringement or misappropriation of, or other conflict with, any Intellectual Property Rights of any other Person, and (iv) to the knowledge of the Parent, no other Person is infringing, misappropriating or otherwise conflicting with any of the Company Intellectual Property Rights. The transactions contemplated by this Agreement will not impair the right, title or interest of any Parent Group Company in and to the Company Intellectual Property Rights and the Company Systems in connection with the Internet Terminal and Related Business, and all of the Company Intellectual Property Rights and the Company Systems will be owned or available for use by the Parent Group Companies in connection with the Internet Terminal and Related Business immediately after the Closing on terms and conditions identical to those under which the Parent Group Companies owned or used the Company Intellectual Property Rights and the Company Systems immediately prior to the Closing. To the knowledge of the Parent, no current or former employee, consultant, director or officer of any Parent Group Company in connection with the Internet Terminal and Related Business has disclosed to any Third Party or otherwise used any confidential information of such Parent Group Company except in the course of their employment or engagement with such Parent Group Company and at the direction of such Parent Group Company.

 

2.14.4    The Group Companies own all right, title and interest in and to the Intellectual Property Rights authored, developed or otherwise created in connection with the Internet Terminal and Related Business by each current and former employee, consultant, director and officer of the Parent Group Companies in connection with their employment with the Parent Group Companies, without any restrictions or obligations owed to such employee, consultant, director or officer with respect to such Parent Group Company’s use or ownership of such Intellectual Property Rights. Without limiting the generality of the foregoing sentence, all author’s and moral rights in any such Intellectual Property Rights have been waived.

 

2.14.5    The company systems, including the software, firmware, hardware (whether for general or special purpose), networks and interfaces owned, leased or licensed by the Group Companies in the conduct of their respective businesses (collectively, the “Company Systems”) are sufficient for the needs of the business of the Group Companies as currently operated. (i) No source code for any proprietary software of any Parent Group Company included in the Company Intellectual Property Rights in connection with the Internet Terminal and Related Business (the “Company Software”) has been delivered, licensed, or made available to any escrow agent or other Person who is not, as of the date of this Agreement, an employee of a Parent Group Company, (ii) no Parent Group Company has a duty or obligation (whether present, contingent, or otherwise) to deliver, license, or make available the source code for any Company Software to any escrow agent or other Person who is not, as of the date of this Agreement, an employee of a Parent Group Company, and (iii) no event has occurred, and no circumstance or condition exists, that (with or without notice or lapse of time) could, individually or in the aggregate, reasonably be expected to result in the delivery, license, or disclosure of the source code for any Company Software to any Person who is not, as of the date of this Agreement, an employee of a Parent Group Company.

 

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2.14.6    The Parent Group Companies are and have been in compliance with (i) all applicable data protection or privacy laws governing the collection or use of personal information and (ii) any privacy policies or related policies, programs or other notices that concern any Parent Group Company’s collection, processing or use of personal information, in each case in connection with the Internet Terminal and Related Business.

 

2.15             Government Licenses and Permits. Section 2.15 of the Company Disclosure Schedule contains a complete listing and summary description of all permits, licenses, franchises, certificates, approvals, registrations, accreditations and other authorizations of domestic and foreign governments or agencies or other similar rights owned, possessed or used by the Group Companies in the conduct of their business and the ownership of their properties in connection with the Internet Terminal and Related Business (collectively, the “Licenses”) and such Licenses are in full force and effect and contain no materially burdensome restrictions or conditions and will remain in full force and effect without such restrictions or conditions following the consummation of the transactions contemplated by this Agreement. Each Group Company owns or possesses all right, title and interest in and to all of the Licenses, and the Licenses constitute all permits, licenses, franchises, certificates, approvals, registrations, accreditations and other authorizations necessary for the conduct of the Internet Terminal and Related Business. No regulatory body is considering modifying, suspending or revoking any of the Licenses. Each Group Company is in compliance with the terms and conditions of the Licenses and has received no notices that it is in violation of any of the terms or conditions of such Licenses or alleging the failure to hold or obtain any permit, license, franchise, certificate, approval or authorization. Each Group Company has taken all necessary action to maintain valid such Licenses. No loss, termination, expiration or revocation of any License is pending or threatened, other than expiration in accordance with the terms thereof and all of such Licenses shall be owned or available for use by the Group Companies on substantially identical terms immediately following the Closing.

 

2.16             Litigation, etc. With respect to each Group Company, or with respect to each Retained Parent Group Company to the extent related to the Internet Terminal and Related Business: there are no actions, suits, claims, proceedings, orders or investigations (including, without limitation, any condemnation, expropriation or similar proceedings) (collectively, “Legal Proceedings”) pending or threatened against or affecting such Parent Group Company or any assets of such Parent Group Company (or pending or threatened against or affecting any of the officers, directors, members, partners, managers or employees of such Parent Group Company with respect to his, her or its business or proposed business activities), or pending or threatened by such Parent Group Company against any third party, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality (including, without limitation, any actions, suits, proceedings or investigations with respect to the transactions contemplated by this Agreement); no Parent Group Company is subject to any arbitration proceedings under collective bargaining agreements or otherwise or any governmental investigations or inquiries; and there is no basis for any of the foregoing. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any employee of any Parent Group Company, the Parent Group Companies’ use in connection with their respective businesses of any information or techniques allegedly proprietary to any such employee’s former employers or such employee’s obligations under any agreements with former employers. The Group Companies are fully insured with respect to each of the matters set forth on Section 2.16 of the Company Disclosure Schedule. No Group Company or its assets are subject to any judgment, order or decree of any court or other governmental agency, and neither any Group Company nor the Parent has received any opinion or memorandum or legal advice from legal counsel to the effect that the any Group Company is exposed, from a legal standpoint, to any liability which may be material to any business of such Group Company.

 

2.17             Brokerage. There are no claims for brokerage commissions, finders’ fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon any Group Companies.

 

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2.18             Insurance. Section 2.18 of the Company Disclosure Schedule contains a description of all insurance policies maintained by any Parent Group Company with respect to its properties, assets or business (including the name of the insurer, the policy number, and the period, amount and scope of coverage) in connection with the Internet Terminal and Related Business. Each such insurance policy (i) is legal, valid, binding and enforceable and in full force and effect and (ii) will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated by this Agreement. No Parent Group Company is in default with respect to its obligations under any insurance policy maintained by it in connection with the Internet Terminal and Related Business and has not been denied insurance coverage. Section 2.18 of the Company Disclosure Schedule also sets forth a list of all claims, if any, made by any Parent Group Company in connection with the Internet Terminal and Related Business during the past three years against an insurer in respect of coverage under an insurance policy and there have been neither denials of claims nor reservation of rights letters with regard to such claims. No Parent Group Company has any self-insurance or co-insurance programs in connection with the Internet Terminal and Related Business, and the reserves set forth in the Financial Statements are adequate to cover all of the Parent Group Companies’ anticipated liabilities with respect to any such self-insurance or co-insurance programs in connection with the Internet Terminal and Related Business.

  

2.19             Employees.  

  

2.19.1    Section 2.19.1 of the Company Disclosure Schedule sets forth a true, complete and correct list of (i) all employees and contractors of each Group Company with the name of the employing company of each and the country in which the employee normally works, (ii) the position, date of hire, current annual rate of compensation (or with respect to employees compensated on an hourly or per diem basis, the hourly or per diem rate of compensation), including any bonus, contingent or deferred compensation, and estimated or target annual incentive compensation of each such person, (iii) the total compensation for each executive and key employee during the fiscal year ended December 31, 2013, including any bonus, contingent or deferred compensation, (iv) a list of each of the directors of each Group Company, and (v) the current annual rate of compensation of each such director.

 

2.19.2    Neither any executive nor any key employee of any Group Company or any group of employees of any Group Company has any plans to terminate his or her employment with such Group Company.

 

2.19.3    Each Group Company has complied in all material respects with all laws relating to the employment of labor (including, without limitation, provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social welfare benefits and the payment or withholding of payroll or similar taxes for employees, or any other applicable law or regulation concerning the employees of any Group Company); no Group Company has failed to contribute or make payment to pension insurance, occupational injury insurance, medical insurance, maternity insurance, unemployment insurance, the social insurance premiums, housing funds or other statutory welfare funds for the benefit of each of its employees in full and on time as required by applicable law, and neither any Group Company nor the Parent is aware of any present or threatened, or has ever experienced any historical, labor relations problems (including, without limitation, any union organization activities, threatened or actual strikes or work stoppages or material grievances).

 

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2.19.4    Neither any Group Company nor any employee of any Group Company is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreements relating to, affecting or in conflict with the present or proposed business activities of any Group Company. Neither any Group Company nor the Parent has received any notice alleging that any violation of any such agreements has occurred. Section 2.19.4 of the Company Disclosure Schedule contains a correct and complete list of all employees and consultants of the any Group Company which have executed and delivered to the Group Company any (i) agreement providing for the nondisclosure by such Person of any confidential information of such Group Company or (ii) agreement providing for the assignment or license by such Person to such Group Company of any Company Intellectual Property Rights (an “Inventions Agreement”). No current employee or consultant of any Group Company has excluded works or inventions made prior to his or her employment with such Group Company from any Inventions Agreement between such Group Company and such Person.

 

2.20             Employee Benefits Matters.

 

2.20.1    Section 2.20.1 of the Company Disclosure Schedule sets forth an accurate and complete list of each employee benefit plan, program or arrangement at any time maintained, sponsored or contributed to by any Group Company. Each such item listed on Section 2.20.1 of the Company Disclosure Schedule is referred to herein as a “Plan” and collectively as the “Plans.”

 

2.20.2    There are no pending or threatened actions, suits, investigations or claims with respect to any Plan (other than routine claims for benefits) which could result in material liability to any Group Company.

 

2.20.3    Each of the Plans and all related trusts, insurance contracts and funds have been maintained, funded and administered in compliance with their terms and in compliance with the applicable laws. With respect to each Plan, all required payments, premiums, contributions, distributions and reimbursements for all periods ending prior to or as of the Closing Date have been made or properly accrued.

 

2.20.4    Each Plan which is subject to health care continuation requirements has been administered in compliance with such requirements. No Plan provides medical or life or other welfare benefits to any current or future retired or terminated employee (or any dependent thereof) of any Group Company other than as required pursuant to applicable laws.

 

2.20.5    With respect to each Plan, the Parent or the Company has provided the Purchaser with true, complete and correct copies of (to the extent applicable) all documents pursuant to which the Plan is maintained, funded and administered (including the Plan and trust documents, any amendments thereto, the summary Plan descriptions and any insurance contracts or service provider agreements).

 

2.21             Compliance with Laws.

 

2.21.1    No Parent Group Company has violated any law, ordinance, code, rule or any governmental regulations, rules, circulars, notices or requirements relating to the operation of the Internet Terminal and Related Business and the maintenance and operation of its properties and assets in connection with the Internet Terminal and Related Business, and neither any Parent Group Company nor the Parent has received any notice of, and no claims have been filed, against any Parent Group Company alleging any such violation. No Parent Group Company has, in connection with the Internet Terminal and Related Business, sold, or facilitated the sale of, any products or goods that infringe any Person’s Intellectual Property Rights. The Inventories include no products or goods that infringe any person’s Intellectual Property Rights.

 

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2.21.2    Neither any Parent Group Company nor any of its respective Affiliates, directors, officers, employees, or agents has taken any act that will cause the Purchaser or any of its Affiliates (including, after the Closing, the Company) to violate the applicable laws of the United States such as the Foreign Corrupt Practices Act, 15 U.S.C. 78dd-1 et seq (the “FCPA”) or any applicable anti-corruption law in connection with the Internet Terminal and Related Business. Without limiting the generality of the foregoing, neither any Parent Group Company nor any director, officer, agent, employee, or any other Person associated with or acting for or on behalf of the foregoing, has offered, paid, promised to pay, or authorized the payment of any money or corporate fraud, or offered, given a promise to give, or authorized the giving of anything of value, to any government official, to any political party or official thereof or to any candidate for political office for any unlawful contribution, gift, entertainment or other unlawful expenses relating to a political activity, or for the purpose of (i) (A) influencing any act or decision of such government official, political party, party official, or candidate in his or its official capacity, (B) inducing such government official, political party, party official or candidate to do or omit to do any act in violation of the lawful duty of such government official, political party, party official or candidate, or (C) securing any improper advantage, or (ii) inducing such government official, political party, party official, or candidate to use his or its influence with any governmental authority to affect or influence any act or decision of such Government Entity, in order to assist such Person in obtaining or retaining business for or with, or directing business to any Parent Group Company, in each case in connection with the Internet Terminal and Related Business.

 

2.21.3    Neither any Parent Group Company nor any of its respective Affiliates, directors, officers, employees, representatives, or agents is currently a government official, officer, agent or employee of a non-U.S. government or government-owned enterprise (wholly or partially owned) or any agency, department or instrumentality thereof or political party or public international organization or a candidate for non-U.S. government or political office or is an agent, officer, or employee of any entity owned by a non-U.S. government (“Non-U.S. Official”). Further, as of the date of execution of this Agreement, no Non-U.S. Official or any agency, department, political party, public international organization, or instrumentality thereof is associated with, or presently owns an interest, whether direct or indirect, in any Parent Group Company or has any legal or beneficial interest in any such Person or the payments to be made by the Purchaser hereunder.

 

2.21.4    Neither any Parent Group Company nor any of its respective Affiliates, directors, officers, employees, representatives, or agents nor any person acting on behalf of any of the foregoing, has made a promise to make anything of value (“Payment”) in connection with the Internet Terminal and Related Business (i) to or for the use or benefit of any Non-U.S. Official; (ii) to any other person either for an advance or reimbursement, if it knows or has reason to know that any part of such Payment will be directly or indirectly given or paid by such other person, or will reimburse such other person for Payments previously made, to any Non-U.S. Official; or (iii) to any other person or entity, the payment of which would violate, or implicate any of the Purchaser or its Affiliates in the violation of, the laws or regulations of the United States or any other Government Entity having jurisdiction over the activities being carried out by the Purchaser.

 

2.21.5    Each Group Company has effective disclosure controls and procedures and an internal accounting controls system that is sufficient to provide reasonable assurances that violations of applicable anti-corruption laws have been and will be prevented, detected and deterred.

 

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2.21.6    No Parent Group Company (nor the Parent on behalf of any Parent Group Company) has at any time made any payments for political contributions or made any bribes, kickback payments or other illegal payments in connection with the Internet Terminal and Related Business.

 

2.21.7    No part of the funds used by any Parent Group Company or its Affiliates in connection with the Internet Terminal and Related Business have been or will be, directly or indirectly derived from, or related to, any activity that contravenes domestic or applicable international laws and regulations, including anti money laundering laws and regulations, or would cause the Purchaser or any of its Affiliates (including, after the Closing, the Company) to be in violation of any anti-money laundering or other laws in any jurisdiction, including the United States. No payment by any of the parties hereunder (whether pursuant to their indemnification obligations or otherwise) shall cause the Purchaser or any of its Affiliates (including, after the Closing, the Company) to be in violation of any anti money laundering laws and regulations of the PRC, the United States or any other relevant jurisdiction applicable to its business or operations.

 

2.22             Affiliate Transactions.

 

2.22.1    Except those between the members of the Group Companies, none of any employee, officer or director or Affiliate of the Group Companies, or the Parent, or any Person in the Family Group of any of the foregoing (each, a “Company Affiliate”) (i) is a party to any agreement, contract, commitment, arrangement, or transaction with any Group Company or that pertains to the business of the Group Companies other than any employment, non-competition, confidentiality or other similar agreements between any Group Company and any Person who is an officer, director or employee of the Group Companies (each, an “Affiliate Agreement”); or (ii) owns, leases, licenses or has any economic or other interest in any asset, tangible or intangible, that is used by any Group Company in carrying out its business (together with the Affiliate Agreements, collectively the “Affiliate Transactions”).

 

2.22.2    As of the Closing, except those between the members of the Group Companies, there will be no outstanding or unsatisfied obligations of any kind (including inter-company accounts, notes, guarantees, loans, or advances) between any Group Company, on the one hand, and a Company Affiliate on the other hand, except to the extent arising out of the post-Closing performance of an Affiliate Agreement that is in writing and is set forth on Section 2.22.2 of the Company Disclosure Schedule (and a true, complete and correct copy of which has been provided to the Purchaser). With respect to any Affiliate Agreement set forth on Section 2.22.2 of the Company Disclosure Schedule, (i) the terms and conditions of any such Affiliate Agreement are no less favorable to any Group Company than could have been obtained from an unrelated Third Party, and (ii) such Affiliate Agreement was negotiated and entered into on an arms-length, commercially reasonable basis.

 

2.23             Suppliers and Customers. Section 2.23 of the Company Disclosure Schedule accurately sets forth a list of the top ten suppliers, vendors or service providers and the top ten customers of the Parent Group Companies in connection with the Internet Terminal and Related Business by U.S. dollar or RMB (or other applicable currency) volume for the past twelve months ending September 30, 2014, showing the approximate total purchases from each such supplier, vendor or service provider and the approximate total revenues from each such customer. No material supplier, vendor or service provider of any Group Company (including, without limitation, any supplier, vendor or service provider referenced above) has given notice to the Parent or any Group Company that it intends to stop or materially decrease the rate of, or materially and adversely change the terms (whether related to payment, price or otherwise) with respect to, paying any commissions to such Group Company or supplying materials, products or services to such Group Company (whether as a result of the transactions contemplated by this Agreement or otherwise). No material customer of any Group Company (including, without limitation, any customer referenced above) has given the Parent or any Group Company notice that it intends to stop or materially decrease the rate of, buying services, materials or products from such Group Company (whether as a result of the transactions contemplated by this Agreement or otherwise). To the knowledge of the Parent, the consummation by each Group Company of the transactions contemplated by this Agreement will not adversely affect the relationship of the Group Companies with any of such customers and suppliers.

 

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2.24             Officers and Directors; Bank Accounts. Section 2.24 of the Company Disclosure Schedule lists all officers and directors of the Group Companies and all bank accounts of the Group Companies (designating each authorized signatory and the level of each signatory’s authorization).

 

2.25             Product and Media Liability. (i) The products, content and other services sold, distributed or otherwise provided by the Parent Group Companies in connection with the Internet Terminal and Related Business have complied with and are in compliance with, in all material respects, all applicable (A) laws (including laws related to copyrights, libel, slander and defamation), (B) industry and self-regulatory organization standards, and (C) contractual commitments and all express or implied warranties; and (ii) there are not, and there have not been, any material defects or deficiencies in any such products, content or services that could reasonably be expected to result in a claim or claims against the Parent Group Companies related to the foregoing. No Parent Group Company has any liability with respect to each such matter set forth thereon and is covered by applicable insurance coverage with respect thereto.

 

 

2.26             Privacy and Security.

 

2.26.1    Without limiting the generality of Section 2.21.1, each Parent Group Company (i) has taken commercially reasonable steps to prevent the violation by any Parent Group Company of the rights of any person or entity with respect to Personally Identifiable Information provided under applicable laws, including PRC, U.S. and state laws, rules and regulations, including all rights respecting (x) privacy generally, (y) the obtaining, storing, using or transmitting of Personally Identifiable Information of any type, whether via electronic means or otherwise, and (z) spyware and adware (clauses (x)-(z), including, without limitation, as “Privacy Rights”) and (ii) complies with applicable governing industry standards and such Parent Group Company’s policy in effect as of the date hereof, in case case in connection with the Internet Terminal and Related Business. For purposes of this Agreement, the term “Personally Identifiable Information” means data in control of any Parent Group Company that would enable such Group Company to identify or locate a particular person, including but not limited to name, address, telephone number, electronic mail address, personal identification number, social security number, bank account number or credit card number; provided, however, that data shall not be Personally Identifiable Information for purposes of this Agreement if no Group Company (x) intentionally collects or intentionally receives any such data or (y) actually uses any such data to identify the identity or location of, or identify or locate, a particular person as a result of any receipt of such data.

 

2.26.2    Each Parent Group Company: (i) takes commercially reasonable steps to protect the confidentiality, integrity and security of their software, databases, systems, networks and Internet sites and all information stored or contained therein or transmitted thereby from unauthorized or improper access, modification, transmittal or use; and (ii) does not use in connection with the provision of their products or services or intentionally collect or intentionally receive any of the following types of Personally Identifiable Information about individuals (other than personnel records for their own employees maintained in the Ordinary Course and in compliance with all applicable laws): social security numbers or credit card numbers, in each case in connection with the Internet Terminal and Related Business.

 

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2.27             Disclosure. Neither this Agreement nor any of the exhibits, schedules, attachments, written statements, documents, certificates or other items prepared and supplied to the Purchaser by or on behalf of the Parent with respect to the transactions contemplated hereby contain any untrue statement of a material fact or omit a material fact necessary to make any statement contained herein or therein not misleading. There is no fact which the Parent has not disclosed to the Purchaser in writing and of which any of the Parent or the Parent Group Company in connection with the Internet Terminal and Related Business or their respective officers, directors or executive employees is aware, which has had or could reasonably be expected to have a Material Adverse Effect.

 

2.28             Maintenance of Relationship. The Parent, whether on its, his or her behalf or otherwise, has not taken any action which was designed or intended or could reasonably have been expected to have the effect of discouraging any distributors, customers, suppliers, vendors, service providers, lessors, licensors, employees or other business associates from maintaining the same business relationships with any Group Company after the Restructuring or after the Closing as were maintained with any relevant Parent Group Company in connection with the Internet Terminal and Related Business prior to the Restructuring.

 

Article III

Representations and Warranties
Regarding the Purchaser

 

As a material inducement to the Parent to enter into this Agreement and to sell the Acquired Shares to the Purchaser in accordance with the terms hereof, the Purchaser hereby represents and warrants that:

 

3.1  Organization; Power and Authority. The Purchaser is a company duly incorporated, validly existing and in good standing under the laws of the British Virgin Islands. The Purchaser possesses all requisite power and authority necessary to carry out the transactions contemplated by this Agreement.

 

3.2  Authorization; No Breach. The execution, delivery and performance of this Agreement and the other agreements contemplated hereby to which the Purchaser is a party have been duly authorized by the Purchaser. This Agreement constitutes, and each of the other agreements contemplated hereby to which the Purchaser is a party, when executed and delivered in accordance with the terms thereof, will constitute, a valid and binding obligation of the Purchaser, enforceable in accordance with its terms. The execution and delivery by the Purchaser of this Agreement does not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under (whether with or without the giving of notice, the passage of time or both), (iii) result in the creation of any Lien upon the Purchaser’s assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the organizational documents of the Purchaser, or any law, statute, rule or regulation to which the Purchaser is subject, or any agreement, instrument, order, judgment or decree to which the Purchaser is subject.

 

3.3  Litigation. There are no Legal Proceedings pending or, to the best of the Purchaser’s knowledge, threatened against or affecting the Purchaser, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would adversely affect the Purchaser’s performance under this Agreement or the other agreements contemplated hereby or the consummation of the transactions contemplated hereby or thereby.

 

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3.4  Brokerage. There are no claims for brokerage commissions, finders’ fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Purchaser. The Purchaser shall pay, and hold the Parent harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses) arising in connection with any such claim.

  

Article IV

Survival; Indemnification

 

4.1  Survival of Representations and Warranties.  All of the representations and warranties set forth in this Agreement or in any writing delivered by the Purchaser, the Company or the Parent in connection with this Agreement shall survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby (regardless of any investigation, inquiry or examination made by or on behalf of, or any knowledge of, or the acceptance of any certificate or opinion by or on behalf of, any Party).

 

4.2  Indemnification.

 

4.2.1        Indemnification Obligations of the Company and the Parent. 

 

(a)                Subject to the limitations set forth in Section 4.2.2 and Section 4.2.3, each of the Company and the Parent shall indemnify the Purchaser and its Affiliates, and each of their respective officers, directors, employees, agents, representatives, successors and assigns (each an “Indemnitee”), and save and hold each of them harmless from and against, and pay on behalf of or reimburse any Indemnitee as and when incurred for, all Losses which any Indemnitee may suffer, sustain or become subject to as a result of any breach of any representation or warranty made by the Parent and the Company in Article II of this Agreement or in any related schedule or exhibit attached to this Agreement (determined in each case without giving effect to any “knowledge,” “material” or “Material Adverse Effect” qualifiers, or qualifiers of similar import, therein, and without regard to any disclosures made pursuant to Section 5.6 to the extent such disclosures relate to events, facts or circumstances occurring or existing prior to the date hereof);

 

(b)               The Company and the Parent shall, jointly and severally, indemnify the Indemnitees, and save and hold each of them harmless from and against, and pay on behalf of or reimburse any Indemnitee as and when incurred for, all Losses which any Indemnitee may suffer, sustain or become subject to as a result of:

 

(i)any nonfulfillment or breach of any covenant, agreement or other provision by or in respect of the Parent and/or the Company under this Agreement;

 

(ii)any Acquisition Proposal made prior to the Closing Date by any Person other than the Purchaser;

 

(iii)any PRC Taxes imposed on the Purchaser or any of its Affiliates (including, after the Closing, the Group Companies) as a result of the Restructuring as contemplated by this Agreement; and

 

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(iv)(1) all Taxes (or the non-payment thereof) of the Company and its Subsidiaries (A) for all taxable periods ending on or before the Closing Date and the portion through the end of the Closing Date for any taxable period that includes (but does not end on) the Closing Date, or (B) in respect of or attributable to transactions or events occurring, or contracts or agreements entered into, on or prior to the Closing Date, whether such Taxes arise before or after the Closing Date, (2) any successor or transferee liability or other secondary or other non-primary liability for Taxes imposed on the Purchaser, any of its Affiliates, or any of the Group Companies), as a result of transactions or events occurring, or contracts or agreements entered into by the Parent or any Parent Group Company (including under the Restructuring), on or prior to the Closing Date, or as a result of any Group Company being part of or owned by, or ceasing to be part of or owned by, an affiliated, combined, consolidated, unitary or other similar group prior to the Closing, or (3) any Taxes imposed on the Purchaser, any of its Affiliates or any of the Group Companies (including, after the Closing, the Group Companies) as a result of or in connection with the failure of the Parent to file any Tax Return or other report required by Tax law with respect thereto.

 

4.2.2        Survival Date. The Parent and the Company will not be liable with respect to any claim made pursuant to Section 4.2.1(a) above for the breach of any representation or warranty contained in Article II of this Agreement unless written notice of a possible claim for indemnification with respect to such breach is given by an Indemnitee to the Parent:

 

(a)                on or before the date which is ninety days after the expiration of the applicable statute of limitations (including any extension or waivers thereof) with respect to claims arising under Section 2.12 (Tax Matters), Sections 2.14.1 through 2.14.4 (Intellectual Property Right) or Section 2.21 (Compliance with Laws, but excluding Section 2.21.1); and

 

(b)               on or before the date which is two years after the Closing with respect to claims arising under any other sections of Article II (such date as set forth in clause (a) or (b) of this Section 4.2.2, as applicable, with respect to each applicable Section of Article II is referred to herein as its “Survival Date”);

 

it being understood that, subject to the limitations set forth in Section 4.2.3 below, so long as written notice is given on or prior to the applicable Survival Date with respect to any claim, the Company and the Parent shall be required to jointly and severally indemnify the Indemnitees for all Losses that the Indemnitees may suffer with respect to such claim through the date of the claim, the end of the survival period and beyond.

 

4.2.3        Limitations. With respect to any claim for indemnification being made by an Indemnitee pursuant to Section 4.2.1(a) (a “Limited Representation and Warranty Claim”), neither the Parent or the Company shall have any obligation to indemnify any Indemnitee from and against any Losses by reason of any such breach (or alleged breach) unless the Indemnitees collectively have suffered Losses by reason of all breaches (or alleged breaches) in excess of US$1 million (the “Deductible”), in which case the Parent and the Company shall be jointly and severally liable for all amounts related to such Loss(es) (including the amounts otherwise constituting the Deductible). The aggregate amount of all payments made by the Parent and the Company, collectively, in satisfaction of claims made by Indemnitees under this Agreement for Losses arising from Limited Representation and Warranty Claims shall not exceed an amount equal to 100% of the Subscription Price (the “Cap”). Notwithstanding the foregoing or anything else to the contrary contained herein, the limitations on indemnification set forth in this Agreement (including, without limitation, the limitations set forth in this Section 4.2.3) shall not apply to any claim based on fraud or willful misconduct of the Parent.

 

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4.2.4        Indemnification Obligations of the Purchaser. The Purchaser shall indemnify and hold harmless the Company from and against all Losses which the Company may suffer, sustain or become subject to as the result of (i) any breach of any representation or warranty made by the Purchaser in this Agreement or (ii) any breach of any covenant made by or in respect of the Purchaser under this Agreement. The Purchaser will not be liable with respect to any claim for breach of any representation or warranty of the Purchaser contained in this Agreement unless written notice of a possible claim with respect to such breach is given by the Parent to the Purchaser on or before the ninetieth day following the Closing Date.

 

4.2.5        Defense of Claims. If any Party seeks indemnification under this Section 4.2 (the “Indemnified Party”), such Party shall give written notice (an “Indemnification Notice”) to the other applicable Party (it being understood that the Purchaser need only deliver notice to the Parent) (the “Indemnifying Party”) of the facts and circumstances giving rise to the claim.

 

(a)                Claims Between the Purchaser and the Parent. Following the delivering of any Indemnification Notice by any Party, the applicable Parties shall meet in person or via teleconference as soon as reasonably practicable following delivery of an Indemnification Notice in order to resolve or settle such claim (if it relates to a claim for money damages). If the applicable Parties are unable to resolve or settle such claim for money damages within ten Business Days (unless an extension is agreed to in writing between the Parent and the Purchaser), then the claim shall be determined as set forth in Section 10.1.

 

(b)               Third-Party Claims. If any Legal Proceeding shall be brought or asserted by any third party (a “Third Party Proceeding”) which, if adversely determined, would entitle the Indemnified Party to indemnity pursuant to this Section 4.2, the Indemnified Party shall within thirty days notify the Indemnifying Party of the same in writing, specifying in detail the basis of such claim and the facts pertaining thereto and attaching a copy of any summons, complaint or other pleading served upon the Indemnified Party; provided that the failure to so notify an Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent such failure shall have materially harmed the Indemnifying Party. The Indemnifying Party may, in its discretion and at its sole expense, elect to assume and control the defense of such Third Party Proceeding, provided that:

 

(i)the Indemnifying Party must consult with the Indemnified Party with respect to the handling of such Third Party Proceeding and the Indemnifying Party must employ counsel satisfactory to the Indemnified Party;

 

(ii)the Indemnifying Party must (A) furnish the Indemnified Party with evidence to the Indemnified Party’s satisfaction that the Indemnifying Party is and will be able to satisfy any such liability and (B) agree in writing to be fully responsible for all Losses relating to such claims and provide full indemnification to the Indemnified Party for all Losses relating to such claim;

 

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(iii)the Indemnifying Party must not settle, compromise or cease to defend any claim or action without the express written consent of the Indemnified Party, which consent may be withheld for any reason or no reason, if (A) pursuant to or as a result of such settlement, compromise or cessation, injunctive or other equitable relief will be imposed against the Indemnified Party, (B) if settlement, compromise or cessation does not expressly and unconditionally release the Indemnified Party from all Losses with respect to such Third Party Claim, with prejudice, or (C) such settlement, compromise or cessation would involve any admission of liability, responsibility, culpability or guilt on the part of the Indemnified Party or which has any collateral estoppel effect on the Indemnified Party;

 

(iv)the Indemnifying Party shall not be entitled to assume control of any Third Party Proceeding and shall pay the fees and expenses of counsel retained by the Indemnified Party if (A) the Third Party Proceeding relates to or arises in connection with any criminal proceeding, action, indictment, allegation or investigation, (B) the claim seeks non-monetary or other injunctive or equitable relief against the Indemnified Party, (C) the claim relates to the Intellectual Property Rights of the Indemnified Party, (D) the claim involves a claim to which the Indemnified Party reasonably believes would be materially detrimental to or materially injure the Indemnified Party’s reputation or customer or supplier relations, (E) is one in which the Indemnifying Party is also a party and joint representation would be inappropriate or there may be legal defenses available to the Indemnified Party which are different from or additional to those available to the Indemnifying Party, or (F) involves a claim which, upon petition by the Indemnified Party, the appropriate court, arbitration or other body determines that the Indemnifying Party failed or is failing to vigorously prosecute or defend. With respect to the actions, lawsuits, investigations, proceedings and other claims that are the subject of this Section 4.2.5(b)(iv), the Indemnifying Party shall have the right to retain its own counsel (but the expenses of such counsel shall be at the expense of the Indemnifying Party) and participate therein, and no Indemnifying Party shall be liable for any settlement of any such action, proceeding or claim without its written consent (which consent shall not be unreasonably withheld); and

 

(v)in the event any Third Party Proceeding shall be brought or asserted which, if adversely determined, would not entitle the Indemnified Party to full indemnity pursuant to this Section 4.2, by reason of the Deductible or the Cap or otherwise, the Indemnified Party may elect to participate in a joint defense of such Third Party Proceeding (a “Joint Defense Proceeding”), the Indemnifying Party shall pay for the expenses of such joint defense and the employment of counsel shall be satisfactory to the Indemnified Party.

 

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If the Indemnifying Party is permitted to assume and control the defense of a Third Party Proceeding and elects to do so, it shall provide notice thereof to the Indemnified Party within thirty days after the Indemnified Party has given notice of the matter. The Indemnified Party shall have the right to employ counsel separate from counsel employed by the Indemnifying Party in any such action and to participate in the defense thereof, but the fees and expenses of such counsel employed by the Indemnified Party shall be at the expense of the Indemnified Party unless (i) the employment thereof has been specifically authorized by the Indemnifying Party in writing, (ii) the Indemnifying Party has failed to assume the defense and employ counsel, or (iii) the Legal Proceeding is a Joint Defense Proceeding. Notwithstanding anything to the contrary above, this Section 4.2.5 shall not apply to any claim or action relating to Taxes.

 

4.2.6        Payments. Any payment pursuant to a claim for indemnification shall be made by wire transfer or delivery of other immediately available funds to the account(s) designated by the Indemnified Party(ies) no later than thirty days after receipt by the Indemnifying Party(ies) of written notice from the Indemnified Party(ies) stating the amount of the claim, unless the claim is subject to defense as provided in Section 4.2.5 above, in which case payment shall be made not later than five days after the amount of the claim is finally determined. Any payment required under this Section 4.2 which is not made when due shall bear interest at the maximum allowable rate permitted by applicable usury laws (not to exceed 18%). Interest on any such unpaid amount shall be compounded monthly, computed on the basis of a 360-day year and shall be payable on demand. In addition, such Party shall reimburse the other Party for any and all costs or expenses of any nature or kind whatsoever (including but not limited to all attorneys’ fees) incurred in seeking to collect such Losses. All payments and related calculations of amounts due therefor of any amounts by any Person pursuant to this Article IV shall, unless otherwise agreed to by the Purchaser and the Parent in writing, be made in U.S. dollars based on U.S. dollar/RMB exchange rate as of the applicable payment date.

 

4.2.7        Other Indemnification Provisions. The Parent hereby agrees that it will not make any claim for indemnification against any Group Company or any Affiliate of any Group Company by reason of the fact that the Parent or any Affiliate of the Parent was a shareholder, director, officer, employee or agent of any such entity or is or was serving at the request of any such entity as a partner, trustee, director, officer, employee or agent of another entity (whether such claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses or expenses) with respect to any action, suit, proceeding, complaint, claim or demand brought by an Indemnitee against the Parent (if such action, suit, proceeding, complaint, claim or demand arises under this Agreement). The Parent hereby acknowledges that it will have no claims or right to contribution or indemnity from any Group Company with respect to amounts paid by the Parent pursuant to this Section 4.2.

 

4.2.8        Adjustment For Tax Purposes. All payments made pursuant to this Section 4.2 shall be treated as an adjustment to the Subscription Price for Tax purposes unless otherwise required by applicable laws.

 

4.3  Remedies.  The foregoing indemnification provisions are in addition to, and not in derogation of, any statutory, equitable or common law remedy that any Party may have with respect to a breach of the provisions hereof, any other agreement or contract or the transactions contemplated by this Agreement. The Parties have and retain all other rights and remedies existing in their favor at law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief (without posting a bond or other security) to enforce or prevent any violations of any provision of this Agreement.

 

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Article V

Pre-Closing Covenants and Agreements

 

5.1  Conduct of Business.

 

5.1.1        Except as set forth on Section 5.1.1 of the Company Disclosure Schedule and unless otherwise consented to in writing by the Purchaser after the date of this Agreement, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing, the Parent shall cause each Group Company to, and the Company shall and shall cause each other Group Company to, conduct the business of the Group in the Ordinary Course and use reasonable best efforts to keep available the services of the Group Companies’ present employees and salespersons and preserve the goodwill, reputation and present relationships of the Group with suppliers, customers, licensors, landlords and others having business relations with the Group Companies. Without limiting the generality of the foregoing, the Parent shall cause each Group Company to, and the Company shall and shall cause each other Group Company to:

 

(a)                maintain the books and records of any Group Company in accordance with good business practice;

 

(b)               pay expenses and payables, continue to make capital commitments and/or expenditures, bill customers, collect receivables, purchase inventory and replace inoperable, worn out or obsolete assets with assets of comparable quality, in each case in the Ordinary Course;

 

(c)                comply in all material respects with all laws applicable to the Group Companies and to the conduct of the business of the Group Companies and perform in all material respects all the obligations of the Group Companies without default; and

 

(d)               maintain the Leased Real Property, including all of the Improvements thereon, in substantially the same condition as of the date of this Agreement, ordinary wear and tear excepted.

 

5.1.2        Except as set forth on Section 5.1.2 of the Company Disclosure Schedule or consented to in writing by the Purchaser after the date of this Agreement, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Closing, the Company shall not, and shall not permit any other Group Company to, and the Parent shall cause each Group Company not to:

 

(a)                amend the organizational documents of any Group Company;

 

(b)               authorize for issuance, issue, sell, pledge, encumber or deliver or agree or commit to issues, sell, pledge, encumber or deliver any equity interests or shares of capital stock of any Group Company, or issue any securities convertible into, exchangeable for or representing a right to purchase or receive, or not enter into any contract with respect to the issuance of, equity interests or shares of capital stock of any Group Company;

 

(c)                materially change the accounting methods, principles or practices or any depreciation or amortization policies or rates of any Group Company;

 

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(d)               delay, postpone or cancel the payment of any accounts payable or any other liability relating to any Group Company, agree or negotiate with any party to the extend the payment date of any accounts payable or accelerate the collection of any accounts or notes receivable of any Group Company or otherwise change any of its cash management practices;

 

(e)                (i) enter into any new line of business, or incur or commit to incur any capital expenditures, obligations or liabilities in connection therewith, or (ii) abandon or discontinue any existing lines of business;

 

(f)                split, combine or reclassify any of its equity interests or shares of its capital stock; declare, set aside or pay any equity dividend or other equity distribution in respect of its capital stock; or redeem or otherwise acquire any of its securities;

 

(g)                (i) incur any Indebtedness or guarantee any Indebtedness of another Person, issue or sell any debt securities or warrants or other rights to acquire any debt securities, guarantee any debt securities of another Person, or (ii) make any loans, advances or capital contributions to, or investments in, any other Person other than to a Group Company in the Ordinary Course;

 

(h)               transfer, assign, lease, sell, license, abandon or otherwise dispose of any material asset, except for cash and inventory in the Ordinary Course or as provided for in this Agreement or by the transactions contemplated hereby;

 

(i)                 mortgage, pledge or subject to any material Lien or security interest (other than Permitted Liens) any material asset;

 

(j)                 (i) increase in any manner the salaries, bonuses or other compensation and benefits of, or enter into any new bonus (including any change in control or transaction bonus arrangement), stock or equity interest option, profit sharing, equity or incentive agreement or arrangement with, any of its employees, contractors, officers, directors, stockholders or other service providers of such Group Company, (ii) except as required by written agreements that have been disclosed to the Purchaser, pay or agree to pay any additional pension, retirement allowance, termination or severance pay, bonus or other employee benefit to any such employee, whether past or present, (iii) enter into any new employment, severance, bonus, consulting, retention, retirement, equity or other compensation agreement with any of its existing employees, officers, directors, stockholders or other service providers of such Group Company, except for agreements for newly hired employees in the Ordinary Course with an annual base salary and incentive compensation opportunity not to exceed US$100,000, (iv) except to the extent required to comply with applicable laws, amend or enter into a new employee benefit plan or amend or enter into any new, or increase any benefits under or renew, amend or terminate any existing employee benefit plan or benefit arrangement or any collective bargaining agreement, (v) grant or announce the issuance of a compensatory equity award, (vi) implement any employee layoffs or (vii) hire any new employees, unless such hiring is in the Ordinary Course and is with respect to employees having an annual base salary and incentive compensation opportunity not to exceed US$100,000;

 

(k)               communicate with employees of any Group Company regarding the compensation, benefits or other treatment that they will receive in connection with the transactions contemplated by this Agreement, unless any such communications are consistent with prior directives or documentation provided to such Group Company by the Purchaser (in which case, such Group Company shall provide the Purchaser with prior notice of and the opportunity to review and comment upon any such communications);

 

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(l)                 enter into any new lease, sublease, license or other agreement for the use or occupancy of any real property or demolish or remove any of the existing Improvements, or erect new improvements on the Leased Real Property or any portion thereof;

 

(m)             undertake any action or fail to take any action that could, individually or in the aggregate, reasonably be expected to result in the loss, lapse or abandonment of any Company Intellectual Property Rights;

 

(n)               suffer any damage, destruction or casualty loss exceeding US$200,000 in the aggregate, whether or not covered by insurance, or experience any material changes in the amount and scope of insurance coverage;

 

(o)               settle or compromise any litigation (whether or not commenced prior to the date of this Agreement) involving the payment of, or an agreement to pay over time in cash, notes or other property, in the aggregate, an amount exceeding US$200,000;

 

(p)               (i) enter into any agreement or transaction that if entered into prior to the date hereof would be required to be set forth on Section 2.13.1 of the Company Disclosure Schedule, including any transaction involving any merger, consolidation, joint venture, partial or complete liquidation or dissolution, reorganization, recapitalization, restructuring, or a purchase, sale, lease, license, assignment, transfer or other acquisition or disposition of any assets or capital stock, or (ii) amend, modify, renew or terminate any Material Contract;

 

(q)               undertake any action or fail to take any action that could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect;

 

(r)                 make, change or revoke any Tax election, change an Tax annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle, compromise, concede or abandon any Tax claim or assessment relating to any Group Company, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to any Group Company, or take any other similar action relating to the filing of any Tax Return or the payment of any Tax; and

 

(s)                agree or commit to agree to take any action not permitted to be taken pursuant to this Section 5.1.

 

5.2  Further Assurances. Subject to the terms of this Agreement, each party hereto shall use its commercially reasonable efforts to take all actions and do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the conditions set forth in Article VI).

 

5.3  Notices and Consents. The Group Companies shall give any required notices to Third Parties, and shall use their commercially reasonable efforts to obtain all consents set forth on Section 5.3 of the Company Disclosure Schedule (including incurring any reasonable costs and expenses associated therewith).

 

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5.4  Delivery of Monthly Financial Statements. The Parent shall deliver to the Purchaser copies of the interim monthly and year-to-date consolidated financial statements of the Group Companies as soon as reasonably practicable (and in any event, within thirty days) following the end of each monthly accounting period between the date of hereof and the Closing Date. Such financial statements shall include income statements and balance sheets.

 

5.5  Access.. The Parent and each Group Company shall permit representatives of the Purchaser (including legal counsel and accountants) to have full access during normal business hours to all premises, properties, personnel, books, records (including Tax records), contracts, and documents of or pertaining to the Group Companies.

 

5.6  Notification of Certain Matters. Between the date hereof and the earlier of the termination of this Agreement and the Closing Date, the Purchaser and the Parent shall give each other prompt notice in writing of: (i) the occurrence, or failure to occur, of any event which occurrence or failure could, individually or in the aggregate, reasonable be expected to cause any of such party’s representations or warranties contained in this Agreement to be untrue or inaccurate in any material respect; (ii) the failure by such party to comply with or satisfy in any respect any covenant, condition or agreement required to be complied with or satisfied by it under this Agreement; (iii) any change, event or circumstance that has had, or could, individually or in the aggregate, reasonably be expected to have (A) a Material Adverse Effect or (B) a material adverse effect on such party’s ability to consummate the transactions contemplated by this Agreement in a timely manner; or (iv) any actions, suits, claims, investigations, audits or proceedings commenced or, to the knowledge of such party, threatened against the notifying party or otherwise affecting the notifying party, which relate to the consummation of the transactions contemplated by this Agreement; provided that no disclosure by any party pursuant to this Section 5.6 shall be deemed to amend or supplement the disclosure schedules attached to this Agreement or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant, or to limit or otherwise affect the remedies of any other party.

 

5.7  Exclusivity. The Parent agrees that, until the earlier to occur of the Closing Date and such time as this Agreement has terminated in accordance with Article VII, neither any Group Company nor the Parent shall, or shall permit, as applicable, its equityholders, employees, officers, directors, advisors, agents or Affiliates to: (i) encourage, initiate, solicit, entertain, negotiate, accept or discuss, directly or indirectly, any proposal or offer (a “Proposal”) by a Third Party (other than the Purchaser or any other person the Purchaser designates) regarding (A) the sale of all or any material assets of any Group Company (other than the sale of inventory in the Ordinary Course) or (B) any sale of equity or debt securities, merger, consolidation, public offering, recapitalization, refinancing or other similar transaction involving any Group Company (the actions referred to in clauses (A) and (B) above, each a “Competing Transaction”), or (ii) provide any non-public financial or other confidential or proprietary information regarding any Group Company (including any materials containing the Purchaser’s or its Affiliates’ proposal and any other financial information, projections or proposals regarding any Group Company) to any Person (other than to the Purchaser or its representatives and agents and any other Person the Purchaser designates), or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could reasonably be expected to result in, a Competing Transaction. Each of the Group Companies and the Parent and their respective officers, directors, members, employees, agents or advisors shall immediately cease and cause to be terminated any previously undertaken or ongoing activities, discussions or negotiations with any other Person with respect to a Competing Transaction. Furthermore, the Parent shall immediately notify the Purchaser if they or any of their or any Group Company’s officers, directors, members, employees, agents or advisors receives after the date hereof any indications of interest, requests for information or offers in respect of a Proposal, and such party shall communicate to the Purchaser in reasonable detail the terms of any such indication, request or proposal (including the identity of such Third Party), and provide the Purchaser with copies of all written communications relating to any such indication, request or proposal.

 

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Article VI
Closing Conditions

 

6.1  Conditions Precedent to Each Party’s Obligations. The obligations of the Purchaser and the Company under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction or waiver (if permitted by applicable laws and, in any event, in each party’s sole discretion), at or prior to the Closing, of all of the following conditions: 

 

6.1.1        Injunction. There shall be no effective injunction, writ or preliminary restraining order of any nature issued by a Government Entity of competent jurisdiction to the effect that the transactions contemplated by this Agreement may not be consummated as provided in this Agreement.

 

6.1.2        Legal Prohibition. No law, judgment or order shall have been enacted, promulgated, entered or enforced by any court or Government Entity which would prohibit, materially restrict, impact or delay implementation of the transactions contemplated under this Agreement.

 

6.1.3        Government Entity Consents. All consents, authorizations, waivers or approvals of any Government Entity as may be required to be obtained in connection with the execution, delivery or performance of this Agreement, the failure to obtain of which would prevent the legal and valid consummation of the transactions contemplated hereby, shall have been obtained.

 

6.1.4        Transaction Documents. Each of the Transaction Documents (excluding the Restated Articles) shall have been executed and delivered by each party thereto before or at the Closing; and the Restated Articles shall have been duly adopted by shareholders the Company in a form reasonably satisfactory to both the Purchaser and the Parent before or at the Closing.

 

6.1.5        Parent Shareholder Approval. The Parent shall have obtained its shareholders’ approval of the transactions contemplated under this Agreement and under the Shareholders Agreement pursuant to applicable laws and regulations.

 

6.2  Additional Conditions Precedent to Obligations of the Purchaser. The obligations of the Purchaser under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all of the following conditions, any one or more of which may be waived in writing by the Purchaser:

 

6.2.1        Accuracy of Representations and Warranties; Performance of Covenants. The representations and warranties of the Parent and the Company set forth in Article II shall be true and correct in all material respects (disregarding for these purposes all qualifications and exceptions contained therein regarding materiality or Material Adverse Effect) on the Closing Date as if made on and as of the date hereof (except for representations and warranties that expressly speak only as of a specific date or time other than the Closing Date, which need only be true and correct as of such other date or time). Each of the Group Companies and the Parent shall have performed and complied with, in all material respects, all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing.

 

6.2.2        No Material Adverse Effect. No fact, event or circumstance shall have occurred which has had or could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and no material change in any relevant laws, regulations or policies in any of the jurisdictions or sectors in which any Group Company does business (whether coming into effect prior to, on or after the Closing Date) shall have occurred that could reasonably be expected to materially and adversely affect any Group Company.

 

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6.2.3        Closing Certificate. The Purchaser shall have received at the Closing a certificate dated as of the Closing Date and validly executed by a director of the Company on behalf of the Company, certifying the fulfillment of the conditions set forth in Section 6.2.1 and Section 6.2.2.

 

6.2.4        Consents and Approvals. The Parent and the Company shall have made all filings and shall have obtained all permits, authorizations, consents and approvals required to be obtained by the Group Companies and/or the Parent to consummate the transactions contemplated by this Agreement as set forth on Section 2.15 and Section 5.3 of the Company Disclosure Schedule and shall have delivered true, complete and correct copies of such to the Purchaser.

 

6.2.5        Corporate Procedures. The Company and the Parent shall have duly attended to and carried out all corporate procedures that are required under the laws of its place of incorporation or establishment to effect its execution, delivery and performance of each Transaction Document to which it is a party and the transactions contemplated thereby, and shall have provided true, complete and correct copies of all relevant resolutions (and all attachments thereto) from such procedures to the Purchaser.

 

6.2.6        Good Standing Certificates. Each Group Company shall have delivered to the Purchaser evidence to the satisfaction of the Purchaser that each Group Company is validly existing and in good standing.

 

6.2.7        Consummation of Restructuring. The Restructuring shall have been consummated in such manner and on such terms satisfactory to the Purchaser, and in particular, the Restructuring shall have been consummated in manners and on terms such that no Group Company shall owe any amount to the Parent or any other Retained Parent Group Companies or owes any liabilities as of Closing.

 

6.2.8        Completion of Due Diligence. The Purchaser shall have completed its business, technical, legal and financial due diligence review to its satisfaction within three (3) months after the shareholders of the Parent approve the transactions contemplated under this Agreement (or such longer period as the Purchaser and the Parent may otherwise agree).

 

6.2.9        Register of Members. The Company shall have delivered to the Purchaser a copy of the register of members of the Company, certified by a duly authorized director of the board of directors or the registered office provider or share registrar of the Company to be true, complete and correct copies thereof, and reflecting the Purchaser holding 45% of all of the issued and outstanding Company Shares at the Closing.

 

6.2.10    Register of Directors. The Company shall have delivered to the Purchaser a copy of the register of directors of the Company, certified by a duly authorized director of the board of directors or the registered office provider of the Company to be true, complete and correct copies thereof, and reflecting two individuals nominated by the Purchaser being elected as members of the board of directors of the Company at the Closing.

 

6.2.11    Legal Opinions. The Purchaser shall have received legal opinions from the Company’s PRC legal counsel and Cayman Islands legal counsel, each dated as of the Closing Date, in form and substance satisfactory to the Purchaser.

 

6.2.12    Business Cooperation Agreements. The Purchaser and the Parent shall have entered into the following agreements:

 

(a) a pre-installment agreement;

 

(b) a promotion agreement; and

 

(c) an OEM agreement.

 

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6.3  Additional Conditions Precedent to Obligations of the Company and the Parent. The obligations of the Company and the Parent under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all the following conditions, any one or more of which may be waived in writing by the Company:

 

6.3.1        Accuracy of Representations and Warranties; Performance of Covenants. The representations and warranties of the Purchaser set forth in Article III shall be true and correct (disregarding for these purposes all qualifications and exceptions contained therein regarding materiality) on the Closing Date as if made on and as of the Closing Date (except for representations and warranties that expressly speak only as of a specific date or time other than the Closing Date, which need only be true and correct as of such other date or time), except in the case of this clause where the failure of such representations and warranties to be so true and correct has not prevented or materially delayed the ability of the Purchaser to effect the Closing and to consummate the transactions contemplated by this Agreement. The Purchaser shall have performed and complied with, in all material respects, all covenants and agreements required by this Agreement to be performed or complied with by the Purchaser on or prior to the Closing.

 

6.3.2        Closing Certificate. The Company shall have received at the Closing a certificate dated as of the Closing Date and validly executed by a director or officer of the Purchaser, certifying the fulfillment of the conditions set forth in Section 6.3.1.

 

Article VII
Termination

 

7.1  Terminations. This Agreement may be terminated at any time prior to the Closing:

 

7.1.1        by the Purchaser or the Parent in writing and without liability of any Party on account of such termination (provided that the terminating party is not otherwise in material default or material breach of this Agreement), if the Closing shall not have occurred on or before September 30, 2015;

 

7.1.2        by the Purchaser, if the Parent or the Company materially breaches any of his, her or its representations, warranties or covenants contained herein such that the conditions set forth in Section 6.2.1 would not be satisfied, without liability of the Purchaser on account of such termination (provided that (i) the Purchaser is not otherwise in material default or material breach of this Agreement and (ii) if such breach is curable by such breaching Person, the Purchaser may not terminate this Agreement under this Section 7.1.2 unless such breach remains uncured for ten Business Days after written notice of such breach is given to the Parent by the Purchaser);

 

7.1.3        by the Company or the Parent, if the Purchaser materially breaches any of its representations, warranties or covenants contained herein such that the conditions set forth in Section 6.3.1 would not be satisfied, without liability of any Group Company or Parent on account of such termination (provided that (i) none of the Company and the Parent is otherwise in material default or material breach of this Agreement and (ii) if such breach is curable by such breaching Person, the Company and the Parent may not terminate this Agreement under this Section 7.1.3 unless such breach remains uncured for ten Business Days after written notice of such breach is given to the Purchaser by any of the Company and the Parent); or

 

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7.1.4        by the Purchaser if a fact, event or circumstance has occurred which has had a Material Adverse Effect.

 

7.2  Effect of Termination. If any party terminates this Agreement pursuant to, and in accordance with, Section 7.1, this Agreement shall forthwith become void and of no further force and effect, except for provisions of Section 4.2 (Indemnification), Section 4.3 (Remedies), Section 8.1 (Press Release and Announcements), Section 8.5 (Expenses), Article X (Miscellaneous), and this Section 7.2 which shall survive such termination indefinitely, provided that nothing in Section 7.1 or this Section 7.2 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement or impair the right of any party to compel specific performance by another party of its obligations under this Agreement.

 

Article VIII
Additional Agreements

 

8.1  Press Releases and Announcements. Except as otherwise required by applicable laws and regulations (including the rules of relevant stock exchange), press releases related to this Agreement or the transactions contemplated hereby, or other announcements to the employees, customers, suppliers, vendors or service providers of the Company will be issued solely by the Purchaser or its Affiliates. Notwithstanding the foregoing, in the event that the Parent or the Company is required by applicable laws and regulations (including the rules of relevant stock exchange) to issue a press release or otherwise make an announcement related to the foregoing, the Parent or the Company shall notify the Purchaser in advance and provide the Purchase with the opportunity to review such press release or announcement and shall limit the disclosure therein to that required by applicable laws (except to the extent otherwise agreed by the Purchaser).

 

8.2  Further Actions. Each Party will execute and deliver such documents and take such additional actions as it is required to effect, consummate, confirm and/or evidence the issuance of the Acquired Shares to the Purchaser and any other transactions contemplated hereby.

 

8.3  Maintenance of Relationships. The Parent shall, and shall cause its Affiliates and any Retained Parent Group Company to, refrain from taking any action which is designed or intended or could reasonably be expected to have the effect of discouraging any customers, suppliers, vendors, service providers, lessors, licensors or other business associates from maintaining the same business relationships with the Company after the Closing as were maintained with the Company prior to and as of the date of this Agreement.

 

8.4  Confidentiality.

 

8.4.1        Each Party undertakes to the other Parties that it shall not reveal, and that it shall use its commercially reasonable efforts to procure that its respective directors, equity interest holders, officers, employees, agents, counsel and advisors (collectively, “Representatives”) who are in receipt of any Confidential Information do not reveal, to any third party any Confidential Information without the prior written consent of the Company or the concerned Party, as the case may be. The term “Confidential Information” as used in this Section 8.4 means (a) any information concerning the organization, structure or business of any Party; (b) the terms of this Agreement and the terms of any of the other Transaction Documents, and the identities of the Parties and their respective Affiliates; and (c) any other information or material prepared by a Party or its Representatives that contains or otherwise reflects, or is generated from, Confidential Information.

 

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8.4.2        The provisions of Section 8.4.1 shall not apply to:

 

(a)                disclosure of Confidential Information that is or becomes generally available to the public other than as a result of disclosure by or at the direction of a Party or any of its/his/her Representatives in violation of this Agreement;

 

(b)               disclosure by a Party to a Representative or an Affiliate, provided that such Representative or Affiliate (i) is under a similar obligation of confidentiality or (ii) is otherwise under a binding professional obligation of confidentiality;

 

(c)                disclosure, after giving prior notice to the other Parties to the extent practicable under the circumstances and subject to any practicable arrangements to protect confidentiality, to the extent required under the rules of any stock exchange on which the shares of a Party or its Affiliate are listed or by applicable laws or governmental regulations or judicial or regulatory process or in connection with any judicial process regarding any legal action, suit or proceeding arising out of or relating to this Agreement; provided that no prior notice to any Party shall be required to be given under this Section 8.4.2(c) with respect to any dispute arising out of or relating to a Transaction Document; or

 

8.5  Expenses. Except as otherwise specifically provided herein, each Party hereto shall pay all of its own fees, costs and expenses (including, without limitation, fees, costs and expenses of legal counsel, investment bankers, brokers or other representatives and consultants and appraisal fees, costs and expenses) incurred in connection with the negotiation of this Agreement and the other agreements contemplated hereby, the performance of its obligations hereunder and thereunder and the consummation of the transactions contemplated hereby and thereby (whether consummated or not).

 

8.6  Waivers of Breaches. The Parent hereby unconditionally and irrevocably waives, and shall procure all Affiliates of the Parent to waive, any and all past and present breach and defaults by, or any past or present claim they may have against, the Company or any other Group Company under any transactions or dealings between any Group Company on one side and the Parent or any Affiliate of the Parent on the other side.

 

8.7  Restructuring and IP Licenses. The Parent and the Company undertake to complete the Restructuring as soon as possible and in any event before September 30, 2015. Effective upon the Closing and for so long as the Parent or any other Retained Parent Group Company holds, directly or indirectly, any Shares or other equity securities of the Company or any other Group Company, each of the Parent and other Retained Parent Group Companies hereby grants, and the Parent shall cause each other Retained Parent Group Company to grant, a non-exclusive, non-terminable, transferable (as set forth in this Section 8.7 below), royalty-free, fully paid-up license (collectively, the “IP Licenses”) to the Company and other Group Companies in the Territory, under any and all Licensed Intellectual Property, including, without limitation, the right to use, make, have made, improve upon, sell, offer for sale, market, distribute, import and export products and services under the Licensed Intellectual Property; provided that, with respect to any Licensed Intellectual Property that is owned by a person other than the Parent Group Companies and which any Retained Group Company shall pay a royalty to use in accordance with the license from the owner, the Group Companies may be required to pay a royalty for such Licensed Intellectual Property to such Retained Group Company or the owner, as the case may be, at an effective rate no higher than that under the original license from the owner and otherwise on terms and conditions no less favorable than those enjoyed by such Retained Group Company under the original license from the owner. The Parent shall not, and shall cause all Retained Parent Group Companies not to, under any circumstances (including, without limitation, in the event of any material breach of the IP Licenses by the Company or any other Group Company), take any action to terminate the IP Licenses or prevent or restrict the use of any Licensed Intellectual Property by any Group Company under the IP Licenses, provided that the Parent or any other Retained Parent Group Company holds, directly or indirectly, any Shares or other equity securities of the Company or any other Group Company. The Company may assign and transfer its rights and obligations under the IP Licenses to: (i) any Group Company, or (ii) an acquirer of all or substantially all of the assets to which the IP Licenses relate. The Parent shall, and shall cause all other Retained Parent Group Companies to: (i) obtain all consents and approvals from any third party that may be necessary for the Parent or the other Retained Parent Group Companies to grant the IP Licenses, and (ii) appropriately file, prosecute, maintain, enforce and protect the Licensed Intellectual Property owned by any Parent Group Company. The Parent and the Company shall execute such documents and take such actions as may be necessary or reasonably requested by the other Party to give effect to the IP Licenses.

 

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Article IX

Definitions; Cross-References to Other Defined Terms

 

9.1  Definitions.

 

When used in this Agreement, the following terms have the meanings set forth below:

 

“Acquisition Proposal” means any proposal or offer to acquire all or a substantial part of the business or properties of the Company or any Share Capital of any Group Company, whether by merger, tender offer, exchange offer, sale of assets or similar transaction involving the Company, divisions or operating or principal business units.

 

“Acquired Assets” means all properties and assets, whether tangible or intangible, that are acquired by the Group Companies under the Restructuring.

 

“Affiliate” of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise.

 

“Affiliated Group” means any affiliated, combined, consolidated, unitary or other similar group that has filed a consolidated return for income Tax purposes for a period during which any Group Company was a member.

 

“Applicable Exchange Rate” means the central parity rate for the exchange of US$ into RMB published by the People's Bank of China or its authorized agency on the third Business Day prior to the Closing Date.

 

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in Hong Kong, Cayman Island or the PRC are required or authorized by law or executive order to be closed or on which a tropical cyclone warning no. 8 or above or a “black” rainstorm warning signal is hoisted in Hong Kong at any time between 9:00 a.m. and 5:00 p.m. Hong Kong time.

 

“Cash” means all cash, cash equivalents and marketable securities classified as a current asset on the Company’s balance sheet.

 

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“Code” means the United States Internal Revenue Code of 1986, as amended.

 

“Contract” means any agreement, contract or other binding obligation.

 

“dollar” or “dollars” or “US$” means the lawful currency of the United States of America, unless otherwise specified.

 

“Encumbrances” means any Lien, voting agreement, voting trust, proxy, option, right of purchase, right of first refusal, right of first offer, restriction on transfer or any other similar arrangement or restriction of any kind whatsoever, including any restriction on transfer of other assignment, as security or otherwise, of or relating to use, quiet enjoyment, voting, receipt of income or exercise of any other attribute of ownership.

 

“Family Group” means, with respect to any natural person, such person’s spouse, parents and siblings, and each of their respective descendants (whether natural or adopted) and any trust or other entity (including a corporation, partnership or limited liability Companies) formed solely for the benefit of such person and/or such person’s spouse, parents, siblings and/or their respective descendants (whether natural or adopted).

 

“Government Entity” means any nation, any state, province or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of government, including any court, in each case having jurisdiction over any Group Company.

 

“Group Companies” means the Company and its direct or indirect Subsidiaries (unless otherwise required by the context, any reference to any “Group Company” or “Group Companies” include a reference to the assets and liabilities acquired and assumed by such Group Company or Group Companies in the Restructuring).

 

“HKFRs” means Hong Kong Financial Reporting Standards.

 

“HKSE” means The Stock Exchange of Hong Kong Limited.

 

“Hong Kong” means the Hong Kong Special Administrative Region of the People’s Republic of China.

 

“Indebtedness” means at a particular time, without duplication, any indebtedness of the Group Companies (i) for borrowed money or issued in substitution for or exchange of indebtedness for borrowed money, (ii) evidenced by any note, bond, debenture or other debt security, (iii) for the deferred purchase price of property or services with respect to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade payables and other current liabilities incurred in the ordinary course of business which are not more than six months past due), (iv) arising from any commitment by which a Person assures a creditor against loss (including, without limitation, contingent reimbursement obligations with respect to letters of credit), (v) guaranteed in any manner by a Person (including, without limitation, guarantees in the form of an agreement to repurchase or reimburse), (vi) arising from any obligations under capitalized leases with respect to which a Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or with respect to which obligations a Person assures a creditor against loss, (vii) secured by a Lien on a Person's assets, (viii) arising from any fees or expenses payable or incurred by or on behalf of any Group Company (including bonuses, phantom equity payments or similar arrangements) in connection with, or in furtherance of, the transactions contemplated by this Agreement (regardless of whether any additional event or occurrence, in addition to the consummation of the transactions contemplated hereby, is required to give rise to such payment obligations), and (ix) arising from accrued interest to and including the Closing Date in respect of any of the obligations described in the foregoing clauses (i) through (viii) of this definition and all premiums, penalties, charges, fees, expenses and other amounts due in connection with the payment and satisfaction in full of such obligations which will be paid or prepaid at the Closing.

 

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“Intellectual Property Rights” means all (i) patents, patent applications, patent disclosures and inventions, (ii) trademarks, service marks, trade dress, trade names, logos and corporate names and registrations and applications for registration thereof together with all of the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable works and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data, data bases and documentation thereof, (vi) trade secrets and other confidential information (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information), (vii) internet domain names and web sites, (viii) other intellectual property rights, (ix) registrations and applications for any of the foregoing, and (x) copies and tangible embodiments thereof (in whatever form or medium).

 

“Investment” as applied to any Person means (i) any direct or indirect purchase or other acquisition by such Person of any notes, obligations, instruments, shares, securities or ownership interest (including partnership interests and joint venture interests) of any other Person and (ii) any capital contribution by such Person to any other Person.

 

“knowledge” and “aware” and any other term of similar import means, with respect to any Person, the actual knowledge of such Person and the knowledge that such Person could be reasonably expected to have after making a reasonable inquiry and exercising reasonable diligence with respect to the particular matter in question.

 

“Latest Balance Sheet Date” means June 30, 2014.

 

“Licensed Intellectual Property” means all Intellectual Property Rights (i) owned by or licensed to the Parent or any other Retained Parent Group Company as of the date hereof or hereafter, and (ii) (A) used or held for use by any Parent Group Company in connection with the Internet Terminal Product and Related Business prior to the Restructuring or (B) necessary for the operation of the Internet Terminal Product and Related Business as conducted by the Parent Group Companies prior to the Restructuring and as currently proposed to be conducted by the Group Companies after the Closing, but excluding any Intellectual Property Rights that are transferred by the Parent or any other Retained Parent Group Company to any Group Company as part of the Restructuring.

 

“laws” means all civil and common law, statute, subordinate legislation, treaty, rule, regulation, directive, decision, by-law, ordinance, circular, code, order, notice, demand, decree, injunction, resolution or judgment of any Government Entity.

 

“Lien” or “Liens” means any mortgage, pledge, security interest, encumbrance, lien, limitation, condition, or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof), any sale of receivables with recourse against the Company or any of its Affiliates, any filing or agreement to file a financing statement as debtor under any statute other than to reflect ownership by a third party of property leased to the Company or any of its Affiliates under a lease which is not in the nature of a conditional sale or title retention agreement, or any subordination arrangement in favor of another Person (other than any subordination arising in the ordinary course of business).

 

“Listing Vehicle” means the Company or another entity that directly or indirectly owns or carries on all or substantially all of the business or assets of the Company and its Subsidiaries and the equity securities of which are or are intended to be listed on a stock exchange.

 

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“Loss” or “Losses” means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, Taxes, liens, losses, diminutions in value, expenses and fees (including, without limitation, arbitral tribunal costs and reasonable attorneys’ fees and expenses).

 

“Material Adverse Effect” means any event, fact, circumstance or condition that has had or could reasonably be expected to have a material adverse effect upon the business, operations, financial condition, operating results, earnings, assets, customer, supplier, employee or sales representative relations, or business prospects, whether individually or in the aggregate, in each case of any Group Company.

 

“Ordinary Course” means the ordinary course of business consistent with past custom and practice.

 

“Parent Group Companies” means the Parent and its direct and indirect Subsidiaries, including the Group Companies.

 

“Permitted Liens” means (i) Tax Liens with respect to Taxes not yet due and payable or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with US GAAP or PRC GAAP; (ii) deposits or pledges made in connection with, or to secure payment of, utilities or similar services, workers’ compensation, unemployment insurance, old age pensions or other social security obligations; (iii) interests or title of a lessor under any of the Leases; (iv) mechanics’, materialmen’s or contractors’ Liens or encumbrances or any similar Lien or restriction for amounts not yet due and payable; and (v) easements, rights-of-way, restrictions and other similar charges and encumbrances not interfering with the ordinary conduct of the business of such Person or detracting from the value of the assets of such Person.

 

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

 

“PRC” means the People’s Republic of China.

 

“PRC GAAP” means the PRC generally accepted accounting principles.

 

“Restated Articles” means the Amended and Restated Memorandum and Articles of Association of the Company to be adopted at the Closing in a form reasonably satisfactory to both the Parent and the Purchaser.

 

“Restructuring” means (i) the transfer of the assets (including but not limited to Intellectual Property Rights) and business owned or controlled by the Retained Parent Group Companies in connection with the Internet Terminal and Related Business to the Company or its relevant Subsidiaries, (ii) the termination of employment of the relevant employees by the Parent or its Subsidiaries, and (iii) such employees entering into employment relationship with the Company or its relevant Subsidiaries, in each case as set forth and described in the Restructuring Schedule.

 

“Restructuring Contracts” means Contracts to be entered into in connection with or in relation to the Restructuring (including all amendments, waivers or other changes thereto) on forms satisfactory to the Purchaser.

 

“Restructuring Schedule” means the restructuring schedule delivered by or on behalf of the Parent to the Purchaser on the date of this Agreement setting forth the assets, business, employees and Contracts to be transferred to the Company in the Restructuring.

 

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“Retained Parent Group Companies” means the Parent Group Companies other than the Group Companies.

 

“RMB” means Renminbi, the lawful currency of the PRC.

 

“Share Capital” means (i) in the case of a corporation, any and all share capital, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of share capital, (iii) in the case of a partnership or limited liability company, any and all partnership or membership interests (whether general or limited), (iv) in any case, any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person, and (v) in any case, any right to acquire any of the foregoing.

 

“Shareholders Agreement” means the shareholders agreement to be entered into by and among the Company, the Parent and the Purchaser on or before the Closing.

 

“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, 50% or more of the total voting power of shares entitled (without regard to the occurrence of any contingency) to vote in the election of members of the board of directors or similar body governing the affairs of such entity, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, 50% or more of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a 50% or more ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated 50% or more of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. With respect to the Company, the Parent or the Purchaser, a Subsidiary shall include any corporation, partnership, limited liability company, association or other business entity that the Company consolidates in its consolidated financial statements as a variable interest entity in accordance with US GAAP.

 

“Tax” and “Taxes” means, with respect to any Group Company, any (i) PRC (including any subdivision, municipality, province or locality of the PRC or any agency thereof) or other non-PRC taxes, charges, fees, levies, deficiencies or other similar assessments or liabilities (including, without limitation, income, receipts, ad valorem, premium, value added, excise, severance, property (whether real or personal property, or whether tangible or intangible property), sales, use, occupation, windfall profits, service, service use, stamp, transfer, transfer gains, licensing, withholding, employment, unemployment, payroll, share, customs duties, profits, license, lease, insurance, social security (or similar), capital, franchise, surplus, alternative or add-on minimum, estimated franchise or any other taxes, charges, fees, levies, deficiencies or other similar assessments or liabilities of any kind whatsoever), whether computed on a separate, consolidated, unitary or combined basis or in any other manner, and includes any interest, fines, penalties, assessments, deficiencies or additions thereto; (ii) liability for the payment of any amounts of the type described in clause (i) arising as a result of being (or ceasing to be) a member of any Affiliated Group (or being included (or required to be included) in any Tax Return relating thereto); and (iii) liability for the payment of any amounts of the type described in clause (i) as a result of any express or implied obligation to indemnify or otherwise assume or succeed to the liability of any other person. For the avoidance of doubt, “Tax” and “Taxes” includes any “Tax” and “Taxes” payable, suffered or incurred as a result of the “base cost”, “investment cost” or “tax basis” in any asset (including shares of any other interest in any Group Company) being reduced or suffering a reduction or being a smaller amount that would have otherwise been the case as a result of (x) the failure of any Parent to file any Tax Return or other report in respect of Taxes or (y) pay Tax on the disposal by it of any shares or any other interest in any person as contemplated by this Agreement.

 

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“Tax Returns” means any payments, returns, renditions, declarations, reports, claims or filings for refund or payment, and any informational returns or statements or other documents filed or paid or required to be filed or paid with a taxing authority in connection with the determination, assessment or collection of Tax or the administration of any laws, regulations or administrative requirements relating to Taxes, including any schedule or attachment thereto, and including any amendment thereto.

 

“Territory” means any territory in the world in which any of the Group Companies may conduct the Internet Terminal Product and Related Business after the Closing.

 

“Third Party” means any Person other than a party to this Agreement.

 

“Transaction Documents” means this Agreement, the Restated Articles, the Shareholders Agreement, and any other agreement contemplated by this Agreement.

 

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“United States” or “US” or “U.S.” means the United States of America.

 

“US GAAP” means the US generally accepted accounting principles.

 

9.2  Cross-References.

 

The following terms are defined in the following Sections of this Agreement:

 

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Term Section
   
Acquired Intellectual Property Rights Section 2.14.1
Acquired Shares Recitals
Affiliate Agreement Section 2.22.1
Affiliate Transaction Section 2.22.1
Agreement Preface
Audited Financial Statements Section 2.5
Cap Section 4.2.3
Closing Section 1.2.1
Closing Date Section 1.2.1
Company Preface
Company Affiliate Section 2.22.1
Company Disclosure Schedule Article II
Company Intellectual Property Rights Section 2.14.2
Company Shares Recitals
Company Software Section 2.14.5
Company Systems Section 2.14.5
Competing Transaction Section 5.7

Confidential Information

Section 8.4.1

Deductible Section 4.2.3
Financial Statements Section 2.5
HKIAC Section 10.1
Improvements Section 2.11.4
Indemnification Notice Section 4.2.5
Indemnified Party Section 4.2.5
Indemnifying Party Section 4.2.5
Indemnitee Section 4.2.1
Internet Terminal and Related Business Recitals
Inventions Agreement Section 2.19.4
Inventories Section 2.10.2
Joint Defense Proceeding Section 4.2.5
Lease/Leases Section 2.11.1
Leased Real Property Section 2.11.1
Legal Proceedings Section 2.16
Licenses Section 2.15
IP Licenses Section 8.7
Limited Representation and Warranty Claim Section 4.2.3
Management Accounts Section 2.5
Material Contracts Section 2.13.1
Non-U.S. Official Section 2.21.3
Parent Preface
Party/Parties Preface
Payment Section 2.21.4
Personally Identifiable Information Section 2.26.1
Plan/Plans Section 2.20
Privacy Rights Section 2.26.1
Proposal Section 5.7
Purchaser Preface
Representatives Section 8.4.1
Subscription Price Section 1.1
Survival Date Section 4.2.2
Third Party Proceeding Section 4.2.5
Transferred Assets Section 2.10.1

 

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Article X

Miscellaneous

 

10.1             Arbitration. All disputes, actions and proceedings arising out of or relating to this Agreement shall be referred to and finally resolved by arbitration in Hong Kong under the UNCITRAL Arbitration Rules in accordance with the Hong Kong International Arbitration Centre (“HKIAC”) Procedures for the Administration of International Arbitration in force at the date of this Agreement which rules are deemed to be incorporated by reference in this Section 10.1. The place of the arbitration shall be Hong Kong and the language of the arbitration shall be English. The appointing authority shall be the HKIAC. There shall be one arbitrator agreed to by the Parent and the Purchaser, and if they cannot so agree on such arbitrator within five Business Days of the commencement of the notice of arbitration proceedings, three arbitrators shall be appointed. In such case, two of the arbitrators shall be nominated by the Parent and the Purchaser, respectively, and if either of them shall abstain from nominating its arbitrator, the HKIAC shall appoint such arbitrator. The two arbitrators so chosen shall select a third arbitrator, provided that if such two arbitrators shall fail to choose a third arbitrator within thirty days after such two arbitrators have been selected, the HKIAC, upon the request of either the Parent or the Purchaser, shall appoint a third arbitrator. The third arbitrator shall be the presiding arbitrator. The arbitration shall be conducted in private. Each Party agrees that all documents and evidence submitted in the arbitration (including without limitation any statements of case and any interim or final award, as well as the fact that an arbitral award has been made) shall remain confidential both during and after any final award that is rendered unless the Parties otherwise agree in writing. The arbitral award is final and binding upon all Parties.

 

10.2             Consent to Amendments. Except as otherwise expressly provided herein, the provisions of this Agreement may be amended only with the written consent of the Parties. No course of dealing between or among any persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any person under or by reason of this Agreement. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver.

 

10.3             Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the Parties shall bind and inure to the benefit of the successors and assigns of the respective Parties whether so expressed or not. The Purchaser may assign its rights and obligations under this Agreement (including its right to indemnification) at its sole discretion, in whole or in part, to a wholly owned Subsidiary, to one or more of its Affiliates, to any subsequent purchaser of the Purchaser or any material portion of its assets (whether such sale is structured as a sale of shares, a sale of assets, a merger or otherwise) and, for collateral security purposes, to any lender providing financing to the Purchaser and all extensions, renewals, replacements, refinancings and refundings thereof in whole or in part. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by the Parent or the Company, without the prior written consent of the Purchaser, or by the Purchaser (except as otherwise provided in this Section 10.3) without the prior written consent of the Parent and the Company.

 

10.4             Counterparts. This Agreement may be executed simultaneously in counterparts (including by means of facsimiled signature pages), any one of which need not contain the signatures of more than one Party, but all such counterparts taken together shall constitute one and the same Agreement.

 

10.5             Descriptive Headings; Interpretation. The descriptive headings of this Agreement and the table of contents are inserted for convenience only and do not constitute a substantive part of this Agreement and shall not affect in any way the meaning or interpretation of this Agreement. The use of the word “including” in this Agreement shall be by way of example rather than by limitation. The Parties intend that each representation, warranty and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty or covenant.

 

-45-
 

 

10.6             Governing law. This Agreement and any dispute or claim arising out of or in connection with it or its subject matter shall be governed by, and construed in accordance with, Hong Kong law.

 

10.7             Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when (i) delivered personally to the recipient, (ii) one day after being sent to the recipient by reputable overnight courier service (charges prepaid), five days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, or (iv) sent by facsimile to the recipient if sent before 5:00 p.m. Hong Kong time on a Business Day. Such notices, demands and other communications shall be sent to the Purchaser, the Parent and the Company at the addresses indicated below or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party:

 

To the Purchaser:

Tech Time Development Limited

c/o Qihoo 360 Technology Co. Ltd.
Building 2, Block 6, Jiuxianqiao Road,
Chaoyang District, Beijing, PRC 100015
Facsimile No.: +86-10-5682-2000

 

with copies (which shall not constitute notice) to:

Kirkland & Ellis
26/F Gloucester Tower, The Landmark
15 Queen’s Road Central, Central
Hong Kong
Facsimile No.: +852-3761-3301
Attn: Mr. David Zhang and Mr. Frank Sun

 

To the Parent:

 

Coolpad Group Limited

Room 1902, Mass Mutual Tower

38 Gloucester Road, Wanchai

Hong Kong

Attn: Mr. JIANG Chao

 

with copies (which shall not constitute notice) to:

 

DLA Piper Hong Kong

17th Floor, Edinburgh Tower,

The Landmark, 15 Queen's Road Central

Hong Kong

Attn: Mr. Mike Suen and Mr. David Cheng

 

-46-
 

 

To the Company:

 

Coolpad Information Harbor 2 Mengxi Road, High-tech Industry Park (North), Nanshan Dist., Shenzhen, PRC 518057

Attn: Mr. JIANG Cha

Facsimile No.: +86-755-83439004

 

with a copy (which shall not constitute notice) to:

 

DLA Piper Hong Kong

17th Floor, Edinburgh Tower,

The Landmark

15 Queen's Road

Central, Hong Kong

Attn: Mr. Mike Suen and Mr. David Cheng

 

10.8             No Strict Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement and the other agreements contemplated hereby. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement.

 

10.9             Entire Agreement. This Agreement and the agreements and documents referred to herein contain the entire agreement and understanding between the Parties with respect to the subject matter hereof and supersede any prior understanding, agreements or representations by or between the Parties, written or oral, which may relate to the subject matter hereof in any way.

 

10.10         Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable laws, but if any provision of this Agreement or the application of any such provision to any Person or circumstance is held to be invalid, illegal or unenforceable in any respect under any applicable law in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, and this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

 

10.11         No Third-Party Beneficiaries. This Agreement is for the sole benefit of the Parties, the Indemnitees and their permitted successors and assigns and nothing herein expressed or implied shall give or be construed to give any Person, other than the Parties, the Indemnitees and such permitted successors and assigns, any legal or equitable rights hereunder.

 

10.12         Schedules. Nothing in the Company Disclosure Schedule shall be adequate to disclose an exception to a representation or warranty made in this Agreement unless such schedule identifies the exception with particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be adequate to disclose an exception to a representation or warranty made in this Agreement, unless the representation or warranty has to do with the existence of the document or such other item itself. No exceptions to any representations or warranties disclosed in the corresponding section of the Company Disclosure Schedule shall constitute an exception to any other representations or warranties made in this Agreement unless a specific cross-reference is made therein to such other representations or warranties or it is reasonably apparent that such exception applies to such other representations or warranties. All schedules and exhibits attached hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if fully set forth herein.

 

* * * * *

 

-47-
 

 

IN WITNESS WHEREOF, the parties hereto have executed this Share Subscription Agreement on the date first written above.

 

  THE PURCHASER:
     
  TECH TIME DEVELOPMENT LIMITED
     
  By: /s/ Xiangdong Qi
     
  Name:    Xiangdong Qi
     
  Title: Authorized Representative

  

  THE PARENT:
     
  COOLPAD GROUP LIMITED
     
  By: /s/ Chao Jiang
     
  Name:    Chao Jiang
     
  Title: Executive Director & Chief Financial Officer

 

  THE COMPANY:
     
  COOLPAD E-COMMERCE INC.
     
  By: /s/ Chao Jiang
     
  Name:    Chao Jiang
     
  Title: Director

 

Signature Page to Share subscription Agreement

 

 
 

 

Exhibit A

 

Capitalization Table

 

Immediately Prior to the Closing

 

Shareholder Number of Shares Percentage
Coolpad Group limited 1,100 100%

 

Immediately After the Closing

 

Shareholder Number of Shares Percentage
Coolpad Group limited 1,100 55%
Tech Time Development Limited 900 45%
Total 2,000 100%

 

 

 



 

 EXHIBIT 8.1

 

List of Significant Subsidiaries of Qihoo 360 Technology Co. Ltd. (the “Registrant”)

 

As of December 31, 2014

 

 

Wholly-Owned Subsidiaries

 

1.Qizhi Software (Beijing) Co., Ltd., a PRC company

   

2.Tianjin Qisi Technology Co., Ltd., a PRC company

   

3.Qifei Xiangyi (Beijing) Software Co., Ltd., a PRC company

 

4.Qiji International Development Limited, a HK company

   

5.360 International Development Co. Limited, a HK company

 

6.Qifei International Development Co. Limited, a HK company

 

Variable Interest Entities

 

1.Beijing Qihu Technology Co., Ltd., a PRC company

   

2.Beijing Star World Technology Co., Ltd., a PRC company

 

 

 

   



 

EXHIBIT 12.1

 

CERTIFICATIONS

 

I, Hongyi Zhou, certify that:

 

1. I have reviewed this annual report on Form 20-F of Qihoo 360 Technology Co. Ltd. (the “Company”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 27, 2015  
   
By: /s/ Hongyi Zhou  
  Name: Hongyi Zhou  
  Title: Chairman and Chief Executive Officer  

 

 

 



 

 EXHIBIT 12.2

 

CERTIFICATIONS

 

I, Jue Yao, certify that:

 

1. I have reviewed this annual report on Form 20-F of Qihoo 360 Technology Co. Ltd. (the “Company”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 27, 2015  
   
By: /s/ Jue Yao  
  Name: Jue Yao  
  Title: Chief Financial Officer  

 

 

 



 

EXHIBIT 12.3

 

CERTIFICATIONS

 

I, Alex Zuoli Xu, certify that:

 

1. I have reviewed this annual report on Form 20-F of Qihoo 360 Technology Co. Ltd. (the “Company”);

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 27, 2015  
   
By: /s/ Alex Zuoli Xu  
  Name: Alex Zuoli Xu  
  Title: Co-chief Financial Officer  

 

 

  



 

EXHIBIT 13.1

 

CERTIFICATIONS

 

In connection with the Annual Report of Qihoo 360 Technology Co. Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Hongyi Zhou, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 27, 2015  
   
By: /s/ Hongyi Zhou  
  Name: Hongyi Zhou  
  Title: Chairman and Chief Executive Officer  

 

 

 

 



 

EXHIBIT 13.2

 

CERTIFICATIONS

 

In connection with the Annual Report of Qihoo 360 Technology Co. Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jue Yao, Co-chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 27, 2015

 

By: /s/ Jue Yao  
  Name: Jue Yao  
  Title: Chief Financial Officer  

 

 

 



 

 EXHIBIT 13.3

 

CERTIFICATIONS

 

In connection with the Annual Report of Qihoo 360 Technology Co. Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Alex Zuoli Xu, Co-chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 27, 2015

 

By: /s/ Alex Zuoli Xu  
  Name: Alex Zuoli Xu  
  Title: Co-chief Financial Officer  

 

 

 



 

Exhibit 15.1

 

[Letterhead of Commerce & Finance Law Offices]

 

April 27, 2015

 

Qihoo 360 Technology Co. Ltd.

Building No. 2

6 Jiuxianqiao Road, Chaoyang District

Beijing 100015, People’s Republic of China

 

Dear Sirs:

 

We hereby consent to the use of our name under the caption "Risk Factors" included in the Annual Report on Form 20-F of Qihoo 360 Technology Co. Ltd. for the year ended December 31, 2014 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the regulations promulgated thereunder.

 

Yours faithfully,

  

/s/ Commerce & Finance Law Offices  
Commerce & Finance Law Offices  

 

 

 



 

EXHIBIT 15.2

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in the Registration Statements No. 333-174444, No. 333-190371 and No. 3336-199395 on Form S-8, of our reports dated April 27, 2015, relating to the consolidated financial statements and financial statement schedule of Qihoo 360 Technology Co. Ltd., and its subsidiaries, variable interest entities and variable interest entities’ subsidiaries (collectively, the “Group”) as of December 31, 2013 and 2014, and for the years ended December 31, 2012, 2013 and 2014, and the effectiveness of the Group’s internal control over financial reporting, appearing in the Annual Report on Form 20-F of Qihoo 360 Technology Co. Ltd. for the year ended December 31, 2014.

 

/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP  
Deloitte Touche Tohmatsu Certified Public Accountants LLP  
Beijing, the People’s Republic of China  
April 27, 2015  

  

 

 

 

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