UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

or

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2013

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                 

For the transition period from                      or                 

Commission file number: 001-33799

EXCEED COMPANY LTD.

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

British Virgin Islands

(Jurisdiction of incorporation or organization)

Level 12, China Minmetals Tower

79 Chatham Road South, Tsim Sha Tsui, Kowloon

Hong Kong

 (Address of principal executive offices)

Tai Yau Ting

Level 12, China Minmetals Tower

79 Chatham Road South, Tsim Sha Tsui, Kowloon

Hong Kong

Facsimile: 852 3975 8116

Tel: 852 3975 8116

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

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

(Title of each class)	(Name of each exchange on which registered)
Ordinary shares of par value US$0.0001 per share	The NASDAQ Global Select Market

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

None

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

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 33,124,349 ordinary shares, par value US$0.0001 per share.

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

¨ Yes þ No

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

¨ Yes þ 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.

þ  Yes ¨ No

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

¨ Yes  ¨ No

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

(check one):

¨ Large accelerated filer ¨ Accelerated filer þ 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 þ International Financial Reporting Standards as issued by the International Accounting Standard Boards  ¨ Other

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

¨ Item 17 ¨ Item 18

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

¨ Yes þ No

TABLE OF CONTENTS

PART I		4
Item 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS	4
Item 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	4
Item 3.	KEY INFORMATION	4
Item 4.	INFORMATION ON THE COMPANY	20
Item 4A.	UNRESOLVED STAFF COMMENTS	37
Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	37
Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	56
Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	60
Item 8.	FINANCIAL INFORMATION	61
Item 9.	THE OFFER AND LISTING	62
Item 10.	ADDITIONAL INFORMATION	63
Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	71
Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	72
PART II		73
Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	73
Item 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	73
Item 15.	CONTROLS AND PROCEDURES	73
Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	73
Item 16B.	CODE OF ETHICS	73
Item 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	74
Item 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	74
Item 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	74
Item 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	74
Item 16G.	CORPORATE GOVERNANCE	74
PART III		76
Item 17.	FINANCIAL STATEMENTS	76
Item 18.	FINANCIAL STATEMENTS	76
Item 19.	EXHIBITS	76

2

CONVENTIONS WHICH APPLY TO THIS FORM

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

· “2009 business combination” refers to the merger by 2020 into Exceed and its redomestication into the British Virgin Islands and the purchase by Exceed of all the issued and outstanding ordinary shares of Windrace, resulting in Exceed becoming the sole shareholder of Windrace on October 21, 2009;

· “2020” refers to 2020 Chinacap Acquirco, Inc.;

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

· “Exceed” refers to Exceed Company Ltd.;

· “Going private transaction” refers to Pan Long’s proposed acquisition of all the outstanding ordinary shares of the Company, other than shares owned by the Rollover Shareholders, at a proposed price of $1.78 per ordinary share in cash, which will result in Pan Long becoming the sole shareholder of the Company;

· “IFRS” refers to International Financial Reporting Standards;

· “Mr. Dong” refers to Mr. Ding Dongdong, executive director of the Company and a brother-in-law of Mr. Lin;

· “Mr. Lin” refers to Mr. Lin Shuipan, chairman and chief executive officer of the Company;

· “Pan Long” refers to Pan Long Company Limited, a company wholly-owned by Mr. Lin;

· “RMB” refers to Renminbi, the official currency of the PRC;

· “Rollover Shareholders” refers to Mr. Lin, Tiancheng Int'l Investment Group Limited, HK Haima Group Limited, Wisetech Holdings Limited, Windtech Holdings Limited, RichWise International Investment Group Limited, Mr. Ding and Eagle Rise Investment Limited;

· “we”, “us”, “our Company” and “our” refer to Windrace and its consolidated subsidiaries prior to the 2009 business combination and Exceed and its consolidated subsidiaries following the 2009 business combination;

· “Windrace” refers to Windrace International Company Limited;

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

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

· “XDLong Jiangxi” refers to Xidelong (Jiang Xi) Athletic Equipment Co., Ltd.

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

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

This annual report contains translations of Renminbi amounts, or RMB, into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, translation of amounts in Renminbi into U.S. dollars was calculated at the rate of US$1.00 = RMB6.0537, which was the daily exchange rate of Renminbi into U.S. dollar on December 31, 2013 as published in the H.10 statistical release by the Board of Governors of the Federal Reserve. We make no representation that the Renminbi amounts referred to in this form could have been or could be converted into U.S. dollars at any particular rate or at all. On April 25, 2014, the exchange rate as set forth in the H.10 statistical release published by the Board of Governors of the Federal Reserve was RMB6.2534 to US$1.00.

3

PART I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3. KEY INFORMATION

A. SELECTED FINANCIAL DATA

The following selected consolidated statements of operations data for the years ended December 31, 2009, 2010, 2011, 2012 and 2013 and the consolidated balance sheets data as of December 31, 2009, 2010, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements. The report of Crowe Horwath HK (CPA) Limited, an independent registered public accounting firm, on our consolidated statements of operations data for the years ended December 31, 2011, 2012 and 2013 and the balance sheet data as of December 31, 2012 and 2013 is included elsewhere in this annual report on Form 20-F. Our selected consolidated statements of operations data for the years ended December 31, 2009 and 2010 and our consolidated balance sheets data as of December 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements not included in this annual report on Form 20-F. You should read the selected consolidated financial data in conjunction with those financial statements and the related notes and Item 5. “Operating and Financial Review and Prospects” included elsewhere in this annual report on Form 20-F. Our consolidated financial statements are prepared and presented in accordance with IFRS as issued by the International Accounting Standards Board. Our historical results do not necessarily indicate our results expected for any future periods.

	For the year ended December 31,
	2009			2010			2011			2012			2013
	(in thousands, except for per share data)
	RMB			RMB			RMB			RMB			RMB			US$
Consolidated Statements of Operations and Comprehensive Income Data
Revenues		2,077,958			2,698,891			3,288,561			2,383,516			1,629,616			269,193
Cost of sales		(1,464,856	)		(1,857,251	)		(2,296,298	)		(1,707,801	)		(1,188,657	)		(196,352	)
Gross profit		613,102			841,640			992,263			675,715			440,959			72,841
Other income and gains		5,855			6,416			14,791			15,917			12,150			2,007
Selling and distribution costs		(268,123	)		(339,637	)		(377,903	)		(347,680	)		(260,828	)		(43,086	)
Administrative expenses		(44,509	)		(57,814	)		(77,073	)		(67,932	)		(51,203	)		(8,458	)
Research and development expenses		(24,953	)		(40,783	)		(53,863	)		(44,227	)		(46,613	)		(7,700	)
Finance costs		(29,566	)		(1,893	)		(856	)		(638	)		(1,122	)		(185	)
Share of loss in jointly-controlled entity		(16	)		(17	)		—			—			—			—
Gain from change in fair value of contingent share liability		170,948			1,604			38,645			—			—			—
Profit before tax		422,738			409,516			536,004			231,155			93,343			15,419
Tax		(3,771	)		(56,274	)		(65,922	)		(32,213	)		(27,801	)		(4,592	)
Profit for the year		418,967			353,242			470,082			198,942			65,542			10,827
Number of shares
Basic		8,292,331			25,232,827			29,700,010			32,997,441			33,081,656			33,081,656
Diluted		11,543,091			33,117,326			34,273,028			32,997,441			33,081,656			33,081,656
Earnings per share
Basic		RMB 50.52			RMB 14.00			RMB 15.83			RMB 6.03			RMB 1.98			US$ 0.33
Diluted		RMB 38.58			RMB 10.67			RMB 13.72			RMB 6.03			RMB 1.98			US$ 0.33

4

	As of December 31,
	2009		2010		2011		2012		2013
	(in thousands)
	RMB		RMB		RMB		RMB		RMB		US$
Consolidated Balance Sheets Data:
Cash and cash equivalents		262,204		762,798		964,317		637,184		486,647		80,388
Working capital (1)		496,741		1,092,381		1,577,219		1,654,901		1,535,577		253,659
Total assets		1,467,785		1,744,150		2,085,757		2,265,773		2,413,207		398,634
Total liabilities		669,119		346,612		123,343		102,869		182,409		30,132
Total stockholders’ equity		798,666		1,397,538		1,962,414		2,162,904		2,230,798		368,502

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

Exchange Rate Information

This annual report contains translations of Renminbi into U.S. dollar amounts at specific rates solely for the convenience of the reader. These rates are provided solely for your convenience and we make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. Unless otherwise indicated, these U.S. dollar amounts have been translated from Renminbi at an exchange rate of RMB6.0537 = US$1.00, which was the daily exchange rate of Renminbi into U.S. dollar on December 31, 2013 as published in the H.10 statistical release by the Board of Governors of the Federal Reserve.

Translating amounts expressed in Renminbi on a specified date (at the prevailing exchange rate on that date) may result in the presentation of U.S. dollar amounts that are different from the U.S. dollar amounts that would have been obtained by translating Renminbi on another specified date (at the prevailing exchange rate on that different specified date).

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

	Renminbi per U.S. Dollar (1)
	Average(2)		High		Low		Period End
2009		6.8295		6.8470		6.8176		6.8259
2010		6.7603		6.8330		6.6000		6.6000
2011		6.4475		6.6364		6.2939		6.2939
2012		6.2990		6.3879		6.2221		6.2301
2013		6.1412		6.2438		6.0537		6.0537

	Renminbi per U.S. Dollar
	High		Low
October 2013		6.1209		6.0815
November 2013		6.0993		6.0903
December 2013		6.0927		6.0537
January 2014		6.0600		6.0402
February 2014		6.1448		6.0591
March 2014		6.2273		6.1183
April 2014 (through April 25, 2014)		6.2534		6.1966

(1) Based on the exchange rate of Renminbi into U.S. dollar as published in the H.10 statistical release by the Board of Governors of the Federal Reserve.

(2) Annual averages are calculated using the average of the exchange rates on the last day of each month during the period. On April 25, 2014, the daily exchange rate was RMB 6.2534 to US$1.00.

B. CAPITALIZATION AND INDEBTEDNESS

Not applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

5

D. RISK FACTORS

Risks Relating to Our Business and Industry

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

Demand for our products is largely dependent upon prevailing economic conditions. The financial crisis in 2008 and the subsequent economic downturn in the global markets have resulted in the reduction of purchase orders from our distributors. While the global economy has evidenced initial signs of a recovery, the extent of any recovery remains uncertain. All of our products are sold to distributors for subsequent resale to consumers in the PRC. In the event the demand for consumer products declines in China as a result of adverse economic conditions globally or in China, demand for our sports products could decrease, which could materially adversely affect our business, financial condition and results of operations.

To maintain our competitive position and pricing power, and to manage inventory levels and the efficiency of our distribution network, we have proactively engaged our distributors and authorized third party retailers in an effort to prudently manage the level of wholesale orders placed with us but not yet manufactured. In anticipation of weaker consumer demand and to prevent a buildup of the level of inventory among distributors, we maintained our strategy to trim production and reduce deliveries in 2013. Our key strategies remain intact, but we have to continue to adjust operations as needed to stay focused on our priorities and to align with the changing market conditions. We cannot predict the timing or the duration of any further downturn in the economy or its effect on our results of operations and financial condition. We continue to monitor the changing economic landscape and may modify our strategic direction based upon the changing business environment. If we do not react quickly enough to the changes in market or economic conditions, this could result in lost customers, decreased market share, and increased operating costs.

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

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

We cannot assure you that our strategies will remain competitive or that we will continue to be successful in the future. Increased competition could result in a loss of our market share. In particular, if our competitors adopt aggressive pricing policies, we may be forced to adjust the pricing of our products in response. This could adversely affect our business, financial condition and results of operations.

We distribute our products mainly through Xidelong retail selling locations, which are operated by independent third-party distributors and retailers over which we have limited control.

We distribute our products mainly through Xidelong retail selling locations. Some Xidelong retail selling locations are operated by our distributors and offer our products exclusively pursuant to the terms of our distribution arrangements. The remaining Xidelong retail selling locations, however, are operated by third-party retailers selected by our distributors. Because we do not have contractual relationships with third-party retailers, we have limited control over their operations. We cannot assure you that our current distribution arrangements provide us with sufficient control to ensure these Xidelong retail selling locations sell our products on an exclusive basis.

In addition, if our distributors or third-party retailers fail to provide quality customer service, our brand could become associated with poor customer service, which could damage our brand image and reputation and could have a material adverse effect on our business, results of operations and financial condition. Finally, if our distributors experience financial difficulties, they may unilaterally attempt to liquidate their inventory of our products through discounts at their Xidelong retail selling locations without our approval, which could damage the image and the value of our brand.

Fluctuations in purchase orders from our distributors could materially adversely affect our financial condition and results of operations.

We sell our products to distributors for subsequent resale to consumers. Our distributors generally do not have any contractual obligation to purchase a minimum quantity of our products or at a minimum price. We may need to lower the selling prices of our products at any time due to changing market conditions. Further, the quantities specified by our distributors in their purchase orders may be subsequently adjusted upward or downward on short notice. For instance, due to lower consumer demand as a result of the global financial crisis, we agreed with certain distributors to reduce their orders to prevent excess inventory buildup. If our distributors perform poorly or if we fail to maintain good relationships with our distributors or retain them in our distribution network, our sales, financial condition and results of operations could be materially adversely affected.

6

We rely on our distributors to expand the geographical coverage of our retail sales network.

Our retail sales network is owned, managed and operated by our distributors under the terms of individual distribution agreements. As of December 31, 2013, our products are distributed through 21 distributors, which operate 3,080 Xidelong retail selling locations located in 30 provinces and municipalities in China.

Under our agreements with our distributors, for each designated geographical area or region, we only appoint one distributor instead of multiple competing distributors. This enables us to manage and monitor the distributor and the Xidelong retail selling locations in the designated region more effectively. We rely on our existing and new distributors to assist us in exploring new markets for our products and identifying potential locations for new stores.

Some of our distributors may carry other sportswear and leisurewear brands, including brands of our competitors. Although distributors are required to operate separate retail selling locations for other brands, we cannot assure you that they will always provide favorable retail store locations and dedicate sufficient marketing resources to our products. We cannot assure you that our distributors are willing to expand their network timely or sufficiently in scope to satisfy the needs of our business. Further, to the extent that any distributor for any particular region ceases to cooperate with us for any reason and we are not able to find a suitable replacement distributor for that region in a timely manner, we could lose significant business in that region, which would adversely affect our business, financial condition and results of operations.

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

We derive a significant portion of our sales from several large distributors. For 2011, 2012 and 2013, sales to our top five distributors accounted for approximately 43.3%, 41.3% and 41.5%, respectively, of our total revenue. For 2011, 2012 and 2013, sales to our single largest distributor accounted for approximately 12.6%, 12.1% and 12.2%, respectively, of our total revenue. As of December 31, 2012 and 2013, we have a high concentration of credit: 41.6% and 41.8% of our total trade receivables as of December 31, 2012 and 2013, respectively, were due from our five largest customers. We generally enter into distribution agreements with our distributors for a term of three years. Each of our top five distributors has maintained their business relationships with us for more than three years. We cannot assure you that our top distributors will renew their distribution agreements with us on commercially acceptable terms or at all.

Further, our top distributors are not obliged to continue to place orders with us at the same levels as before or at all. We cannot assure you that we will be able to obtain orders from other distributors to replace any such lost sales. Any substantial reduction in purchases from our top distributors, any failure to renew their agreements with us, or any failure for us to collect trade receivables from them, may result in a significant loss of sales, and our business, financial condition and results of operations could be materially adversely affected.

Sales of substandard products at discounted prices could have a material adverse effect on our brand name.

Our distributors are required to sell our products at our suggested retail prices. During the years ended December 31, 2011, 2012, and 2013, a number of distributors notified us of certain products with minor deviation from their manufacturing specifications. Because the deviation was harmless and the quantities involved were immaterial, we allowed the distributors and their authorized third-party retailers to sell these products at a discount without affecting our selling prices to such distributors. The levels of discount were decided and approved by us on a case-by-case basis. Increased sales of products with deviation from their manufacturing specifications at discounted prices could damage our brand image. If there are products with more significant deviation from their manufacturing specifications, we could be required to reduce the selling prices of our products to distributors, which would adversely affect our business, financial condition and results of operations.

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

Our distributors place orders for our products in sales fairs organized by us. The sports and leisure footwear, apparel, and accessories retail markets in the PRC are dominated by a few large sports and leisure footwear, apparel, and accessories distributors with many stores. The dominant distributors may increase their market share by expanding through acquisitions or through the establishment of additional stores.

We provide credit to our distributors based on our assessment of each distributor’s financial condition. Our credit risk is concentrated in a relatively small number of distributors. If any of them were to experience a shortage of liquidity, it would increase the risk of nonpayment of their outstanding payables to us. The loss of, or a significant decrease in sales to, these distributors, or their failure to pay us in a timely manner or at all, could materially adversely affect our business, financial condition and results of operations.

In addition, any shifting concentration of market share to a small number of distributors in a particular province or region increases our operational risks. If any one of them substantially reduces their purchases of our products, we could be unable to find a sufficient number of other retail selling locations for our products to sustain the same level of sales and revenues. Further, the consolidation of distributors could limit our ability to negotiate contract terms in our favor. For example, due to a small number of distributors existing in the industry to whom we can sell our products, we may need to reduce our selling prices to retain our business relationship with these distributors, which could adversely impact our profitability.

7

We may be unable to respond to changing market trends and consumer preferences.

Substantially all of our revenue is derived from the sale of sports and leisurewear products, which are subject to rapidly changing consumer preferences. Our sales and profits are sensitive to these changing preferences, and our success depends on our ability to identify, originate and define product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner.

We sell our products only to distributors and do not receive any reports on their resale of our products to consumers at Xidelong retail selling locations. We do not accept returns of unsold products from distributors, nor do we track information on a real-time basis with respect to the inventory levels and movements of our products at Xidelong retail selling locations. We rely on inventory reports submitted by our distributors to identify whether particular products are gaining consumer acceptance. However, such reporting system requires the cooperation of the distributors to report accurately and submit the relevant inventory data to us on a timely basis. If our distributors do not provide accurate and timely inventory data, we are not able to assess accurately whether our sales to distributors track sales of our products to consumers. Further, we are only able to obtain inventory data from the retail selling locations directly operated by our distributors but not the authorized third-party retailers because we do not have contractual relationships with them. Therefore, we rely on our distributors to monitor inventory levels and overall sales performance of the authorized third-party retailers. If we are unable to track end-consumer sales accurately, we may not be able to assess market trends and preferences, which ultimately could have a material adverse effect on our business, financial condition and results of operations.

Further, all of our products are subject to changing consumer preferences that we cannot predict with certainty. Our new products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of performance or other sports footwear or apparel or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. If we fail to anticipate accurately and respond to trends and shifts in consumer preferences by adjusting the mix of existing product offerings, developing new products, designs and styles, or influencing sports and fitness preferences through vigorous marketing, we could experience lower sales, excess inventories and lower profit margins, any of which could have an adverse effect on our business, financial condition and results of operations.

Increases in labor, raw material and other production costs in the PRC could materially adversely affect our profitability.

The sportswear manufacturing industry is labor intensive. Labor costs in the PRC have been increasing in recent years and our labor costs in the PRC could continue to increase in the future. If labor costs in the PRC continue to increase, our production costs, including our own manufacturing and outsourcing costs, will likely increase. This may in turn affect the selling prices of our products, which may then affect the demand for such products and therefore adversely affect our sales, financial condition and results of operations.

In order to reduce the attrition rate of our employees, we commenced the construction of new staff quarters to improve their working and living environments at our production facility in Jinjiang, Fujian Province. Construction work has been completed and internal renovation is expected to be completed in 2014. It is, however, uncertain whether this project will help us retain our skilled labor or help us to reduce the pace of the increase of labor cost.

Increases in costs of raw materials and components, such as cotton, natural and synthetic leather and semi-finished rubber soles; and increases in other production costs, such as electricity costs, could have similar adverse effects, particularly if we are unable to identify and employ other appropriate means to reduce our costs of production.

Our profitability could be materially adversely affected by the loss of favorable tax treatments.

Our profit is affected by the income tax that we pay and any preferential tax treatment that we receive. Our operations in Jinjiang, Fujian Province are conducted by XDLong China. As a foreign-invested enterprise engaged in the manufacturing business, XDLong China was entitled to the preferential tax treatments provided under the Foreign Enterprise Income Tax Law. XDLong China was entitled to a full exemption from PRC enterprise income tax for its first two profitable years (i.e.,2008 and 2009), and was entitled to a 50% tax reduction for the following three years (i.e., 2010, 2011 and 2012). All preferential tax treatments expired on December 31, 2012. As a result, XDLong China was subject to 25% enterprise income tax in 2013, which has negatively impacted our profit.

We intend to conduct our operations in a second production facility in Ruichang, Jiangxi Province through XDLong Jiangxi, a foreign-invested enterprise established after the PRC Enterprise Income Tax Law became effective on January 1, 2008. Pursuant to an agreement between XDLong Jiangxi and the Municipal Government of Ruichang City, XDLong Jiangxi is exempted from the local income tax, for its first two years of production and is entitled to a 50% reduction in the local income tax for the subsequent three years. XDLong Jiangxi will otherwise not be entitled to any exemption or reduction in the portion of enterprise income tax shared by the national government. As of December 31, 2013, XDLong Jiangxi had not commenced production.

8

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

Our manufacturing operations depend on adequate supplies of raw materials and components. We purchase a large portion of our raw materials and components from a small number of suppliers for our footwear manufacturing operations. Our standard supply agreements are for a term of two years. Most of our raw materials suppliers are located in Quanzhou, which is adjacent to our production facility in Jinjiang, Fujian Province. Our contractual relationships with most of our suppliers have been in place since 2004.

Because we also outsource our products to contract manufacturers, our purchases consist purchases of raw materials and components as well as purchases of finished goods from contract manufacturers. For 2011, 2012 and 2013, purchases from our top five raw material suppliers and contract manufacturers accounted for approximately 44.2%, 53.6% and 38.0%, respectively, of our total purchases. During the same periods, purchases from our single largest supplier accounted for approximately 11.1%, 14.8% and 10.2%, respectively, of our total purchases.

We cannot assure you that our top suppliers will continue to deliver raw materials or components to us in a timely manner or at acceptable prices and quality, or at all. Any disruption in supply of raw materials or components from our suppliers may adversely affect our business, financial condition and results of operations.

We rely on third-party contract manufacturers for a portion of our footwear production and all of our apparel and accessories production.

We manufacture a significant portion of our footwear at our production facility in Jinjiang, Fujian Province. We outsource the manufacturing of the remaining portion of our footwear and all of our apparel and accessories to contract manufacturers. As a result, purchases for footwear includes purchases of raw materials and components as well as purchases of finished goods from contract manufacturers, while purchases for apparel and accessories consist largely of purchases of finished goods from contract manufacturers.

For 2011, 2012 and 2013, purchases from our single largest contract manufacturer of footwear accounted for approximately 35.6%, 50.3% and 51.8%, respectively, of our total purchases for footwear. For 2011, 2012 and 2013, purchases from our single largest contract manufacturer for apparel and accessories accounted for approximately 12.2%, 15.2% and 10.9%, respectively, of our total purchases for apparel and accessories, and purchases from our top five contract manufacturers of apparel and accessories accounted for approximately 45.7%, 61.0% and 45.4%, respectively, of our total purchases for apparel and accessories.

We expect our reliance on contract manufacturers to continue. Any increase in our footwear sales will therefore depend on the successful expansion of our footwear production capacity at our production facility and the availability of contract manufacturers with sufficient production capacity of their own. If we are unable to continue to increase our internal production capacity or engage suitable contract manufacturers, our business, financial condition and results of operations could be adversely affected.

We do not have any long term contracts with our contract manufacturers. As such, we may be unable to renew these contracts on commercially acceptable term or at all, when they expire. Contract manufacturers may unilaterally terminate our supply contracts or increase their prices. As a result, we are not assured of an uninterrupted supply of footwear, apparel and accessories of acceptable quality or at acceptable prices from our contract manufacturers. We may not be able to offset any interruption or decrease in supply of our products by increasing production at our own production facilities due to capacity constraints, and we may not be able to substitute suitable alternative contract manufacturers in a timely manner on commercially acceptable term or at all. Any disruption in our supply of products from contract manufacturers may adversely affect our business and could result in loss of sales and increase in production costs, which could adversely affect our business, financial condition and results of operations.

To reduce our reliance on contract manufacturers, we have entered into an agreement with the Municipal Government of Ruichang City to acquire a land parcel for the construction of a second production facility. The first phase of the new production facility is expected to be completed by the end of 2014. It is uncertain whether the completion of this project will help us avoid any future interruption in the supply of our products or whether this investment is justified as a result of the recent decrease in our sales.

Failure to optimize our manufacturing potential and cost structure could materially increase our overhead, causing a decline in our margins and profitability.

We strive to utilize the manufacturing capacity of our facilities fully and expand our manufacturing capacity to meet additional demands but may not do so on a consistent basis. Our factory utilization is dependent on our success in, among other things:

· accurately forecasting demand;

· predicting volatility;

· timing volume sales to our customers;

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· balancing our productive resources with product mix; and

· planning manufacturing services for new or other products that we intend to produce.

Demand for manufacturing of our products may not be as high as we expect, and we may fail to realize the expected benefit from our investment in our manufacturing facilities, which could adversely affect our business, financial condition and results of operations.

Failure to effectively promote or maintain the Xidelong brand could adversely affect our business and results of operations.

The image of the Xidelong brand is an important factor in influencing consumer preferences and building brand loyalty. Promoting and maintaining the Xidelong brand is therefore crucial to our success and growth within the PRC sportswear market. We have a branding and promotional department that deals mainly with media arrangements, sponsorships, other endorsement activities and store image maintenance matters. For 2011, 2012 and 2013, advertising and promotional activities represented approximately 10.7%, 13.8% and 15.1%, respectively, of our total revenue.

We use a variety of media, such as television, newspapers, magazines, the Internet and outdoor billboard displays to build both regional and national brand recognition. We have incurred and expect to continue to incur significant costs and expenses arising out of our brand-building activities, including store refurbishment and renovation, sponsorships and advertising in regional and national newspapers, magazines, the Internet, television and billboard displays. These activities may not be successful in building the goodwill and profile of our brand.

We also collaborate with athletes, media celebrities and industry experts on marketing and endorsement arrangements and they act as spokespersons for the Xidelong brand. Our brand is therefore partly dependent on the public perception of these individuals, over which we have no control. In 2013, we continued our sponsorship of the “Fitness for All” Sports Campaign and our engagement of By2, a pop musical group as our product spokesperson. Any negative publicity, whether in the PRC or abroad, in relation to our brand or our brand representatives could have an adverse effect on the public’s perception of our brands. This negative publicity could arise from poor performance by our endorsers in their fields, our failure to continue to identify correctly promising athletes and or celebrities to use and endorse our products, or our failure to enter into endorsement arrangements with prominent athletes and sports organizations.

If we are unsuccessful in promoting our Xidelong brand among its targeted consumer groups, the goodwill and consumer acceptance of our Xidelong brand may be eroded, and our business, financial condition, results of operations and prospects could be adversely affected. 

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

We experience moderate fluctuations in sales volume during the year, although sales of individual products could vary considerably from time to time as a result of changes in seasonal and geographic demand for particular types of footwear, apparel and accessories. Historically, revenues in the third and fourth fiscal quarters have slightly exceeded those in the first and second fiscal quarters. Overall consumer spending in China varies seasonally, with sales often peaking around the Chinese New Year in January and February, the Labor Day holiday in early May, the summer months, and the National Day holiday in early October.

Operations in our production facilities could be disrupted for reasons beyond our control. The causes of disruptions may include extreme weather conditions, landslides, earthquakes, fires, natural catastrophes, raw material supply disruptions, equipment and system failures, labor force shortages, energy shortages, workforce actions or environmental issues. A disruption in our production activities could affect sales of our products to distributors, especially products that are timed for release during a particular season.

Similarly, sales of our products to consumers could be disrupted by unforeseen events. In May 2008, Wenchuan, Sichuan Province, a region that is approximately 360 kilometers away from Chongqing, suffered an earthquake with an 8.0 magnitude on the Richter Scale. As a result of the earthquake, 87 retail selling locations of our distributors were closed. We cannot assure you that we will not suffer any further losses in the future as a result of similar events that are beyond our control.

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

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

· the timing of international and domestic sports events;

· consumer acceptance of our new and existing products;

· the size of the overall sportswear industry;

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

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· the timing and purchase decisions of our distributors.

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

We may not be able to resume our growth after the recent slowdown or manage our growth effectively.

Despite a temporary slowdown in 2013, we intend to continue growing our business either through organic growth or through acquisitions and investments in related businesses as we deem appropriate. As part of our growth strategy, we are constructing a second production facility in Ruichang, Jiangxi Province.

Business expansion may place a significant strain on our managerial, operational and financial resources. Our expansion plans will require us to increase investments in, and devote significant resources to, our brand promotion efforts, internal production capacities, research and design capabilities and our retail sales network. To be successful in our expansion, we must devise and implement business plans, train and manage our growing workforce, manage costs and implement adequate control and reporting systems in a timely manner.

Furthermore, our ability to obtain adequate funds to finance our expansion plans depends on our financial condition and results of operations, as well as other factors that may be outside our control, such as general market conditions, the performance of the PRC sportswear industry, and political and economic conditions in China. If additional capital is unavailable, we could be forced to abandon some or all of our expansion plans, as a result of which our business, financial condition and results of operations could be adversely affected.

We cannot assure you that our expansion plan will be successful or our personnel, procedures and controls will be managed effectively to support our future growth adequately. Failure to manage our expansion effectively could affect our success in executing our business plan and adversely affect our business, financial condition and results of operation. In addition, our growth in percentage terms could slow in the future. Accordingly, you should not rely on our historic growth rate as an indicator for our future growth rate.

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

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

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

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

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

One element of our growth strategy is to continue to design and manufacture products through further investment in product design and research and development initiatives. We primarily rely on the China Institute of Sport Science for such research and development initiatives. We renewed our technology cooperation agreement with the China Institute of Sport Science in October 2011 for an additional term of five years. We cannot assure you that the China Institute of Sport Science will agree to renew the agreement again when it expires on its terms in the future, nor can we assure you that after renewal, the China Institute of Sport Science will comply with the agreement. If the China Institute of Sport Science does not honor any terms and conditions of the agreement, including its renewal provisions, for any reason, our research and development capabilities may be adversely affected. This could have an indirect adverse impact on our business, financial condition and results of operations.

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

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

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

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

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

Regulatory uncertainties in our rights to use certain land parcels may adversely affect our expansion plan.

We currently conducted substantially all of our operations in Jinjiang, Fujian Province on a land parcel held by XDLong China. We plan to expand our operations through the construction of additional production and supporting facilities, including a production facility in Ruichang, Jiangxi Province, new staff quarters in our existing production facility in Jinjiang, Fujian Province; and an additional production facility in Jinjiang, Fujian Province. These facilities will be located on land parcels to which our land use rights are subject to some uncertainties, as described below:

· Our production facility in Ruichang, Jiangxi Province is located on land parcels with an aggregate site area of 400,000 square meters. We have committed to acquire land use rights to these land parcels from the Municipal Government of Ruichang City pursuant to an agreement in December 2011. On December 1, 2012, we completed the purchase of the land use rights to a land parcel with a site area of 193,333 square meters. The purchase for the remaining land parcels with an aggregate site area of 206,667 square meters has not been finalized and is subject to municipal and administrative approvals.

· The new staff quarters in Jinjiang, Fujian Province are located on land parcels adjacent to our existing production facility with an aggregate site area of 22,160 square meters. We acquired our interest in the land parcels from independent third parties through sales and purchase agreements dated May 17, 2010, May 20, 2010, November 18, 2010 and January 3, 2011, respectively. We are in the process of applying for a certificate of land use rights to the land parcels.

· The additional production facility in Jinjiang, Fujian Province will be located on a land parcel with an area of 15,000 square meters. XDLong Fujian, one of our wholly-owned subsidiaries, acquired land use rights to the land parcel from the PRC government in 2005 through the payment of RMB531,000 in land grant fees. Pursuant to the terms of grant, XDLong Fujian was required to construct a production facility on the land parcel no later than February 28, 2006. Because no construction has been made on the land parcel to date, there is a risk that the land parcel will be repossessed without any compensation.

XDLong Fujian had not commenced construction by such date because we decided to construct our production facility on a larger land parcel. On May 14, 2008, XDLong Fujian applied for local government approval to postpone construction. On July 1, 2012, the Ministry of Land and Resources promulgated a new regulation titled Measures on Disposing Idle Land, which emphasizes that the land authority shall repossess an idle land parcel without any compensation if the scheduled construction has not commenced for two years since the scheduled date set forth in the land grant contract. The new regulation also stipulates the procedures, results and other details regarding the repossession of idle land.

We do not believe that the land parcel held for use by XDLong Fujian met the definition of idle land under the Measures on Disposing Idle Land. Local government has verbally confirmed to us that it does not intend to repossess the land parcel held for use by XDLong Fujian, or otherwise cancel the underlying contract. Management based its conclusion on the fact that the local government has been advised that we intend to commence construction on the land parcel and officials have provided verbal assurances that they do not intend to take punitive action for our failure to commence construction on a timely basis. Consistent with the objectives of the local government, the construction of the additional facilities in Jinjiang, Fujian Province will have a positive impact on the local economy and result in an expansion of our local workforce. As a result, we have concluded that the possibility of incurring impairment in value or loss of land use is remote.

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Under PRC laws, a certificate of land use rights is required for the construction and use of our facilities. If we fail to obtain the certificate of land use rights for any reason, we may be fined or required to relocate our staff quarters, which would adversely affect our business, results of operations and financial condition. In addition, if the local government repossesses the land parcel held by XDLong Fujian, we may lose our land use rights thereto and we will not be able to recover the land grant fees previously paid to the government. Our ability to implement our production expansion plans may be adversely affected.

Changes in environmental regulation could result in additional capital expenditures.

Our production facilities are subject to PRC environmental laws and regulations. These laws and regulations require enterprises engaged in manufacturing that may generate industrial wastes to adopt effective measures to control and properly dispose of such wastes. The government can levy fines for environmental law violations. For material violations, the government may suspend or close any or all of our operations. We cannot assure you that the government will not change the existing laws or regulations or impose additional or stricter laws or regulations. Compliance with any of these additional or stricter laws or regulations may cause us to incur additional capital expenditure, which we may be unable to pass on to customers through higher prices for our products.

We contract with third-party contract manufacturers and raw material suppliers and do not exercise any control over the operations of our contract manufacturers or suppliers. We are therefore not able to ensure their compliance with the applicable environmental laws. If our contract manufacturers or suppliers violate any applicable laws, we may be named as a defendant in the related legal proceedings and incur costs and resources in defending ourselves. Any resulting negative publicity may also damage our brand and harm our brand building efforts. Our business, financial condition and results of operations could be adversely affected as a result.

Power shortages could disrupt our business.

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

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

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

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

As a result of the global financial downturn in 2008, banks and other financial institutions tightened lending to businesses. Moreover, the PRC government may pass measures to tighten credit, including trade financing, available in the PRC market. As a result, businesses experienced difficulties in obtaining credit at commercially acceptable terms, or at all. We obtained new bank borrowings of RMB30.0 million in 2012 and RMB10.0 million in 2013. We cannot assure you that we will continue to be able to obtain additional funding when the need arises. If we are unable to obtain new credit facilities and are unable to finance our liquidity or working capital requirements through cash flows from operating activities or other sources, our business, financial condition and results of operations could be adversely affected.

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

We have established risk management and internal control systems consisting of relevant organizational frameworks, policies, procedures and risk management methods that we believe are appropriate for our business operations, and we seek to continue to improve such risk management and internal control systems from time to time. However, due to the inherent limitations in the design and implementation of risk management and internal control systems, we cannot assure you that our risk management and internal control systems will be sufficiently effective in identifying and preventing all such risks.

In addition, as some of our risk management and internal control policies and procedures are relatively new, we may need to establish and implement additional risk management and internal control policies and procedures to further improve our systems from time to time. Our risk management and internal control systems also depend on their implementation by our employees, and we cannot assure you that such implementation will not involve any human errors or mistakes. If we fail to timely adapt and implement our risk management and internal control policies and procedures, our business, financial condition, and results of operations could be materially adversely affected.

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

We are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on the effectiveness of such companies’ internal control over financial reporting in their respective annual reports. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting because we exited the accelerated filer status at the end of the fiscal year ended December 31, 2012 and now hold the status as a non-accelerated filer. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2013. 

If we fail to maintain the effectiveness of our internal control over financial reporting, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports. As a result, any failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ordinary shares. Furthermore, we may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.

Risks Relating to the PRC

Our future performance is dependent on the PRC economy and the PRC consumer market in particular.

We derive all of our revenue from sales of our products in the PRC. The success of our business depends on the condition and growth of the PRC consumer market, which in turn depends on macro-economic conditions and individual income levels in the PRC. We cannot assure you that projected growth rates of the PRC economy and the PRC consumer market will be realized under the current economic situation. Any future slowdowns or declines in the PRC economy or consumer spending could adversely affect our business, financial condition, and results of operations. We believe that consumer spending habits could be adversely affected during a period of recession in the economy or that uncertainties regarding future economic prospects could also affect consumer spending habits, all of which may have an adverse effect on certain enterprises operating within the consumer and retail sectors, including us. The consumer and retail market could be affected by the changing operating conditions in the PRC. With the accession of the PRC to the World Trade Organization, or WTO, changes and developments in the consumer and retail market could be volatile and unpredictable. For instance, the reduction in tariffs on foreign products after the liberalization of the PRC market and further entry of international brands may intensify the competition in the PRC market. This could have a material adverse impact on our business, financial condition and results of operations.

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

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

· its structure;

· level of government involvement;

· level of development;

· level of capital reinvestment;

· control of capital reinvestment;

· control of foreign exchange; and

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· allocation of resources.

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

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

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

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

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

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

We are exposed to the risks associated with foreign exchange controls and restrictions in China, as our revenues are denominated in Renminbi, which is currently not freely exchangeable. The PRC government controls the convertibility of the Renminbi into foreign currencies. Under the rules promulgated under the PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and operation-related expenditures, may be made in foreign currencies without prior approval but are subject to procedural requirements. Strict foreign exchange control continues to apply to capital account transactions. These transactions must be approved by or registered with the PRC State Administration of Foreign Exchange and repayment of loan principal, distribution of return on direct capital investment and investments in negotiable instruments are also subject to restrictions. We cannot assure you that we will be able to meet all of our foreign currency obligations or to remit profits out of China.

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

Exceed is a holding company incorporated in the British Virgin Islands and relies principally on dividends paid by operating subsidiaries in the PRC for cash requirements, including the funds necessary to service any debt we may incur. Applicable PRC laws, rules and regulations permit payment of dividends by our PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC accounting standards, which differ in many aspects from generally accepted accounting principles in other jurisdictions. Based on PRC accounting standards, our PRC subsidiaries are also required to set aside a certain percentage of their after-tax profit each year to their reserve fund in accordance with the requirements of relevant laws and provisions in their respective articles of associations, which are not available for distribution as cash dividends. As a result, our PRC subsidiaries are restricted in their ability to transfer a portion of their net income to us, whether in the form of dividends, loans or advances. Further, if any of our subsidiaries incurs debt in their own name in the future, the instruments governing the debt may restrict dividends or other distributions on its equity interest to our Company. Any limitation on the ability of our subsidiaries to pay dividends could materially adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

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

Our subsidiaries may trigger withholding tax requirements in the future under the PRC Enterprise Income Tax Law and the Rules on the Implementation of Enterprise Income Tax Law of the PRC, or Implementation Rules, depending on their classification as a PRC or non-PRC tax resident enterprise. Under the PRC Enterprise Income Tax Law and Implementation Rules, dividend and profit distribution by a “resident enterprise” to a “non-resident enterprise” will be subject a withholding tax rate of 5% if the latter is a qualified Hong Kong company and a withholding tax rate of 10% if the latter is a British Virgin Islands company. In contrast, qualified dividend and profit distribution from equity investment between “PRC tax resident enterprises” are exempt from withholding tax and income tax. Among other things, “qualified dividend and profit distribution” include investment income derived by a PRC tax resident enterprise from the direct investment in other PRC tax resident enterprises, other than investment income from circulating stock issued publicly by PRC tax resident enterprises and traded on stock exchanges where the holding period is less than 12 months.”

Under the PRC Enterprise Income Tax Law, “non-resident enterprises” are enterprises that do not have an establishment or place of business in the PRC, or that have establishment or place of business but the relevant income is not effectively connected with the establishment or place of business. If an enterprise incorporated outside of the PRC has “de facto management organization” within the PRC, it may be recognized as a “resident enterprise” and may be subject to a 25% enterprise income tax on its worldwide income. According to the Implementation Rules, “de facto management organization” means the institution that materially and comprehensively manages and controls the enterprise’s business, personnel, finance and assets. Given the short history of the tax law and the Implementation Rules, the way for an enterprise to qualify for tax exemptions remains unclear. Our ability to pay dividends and our financial condition may be adversely affected as a result of the new tax law and other changes in PRC policies and regulations on dividend distributions, withholding tax, and enterprise income tax.

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

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

Fluctuations in the exchange rate between the U.S. dollar and Renminbi could adversely affect us.

Substantially all of our revenues and expenditures are denominated in Renminbi. As a result, fluctuations in the exchange rate between U.S. dollar and Renminbi will affect our financial results in U.S. dollar terms without affecting our business or results of operations. Renminbi’s exchange rate with the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions. The exchange rate for conversion of Renminbi into foreign currencies is heavily influenced by intervention in the foreign exchange market by the People’s Bank of China. From 1995 until July 2005, the People’s Bank of China intervened in the foreign exchange market to maintain an exchange rate of approximately 8.3 Renminbi per U.S. dollar. On July 21, 2005, the PRC government changed this policy and began allowing modest appreciation of the Renminbi versus the U.S. dollar. The People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. The RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. It is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to 2% in order to proceed further with the reform of the RMB exchange rate regime. These could result in a further and more significant floatation in the RMB’s value against the U.S. Dollars.

The international reaction to the RMB revaluation has generally been positive. But, international pressure continues to be placed on the Chinese government to adopt an even more flexible currency policy, which could result in significant fluctuation of the RMB against the U.S. Dollars. Any significant revaluation of the Renminbi may have a material adverse effect on our revenues and financial condition as well as on the value of, and any dividends payable on, our ordinary shares in foreign currency terms. For instance, a decline in the value of Renminbi against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in us and the dividends we may pay in the future, if any.

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

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We may be subject to fines and legal sanctions if we or our employees who are PRC citizens fail to comply with the PRC regulations relating to employee share options granted by overseas listed companies to PRC citizens.

In March 2007, SAFE issued the Application Procedures for Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plans or Share Option Plans of Overseas Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC individuals who participate in an employee stock holding plan or share option plan of an overseas listed company are required, through a PRC domestic agent or PRC subsidiary of the overseas listed company, to register with SAFE and complete certain other procedures. As we are an overseas listed company, we and our PRC employees who have been granted share options and/or restricted share units under our equity incentive plans are subject to the Stock Option Rule. On February 15, 2012, SAFE issued the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, or the Stock Incentive Plan Rules, or the Updated Stock Option Rule, which replaced the Stock Option Rule issued by SAFE in March 2007. We have issued restricted shares under our equity incentive plan and we and our employees intend to make such application and complete all the requisite procedures in accordance with the Updated Stock Option Rule. However, there exist significant uncertainties in practice with respect to the interpretation and implementation of the Updated Stock Option Rule, and we cannot assure you that we can complete all the procedures in a timely manner. If SAFE or other PRC governmental authorities determine that we or our PRC employees have failed to comply with the provisions of the Updated Stock Option Rule, we or they could be subject to fines and legal sanctions, which could have a material adverse effect on the implementation of our equity incentive plans and our business operations.

The audit report included in this annual report are 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

Auditors of companies that are traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board, or PCAOB, and are 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 we have substantial operations within China and the PCAOB is currently unable to conduct inspections of the work of our auditors without the approval of the Chinese authorities, our auditors are not currently inspected fully by the PCAOB. In May 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.  

Inspections of other firms that the PCAOB has conducted outside 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 full 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.

Proceedings instituted by the SEC against five PRC-based accounting firms could result in adverse impact on our business and price of our stock.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against five PRC-based accounting firms. The Rule 102(e) proceedings initiated by the SEC relate to these firms’ failure to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

In January 2014, the administrative judge reached an initial decision that the "big four" accounting firms should be barred from practicing before the SEC for six months. It is currently impossible to determine the ultimate outcome of this matter as the accounting firms have indicated their intention to file a petition for review of the initial decision and pending that review the effect of the initial decision is suspended. It will, therefore, be for the SEC to make a legally binding order specifying the sanctions if any to be placed on these audit firms. Once such an order was made, the accounting firms would have a further right to appeal to the US federal courts, and the effect of the order might be further suspended pending the outcome of that appeal.

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Depending on the final outcome, public 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 may result in SEC’s revocation of the registration of their shares under the Exchange Act. Moreover, although our independent registered public accounting firm was not named as a defendant in the above SEC administrative proceedings, any negative news about the proceedings against these audit firms may erode investor confidence in China-based, US public companies, including us, and the market price of our shares may be adversely affected.

If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed PRC companies, we may have to expend significant resources to investigate and resolve the matter, which could harm our business operations, stock price and reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.

In the past few years, U.S. public companies with substantially all of their operations in China, particularly companies like us which became an SEC reporting company partly as a result of reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value and, in some cases, have become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions, and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and could distract our management from growing our Company. If such allegations are not proven to be groundless, our Company and business operations will be severely affected and your investment in our stock could be rendered worthless.

Risks Related to the Going Private Transaction and Investment in our Ordinary Shares

The going private transaction is progressing, creating restrictions and uncertainties that may materially affect our business and operations.

An extraordinary general meeting of shareholders will be convened in the near future to consider the going private transaction, which will involve Pan Long’s acquisition of all the outstanding ordinary shares of the Company, other than shares owned by the Rollover Shareholders, at a proposed price of $1.78 per ordinary share in cash through a merger between a wholly-owned subsidiary of Pan Long into the Company, resulting in Pan Long becoming the sole shareholder of the Company. Pan Long is an entity set up by Mr. Lin, our chairman and chief executive officer, for the going private transaction.

The terms of the going private transaction was negotiated on our behalf by an independent committee formed by our board of directors and are set forth in a merger agreement dated December 2, 2013. The going private transaction cannot be completed unless approved and authorized by an affirmative vote of shareholders representing at least 70% of our outstanding shares. The failure of any shareholder to vote in person or by proxy at the extraordinary general meeting will have the same effect as a vote against the transaction. Shareholders are recommended to vote to approve the transaction.

The extraordinary general meeting of shareholders for the approval of the going private transaction was originally scheduled for April 16, 2014, but the meeting was adjourned due to a delay in financing on the part of Mr. Lin. Our board of directors has been advised that financing will become available no later than May 31, 2014. Notice of the re-convening of the adjourned meeting will be sent to shareholders when Mr. Lin confirms that the merger consideration has been deposited into a bank account outside of the PRC.

The record date for the extraordinary general meeting of shareholders for the approval of the going private transaction is March 21, 2014. Based on shareholding information as of the record date, the Rollover Shareholders, as a group, beneficially own 22,143,530 Shares, which represent approximately 66.8% of the total number of outstanding shares eligible to vote. Accordingly approximately 1,055,181 Shares owned by the unaffiliated shareholders must be voted in favor of the going private transaction to be approved.

The going private transaction, whether or not consummated, presents a risk of diverting management focus and resources from other strategic opportunities and from operational matters. Uncertainty about the transaction may have an adverse effect on our employees, customers, and other parties. Such uncertainty may impair our ability to attract, retain, and motivate key personnel, including our executive leadership, and could cause customers, suppliers, financial counterparties, and others to seek to change existing business relationships with us.

Until the going private transaction is consummated or the merger agreement is terminated, we will be restricted from making certain acquisitions and investments, from accessing the debt and capital markets, and from taking other specified actions. These restrictions may prevent us from pursuing otherwise attractive business opportunities and taking other actions with respect to our business that we may consider advantageous.

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You may be unable to participate in our future growth as a shareholder.

If the going private transaction is consummated, the Company will be delisted from NASDAQ and become a private company. Upon the effectiveness of the merger, the shares not owned by the Rollover Shareholders or by shareholders who properly exercise their statutory appraisal rights under BVI law will be cancelled and automatically converted into the right to receive the merger consideration, which is $1.78 per share in cash, without interest. Accordingly, shareholders other than the Rollover Shareholders may be unable to sell your shares at a price greater than $1.78 per share and will not be able to participate in our future growth.

If the going private transaction is not consummated, our business and operations may suffer.

The merger agreement and related transaction documents enumerate various closing conditions and also provide for termination events. If the going private transaction is rejected by our shareholders, or not closed for any other reason, the price of our ordinary shares may fall to the former level prior to the announcement of the proposal, and may not reach $1.78 per share in future periods.

We have incurred, and will continue to incur, costs, expenses, and fees for professional services and other transaction costs in connection with the going private transaction. All the fees and costs will be borne by us.

There are numerous additional risks and uncertainties attending this transaction as contemplated; and therefore, shareholders are urged to read carefully the documents filed with the SEC by the Company and the parties to the transaction, particularly the transaction statement on Schedule 13E-3 first filed on December 19, 2013, as subsequently amended, and the merger agreement and proxy statement attached as an exhibit to the Schedule 13E-3, including the information regarding the effects of the transaction on our Company, and other discussions regarding risks and uncertainties.

The market price for our ordinary shares could be volatile.

The trading price of our ordinary shares may be subject to fluctuations. During the period from October 13, 2009, the first day on which our ordinary shares were listed on the NASDAQ Capital Market, and were transferred and being traded on the NASDAQ Global Market and NASDAQ Global Select Market on June 28, 2010 and January 3, 2011, respectively. Until April 29, 2014, the trading prices of our ordinary shares ranged from US$1.18 to US$13.69 per ordinary share and the closing sale price on April 29, 2014 was US$1.62 per ordinary share. The market price for our ordinary shares could continue to be volatile and subject to fluctuations in response to factors including the following:

· recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies;

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

· actual or anticipated fluctuations in our quarterly operating results;

· changes in financial estimates by securities research analysts;

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

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

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

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

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

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

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

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

Since we are a British Virgin Islands company, the rights of our shareholders could be more limited than those of shareholders of a company organized in the United States.

Under the laws of some jurisdictions in the United States, majority and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions by controlling shareholders that are obviously unreasonable may be declared null and void. There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands for business companies is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company's affairs by the majority or the board of directors. However, every shareholder is entitled to have the affairs of the company conducted properly according to law and the constituent documents of the corporation. As such, if those who control the company have persistently disregarded the requirements of company law or the provisions of the company's memorandum and articles of association, then the courts will grant relief. Generally, the areas in which the courts will intervene are the following: (1) an act which is illegal or ultra vires; (2) act that constitute fraud on the minority where the wrongdoers are themselves in control of the company; and (3) an act which, although not ultra vires, could only be affected duly if authorized by a special or qualified majority vote that has not been obtained.

The principal protection under statutory law is that shareholders may bring an action to enforce the constituent documents of the corporation, our memorandum and articles of association. Shareholders are entitled to have the affairs of us conducted in accordance with the general law and the memorandum and articles of association.

We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.

  A non-U.S. corporation is deemed 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. We operate an active business of manufacturing and sales of sports and leisure footwear, apparel and accessories in China. Based on our use of cash for our business operations and on the projected composition of our income and valuation of our assets, including goodwill, we do not believe that we were considered to be a passive foreign investment company, or a PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2013, and we do not expect to become a PFIC for our taxable year ending December 31, 2014 or thereafter.  The determination of whether a non-U.S. corporation is a PFIC is made on an annual basis after the close of each taxable year. We cannot assure you that we were not a PFIC for our taxable year ended December 31, 2013 or that we will not become a PFIC for any future taxable year. The most consequential factor affecting the outcome of annual PFIC determination in 2014 and future taxable years will be our use of cash in our active business. Because items of working capital are generally treated as passive assets for PFIC purposes, accumulating cash, cash equivalents and other assets that are readily convertible into cash increases the risk that we will be classified as a PFIC for U.S. federal income tax purposes. A determination that we are a PFIC could result in adverse U.S. tax consequences to you if you are a U.S. investor, in the form of increased tax liabilities and burdensome reporting requirements. For example, if we were a PFIC, you would generally be taxed at the higher ordinary income tax rates, rather than the lower capital gain tax rates, if you dispose of ordinary shares at a gain in a later year, even if we are not a PFIC in that year. In addition, a portion of the tax imposed on your gain would be increased by an interest charge. Also, if we were classified as a PFIC in any taxable year, you would not be able to benefit from any preferential tax rate with respect to any dividend distribution that you may receive from us in that year or in the following year. Since our business and assets may evolve over time in ways that are different from what we currently anticipate, we cannot assure you that we will not be a PFIC for any future taxable year. For more information on the tax consequences to you if we were treated as a PFIC, see Item 10. “Additional Information—Taxation—United States Federal Income Taxation— Passive Foreign Investment Company Rules.”

Item 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

The legal and commercial name of our Company is Exceed Company Ltd. Our principal executive offices are located at Level 12, China Minmetals Tower, 79 Chatham Road South, Tsim Sha Tsui, Kowloon, Hong Kong. Our telephone number is (852) 3975 8116. Our agent for U.S federal securities laws purpose is Puglish & Associates whose address is 850 Library Avenue, Suite 204, Newark, Delaware, 10711.

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We conduct substantially all of our operations in our production facility in Jinjiang, Fujian Province. The facility currently has nine production lines, each with a designed production capacity of approximately one million pairs of footwear per year. We manufactured 7.1 million, 6.3 million and 6.3 million pairs of footwear in 2011, 2012 and 2013, respectively, at our production facility. We outsource a portion of our footwear production and all of our apparel and accessories production to third party contract manufacturers.

The Company has been a non-accelerated filer since December 31, 2012.

Early stage of development

In September 2001, we were founded by Mr. Lin and began our operations in China through the establishment of XDLong Fujian.

In January 2002, we began designing, manufacturing and selling footwear under the “”, or Xidelong, brand name in a rented production facility in Jinjiang, Fujian Province.

In 2003, we began designing and selling Xidelong apparel and accessories.

Our footwear production capacity increased steadily. As of December 31, 2005, our rented production facility was equipped with five production lines with an aggregate annual production capacity of approximately five million pairs and occupied an aggregate gross floor area of 6,000 square meters,

In March 2007, we established our own production facility in Jinjiang, Fujian Province. Our footwear production capacity increased further to seven production lines with an aggregate annual production capacity of approximately seven million pairs.

In March 2008, Windrace, a British Virgin Islands company, became the holding company of XDLong Fujian.

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

In June 2008, our footwear production capacity increased further to nine production lines with an aggregate annual production capacity of approximately nine million pairs.

2009 business combination

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

On June 30, 2010, all of the preferred shares held by Elevatech were redeemed by Windrace in exchange for a promissory note in the amount of HK$306.2 million (RMB272.5 million) and an immediate payment of $1.0 million (RMB6.9 million) as premium.

On October 20, 2009, 2020 merged with and into Exceed, with Exceed as the surviving entity. On October 21, 2009, Exceed acquired all of the outstanding securities of Windrace from its shareholders through a share exchange, resulting in Windrace becoming a wholly-owned subsidiary of Exceed and Mr. Lin becoming the controlling shareholder of Exceed. The merger of 2020 with and into Exceed resulted in the redomestication of 2020 to the British Virgin Islands on October 21, 2009, and Exceed, the surviving entity following the merger, became a foreign private issuer. Prior to the 2009 business combination, neither 2020 nor Exceed had any operating business.

Concurrent with the 2009 business combination, Exceed paid HK$306.2 million (RMB272.5 million) in cash to Elevatech pursuant to the terms of the promissory note.

Expansion of production and ancillary facilities

In July 2011, the footwear business of XDLong Fujian was transferred to XDLong China. After the transfer, the business of XDLong Fujian has been primarily limited to the holding of the land use rights to the land parcel in Jinjiang on which our production facility is situated.

In December 2011, we entered into a contract with the Municipal Government of Ruichang City, pursuant to which we will purchase several land parcels with an aggregate site area of 400,000 square meters for the construction of a new production facility in Ruichang, Jiangxi Province. The first phase of the new production facility is expected to be completed by the end of 2014.

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In March 2011, we commenced construction of new staff quarters in our production facility in Jinjian, Fujian Province. Contruction work has been completed and internal renovation is expected to be completed in late 2014.

Partly as a result of the foregoing expansion projects, we incurred capital expenditures of RMB38.7 million, RMB65.6 million and RMB246.8 million in 2011, 2012 and 2013, respectively. These capital expenditures were funded from our operating cash flows and a loan from our shareholder. For additional information on our capital expenditures, see Item 5.B. “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Capital Expenditures.”

Going private transaction

On August 19, 2013, our board of directors received a non-binding proposal from Mr. Lin, our chairman and chief executive officers, and some other shareholders to acquire all of the outstanding shares of the Company for a cash consideration of $1.72 per share. A three-member independent committee was established to consider the proposal on behalf of the Company.

On December 2, 2013, at the recommendation of the independent committee, we entered into a merger agreement with Pan Long, an entity set up by Mr. Lin, our chairman and chief executive officer, for the going private transaction. The merger agreement provides that, upon the approval and authorization by an affirmative vote of shareholders representing at least 70% of our outstanding shares, Pan Long will acquired all the outstanding ordinary shares of the Company, other than shares owned by the Rollover Shareholders, at a proposed price of $1.78 per share in cash through a merger between a wholly-owned subsidiary of Pan Long into the Company, resulting in Pan Long becoming the sole shareholder of the Company. Shareholders are recommended to vote to approve the transaction. The failure of any shareholder to vote in person or by proxy at the extraordinary general meeting will have the same effect as a vote against the transaction.

Pan Long has received from Mr. Lin an equity commitment letter, pursuant to which Mr. Lin has committed to subscribe for ordinary shares in Pan Long in the amount of $19,545,858 subject to adjustment in certain cases. Mr. Lin has also entered into a limited guarantee in favor of our Company.

The extraordinary general meeting of shareholders for the approval of the going private transaction was originally scheduled for April 16, 2014, but the meeting was adjourned due to a delay in financing on the part of Mr. Lin. Our board of directors has been advised that financing will become available no later than May 31, 2014. Notice of the re-convening of adjourned meeting will be sent to shareholders when Mr. Lin confirms that the merger consideration has been deposited into a bank account outside of the PRC.

The record date for the extraordinary general meeting of shareholders for the approval of the going private transaction is March 21, 2014. Based on shareholding information as of the record date, the Rollover Shareholders, as a group, beneficially own 22,143,530 Shares, which represent approximately 66.8% of the total number of outstanding shares eligible to vote. The Rollover Shareholders have agreed under a voting agreement to vote all in favor of the going private transaction. Accordingly approximately 1,055,181 Shares owned by the unaffiliated shareholders must be voted in favor of the going private transaction to be approved.

If the going private transaction is completed, our Company will become a privately held company and our shares will no longer be listed on Nasdaq.

You may find more information in, and our shareholders are urged to read carefully, the transaction statement on Schedule 13E-3 filed with SEC as first filed on December 19, 2013 and subsequently amended, the exhibits thereto, including the merger agreement and the proxy statement regarding the extraordinary general meeting, and other reports and documents furnished or filed with the SEC by the Company and various parties in connection with this proposed transaction. For your information purpose, with respect to this transaction, a Schedule 13D was filed by certain Rollover Shareholders on December 4, 2013, as subsequently amended. Please also see Item 3D — “The going-private transaction of the Company is progressing, creating restrictions and uncertainties that may materially affect business and operations.”

B. BUSINESS OVERVIEW

We design, develop and wholesale footwear, apparel and accessories under the “” (Xidelong) brand name and the “” trademark. We have three principal product categories: (i) footwear, which mainly comprises running, leisure, basketball, skateboarding, canvas, tennis and outdoor footwear, (ii) apparel, which mainly comprises sports tops, pants, jackets, track suits and coats, and (iii) accessories, which mainly comprise bags, socks, hats and caps. The table below sets out, for the periods indicated, the percentage of sales by product category based on total revenue:

	For the years ended December 31,
	2011			2012			2013
Footwear (1)		46.0	%		48.0	%		46.1	%
Apparel		52.7	%		50.3	%		52.4	%
Accessories		1.3	%		1.7	%		1.5	%
		100.0	%		100.0	%		100.0	%

______

(1) Our primary footwear styles are skateboarding and leisure footwear.

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We sell our products to distributors, which resell our products mainly to consumers through Xidelong retail selling locations that are owned, managed and operated by them pursuant to the terms of individual distribution agreements. Xidelong retail selling locations consist of three types: (i) Xidelong retail stores, which sell our products exclusively, (ii) department store concessionary counters, and (iii) stores-within-stores. Some of the Xidelong retail selling locations are operated by our distributors indirectly through authorized third-party retailers. We have contractual relationships only with our distributors, not with any authorized third-party retailers.

We believe that the sale of our products through distributors has enabled us to grow by leveraging on their regional retail expertise and economies of scale. We provide our distributors with retail policies and guidelines, training, advertising and marketing support to assist them to manage and expand the Xidelong retail sales network. The number of the Xidelong retail selling locations decreased from 4,909 as of December 31, 2012 to 3,080 as of December 31, 2013. The net decrease of retail selling locations was caused by the closure of the relatively small and inefficient retail selling locations.

 We focus primarily on second and third-tier cities in China characterized by increasing urbanization and strong economic development, which we believe present the best opportunity for our retail sales growth. Our target customers are between 15 to 35 years old. We plan to increase our penetration in those areas using a middle-market pricing strategy. We also aim to expand our geographical presentation and establish regional leadership, particularly in Southwest China and Southern China. The table below sets out, for the periods indicated, the percentage of sales to distributors by region based on total revenue:

	For the years ended December 31,
	2011			2012			2013
Northern Region		14.2	%		14.7	%		14.7	%
Northeastern Region		4.4	%		4.9	%		4.7	%
Northwestern Region		8.9	%		9.7	%		9.7	%
Eastern Region		16.8	%		17.7	%		16.9	%
Southern Region		25.9	%		22.5	%		22.9	%
Southwestern Region		29.8	%		30.5	%		31.1	%
		100.0	%		100.0	%		100.0	%

We believe sportswear brands will continue to benefit from the ongoing urbanization, the increasing demand for lifestyle and leisure products and the heightened interest in health consciousness among Chinese consumers. We place great emphasis on the comfort and functionality of our products and tailor our sports and leisure footwear, especially running footwear, to the needs of Chinese consumers. Our commitment to the comfort and quality of our footwear is represented by our slogans used in our promotional campaigns such as “The Foot Knows Comfort”, “Run Freely” “Freedom comes first” and “Respect Yourself”.

The China Institute of Sport Science, the research center established by the General Administration of Sport of China and China’s first government agency engaging in research of sport science, has selected us as their exclusive partner in their research and development projects. We have the exclusive right to use the endorsement, “The Strategic Partner of the China Institute of Sport Science”, on our products and priority to use the know-how developed through our collaboration with the China Institute of Sport Science.

We manufacture some of our footwear products in our production facility in Jinjiang, Fujian Province and the remaining footwear products and all of our apparel and accessories through third-party contract manufacturers. Our production facility has a gross floor area of approximately 66,102 square meters. It has nine production lines with an aggregate annual production capacity of approximately nine million pairs of footwear.

We are constructing a new production facility in Ruichang, Jiangxi Province. Upon the full completion of the construction of the new production facility, we expect our annual production capacity for our footwear products to increase to approximately 30.0 million pairs. The new production facility will also give us, for the first time, production capability for our apparel products. We believe increased in-house production capacities will give us more control over the production process and allow us to reduce costs.

Brand and Products

Xidelong brand

We market our products under the “” (or Xidelong) brand name and the “” trademark. We use the Chinese promotional slogan “Respect Yourself” to market our products, which is designed to symbolize our emphasis on individualism. Our brand is well recognized in China as illustrated by the following examples:

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

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· We were named as one of the “Top Ten Sports Footwear Enterprises” in China in 2011 and 2012.

· We were selected as one of the “100 Most Valuable Brands of 2010 in the Footwear Industry” by the National Productivity Center of the Leather and Footwear Industry in 2011.

· In November 2013, Xidelong (China) Co., Ltd., our principal PRC subsidiary, was awarded as one of the “Most Influential Chinese Brands” in the corporate activity organized by hc360.com, a B2B e-commerce platform in China.

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

Products

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

The table below sets forth our current main products under each product category:

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

Business Model

The diagram below illustrates our business model:

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Product design, research and development	Our design team at the research and development center formulates new designs for footwear, apparel and accessories, and tests prototype designs. We carry out other research and development activities at our research and development center.
Sales fairs	We display samples of our new products at sales fairs held three times each year and take orders for our new products.
Purchase orders from distributors	At the sales fairs, distributors place purchase orders for new products.
Raw materials and components procurement	Based on the purchase orders received at the sales fairs, our purchasing team procures the requisite quantity of raw materials and components. Raw materials and components undergo our quality control.
Production	The footwear production department carries out the production plan.
Outsourcing	We outsource some of our footwear and all of our apparel and accessories production to contract manufacturers.
Quality control	We sample and check finished goods against our quality and performance standards at the science and technology laboratory located in the research and development center.
Distribution management	We deliver our products to distributors. We then monitor and oversee their operation of the Xidelong retail selling locations. We work with them to renovate the Xidelong retail selling locations, achieve performance targets and expand the sales distribution network.

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Production

Our production facility focuses on the production of higher-priced running and basketball footwear, which incorporates our proprietary intellectual property and technology. Located in Jinjiang, Fujian Province, the production facility has nine production lines with an annual production capacity of approximately nine million pairs of footwear occupying an aggregate gross floor area of approximately 66,000 square meters. It was established in March 2007. Prior to that, we carried out our production activities in a rented production facility in the same region. As of December 31, 2013, our production facility had a full-time staff of 1,602.

The utilization rates of our production facility were approximately 79%, 70% and 70% for 2011, 2012 and 2013, respectively.

We are constructing a new production facility in Ruichang, Jiangxi Province and have committed to acquire land use rights to these land parcels from the Municipal Government of Ruichang City pursuant to an agreement in December 2011. On December 1, 2012, we completed the purchase of the land use rights to a land parcel with a site area of 193,333 square meters. The purchase for the remaining land parcels with an aggregate site area of 206,667 square meters has not been finalized and is subject to municipal and administrative approvals. The first phase of the new production facility is expected to be completed by the end of 2014.

Upon the full completion of the construction of the new production facility, we expect our annual production capacity for our footwear products to increase to approximately 30.0 million pairs. The new production facility will also give us, for the first time, production capability for our apparel products. We believe increased in-house production capacities will give us more control over the production process and allow us to reduce costs. Ultimately, the expansion of in-house production capacities will help increase our gross profit margins, as we can reduce the reliance on outsourced manufacturing. It is an important part of our long-term strategy to gain better control on production, increase economies of scale, enhance profitability and capture a greater market share.

Production process

Footwear production

The following diagram illustrates the production process for our footwear:

Raw materials procurement We procure raw materials such as natural and synthetic leather, nylon, canvas, rubber and plastics for our manufacturing requirements. We also recommend raw materials suppliers to our contract manufacturers for their production of our outsourced footwear and to component subcontractors for their production of our footwear components.

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Preparation and processing of raw materials	Our quality control department inspects and tests raw materials for processing. Our quality control department also inspects and tests components supplied by component subcontractors.
Sewing and stitching	Our footwear production department sews and stitches individual parts created from raw materials and components sourced from component subcontractors.
Shaping and assembly of soles	Our footwear production department manufactures the upper soles and midsoles of the footwear and assembles them together.
Assembly	Our footwear production department assembles all unfinished parts. The assembly process includes gluing the soles to the body of the shoe and pressing and drying the products.
Quality control	Finished footwear undergoes our quality control tests.
Packaging	We package our finished products according to customer orders.

Apparel and accessories production

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

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

Outsourcing

In 2011, 2012 and 2013, we outsourced production of a portion of our footwear, generally products with lower technology content, and all of our production of apparel and accessories to third-party contract manufacturers. We will continue our efforts to balance the mix between in-house production and outsourced manufacturing moving forward, to enhance profitability. In 2011, 2012 and 2013, approximately 64.5%, 57.0% and 36.2%, respectively, of our footwear in terms of sales volume were produced through outsourced manufacturing. Our reduced reliance on outsourced manufacturing was mainly attributable to the decrease in sales.

Contract manufacturers only carry out production activities and do not conduct product design for us. We provide our contract manufacturers with the designs and specifications of our products. We actively protect our intellectual property rights from unauthorized use by our contract manufacturers. Our trademarks are registered, and we engage the appropriate legal services and assistance to ensure that our trademarks are effectively protected and enforced against any unauthorized use.

We select and evaluate our contract manufacturers carefully. We assess contract manufacturers on an annual basis based on factors such as their product quality and ability to meet production orders on a timely basis. All of our contract manufacturers are independent third parties and almost all of them are located in Fujian province. We have not terminated our contractual relationships with any of our contract manufacturers of footwear during the term of the agreements. However, there have been some incidents of contract termination with our contract manufacturers of apparel and accessories. When this occurs, we have been able to appoint replacement contract manufacturers readily due to the large number of replacement contract manufacturers from which we can select. See “Risk Factors — We rely on third-party contract manufacturers for the production of a portion of our footwear and all of our apparel and accessories.”

We require our contract manufacturers to comply with our manufacturing standards and specifications. We do not allow contract manufacturers to sub-contract our production orders without our prior consent. We subject outsourced products to our quality control procedures. We return defective components or unused components to the relevant contract manufacturers.

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

All of our products, whether manufactured in-house or outsourced to third-party contract manufacturers, undergo testing by our stringent quality control system before being distributed for retail sale.

Procurement

To date, our in-house production capacity is limited to footwear products. The major raw materials used in the production of our footwear products include natural and synthetic leather, nylon, canvas, rubber and plastics. Our raw material suppliers are primarily located in Quanzhou, which is adjacent to our production facility in Jinjiang, Fujian Province. We select raw material suppliers based on our selection criteria, which include product quality, reliability, price, and speed of delivery. We also recommend raw material suppliers to our contract manufacturers for their production of our outsourced footwear. We place orders for raw material requirements only after we receive sales orders at our sales fairs.

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We procure semi-finished rubber soles, a key part of our footwear, and other components from component subcontractors. Other than these semi-finished rubber soles and other components, we do not purchase other finished products from component subcontractors. Component subcontractors manufacture semi-finished rubber soles to our specifications. We also recommend raw material suppliers to component subcontractors for their production of our footwear components. We select component subcontractors based on location, product quality, reliability, price, and speed of delivery. Similar to our raw materials suppliers, our component subcontractors are primarily located in Quanzhou, Fujian Province. We pay our component subcontractors a subcontracting fee. The subcontracting fees for 2011, 2012 and 2013 were approximately RMB10.4 million, RMB9.2 million and RMB9.3 million (US$1.5 million), respectively. The major raw materials used in the production of our products included cotton, rubber and plastics. We are exposed to fluctuation in the prices of these raw materials which are influenced by global as well as regional supply and demand conditions. We plan to ease inflationary pressures through collaboration with our suppliers in efforts such as the collective procurement of materials.

For 2011, 2012 and 2013, purchases from our top five raw material suppliers and contract manufacturers accounted for approximately 44.2%, 53.6%, and 38.0%, respectively, of total purchases from raw material suppliers and contract manufacturers, and purchases from our single largest supplier accounted for approximately 11.1%, 14.8% and 10.2%, respectively, of our total purchases from raw material suppliers and contract manufacturers.

Inventory Control and Management

Our inventory consists of raw materials for our footwear production, footwear components and finished products. We keep generally low inventory levels of raw materials and components because we commence production only after receiving confirmed sales orders from our distributors. We have established an inventory management system to monitor inventory levels.

Our policy is to review regularly obsolete inventories based on the age and the expected future salability of a product. In addition, we carry out our physical inventory inspection on a timely basis to identify any obsolete or damaged inventories. We make specific provisions for a damaged item or an item of inventory that has a carrying amount lower than its net realizable value. During 2011, 2012 and 2013, we did not make any provisions for obsolete inventories.

We maintain our finished goods inventory in two warehouses, one for storage of footwear and the other for storage of apparel and accessories. We generally store finished goods in our warehouses by the type of footwear. Our average inventory turnover were 6 days, 5 days and 5 days for 2011, 2012 and 2013, respectively, while our inventory balances as of December 31, 2011, 2012 and 2013 accounted for approximately 1.5%, 0.5% and 0.8%, respectively, of our total assets.

Quality Control

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

Raw materials and components quality control

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

Design prototypes quality control

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

Production process quality control

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

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Finished products quality control

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

In December 2005, the General Administration of Quality Supervision, Inspection and Quarantine of the PRC designated our Xidelong footwear and apparel as “State-designated Products Exempted from Quality Inspection.” The term “Exempted from Inspection” is defined to include products that are excellent in quality, and can enhance the consumers’ trusts and confidence. The enterprise who obtains the “Exemption from Inspection” is perceived to be outperforming in the profession. To obtain the remarkable results, these enterprises use advanced science and technology to improve the product quality, using an unremitting effort to strengthen the satisfaction of consumers.

In 2008, we obtained ISO 9001 certification for the design, development and production of our footwear, and the design, development and production management of our apparel.

Sales and Distribution

Product sales and distribution are managed by our sales and marketing department based in our headquarters in Jinjiang, Fujian Province with the assistance of regional sales teams. As of December 31, 2013, our sales and marketing department had a staff of 107. Our sales and marketing department devises and implements policies for our distributors to assist them in operating the Xidelong retail selling locations, which include policies relating to marketing and promotion, sales management, pricing, recording of sales and human resources.

Sales network

We sell all of our products to distributors for subsequent resale to consumers through Xidelong retail selling locations owned, managed and operators by them. We do not sell any products directly to consumers. As of December 31, 2013, our 21 distributors operated 3,080 Xidelong retail selling locations.

Xidelong retail selling locations consist of three types: (i) Xidelong retail stores, which sell our products exclusively and are retail shops, usually on the street level, (ii) department store concessionary counters, which are designated sections of department stores that sell our products, and (iii) stores-within-stores.

Xidelong retail selling locations are operated directly by our distributors or indirectly through third parties. Distributors place wholesale orders (which include purchase orders that the distributors secure from authorized third-party retailers) for our products at our sales fairs for retail sale at the Xidelong retail selling locations. Sales to our top five distributors accounted for approximately 41.5% of our total revenue in 2013.

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

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

Selection of distributors

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

· its relevant experience in the management and operation of sportswear retail selling locations;

· its creditworthiness;

· its ability to develop and operate a network of retail selling locations in its designated sales region;

· its ability to meet our sales targets; and

· the suitability of its store location and size.

We set guidelines for our distributors in respect of the location, store layout and product display of their Xidelong retail selling locations. Distributors or third-party retailers require our prior approval before opening new Xidelong retail selling locations. We typically visit potential locations for new Xidelong retail selling locations with distributors and consider the suitability of such locations before approving a new Xidelong retail selling location. As an incentive to our distributors to expand the number of Xidelong retail selling locations and to create a uniform high-quality store image across Xidelong retail selling locations nationwide, we provide certain renovation subsidies in the form of standardized promotional materials and display equipment to qualified Xidelong retail selling locations.

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We also allow our distributors to operate the Xidelong retail selling locations through third parties. Distributors must obtain our approval before appointing such retail store operators. We do not have direct contractual relationships with the authorized third-party retailers and thus we require our distributors to implement, monitor compliance with and enforce our retail store guidelines on the authorized third-party retailers.

For 2011, 2012 and 2013, sales to our top five distributors accounted for approximately 43.3%, 41.3% and 41.5%, respectively, of our total revenue. During the same periods, sales to our single largest distributor accounted for approximately 12.6%, 12.1% and 12.2%, respectively, of our total revenue.

Ordering of our products

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

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

Seasonality

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

Return policy

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

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

Promotion and Marketing

Our marketing department handles media arrangements, sponsorships, other endorsement activities and store image maintenance. We use a variety of media, such as television, newspapers, magazines, the Internet and outdoor billboard displays to build both regional and nationwide brand recognition. We collaborate with athletes, media celebrities and industry experts on marketing and endorsement arrangements and they act as spokespersons for the Xidelong brand. We also invest resources in maintaining store image and organizing renovation activities to build our brand recognition to enhance our brand awareness.

For 2011, 2012 and 2013, advertising and promotional expenses constituted approximately 10.7%, 13.8% and 15.1% of our total revenue, respectively.

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Spokespersons and advertising

We actively seek reputable spokespersons to promote our brand. From May 2010 to June 2013, we engaged Singaporean twin sisters Miko Bai Wei-Fan and Yumi Bai Wei-Ling of By2, a popular Taiwan-based musical group, to act as the Company's official product series spokespersons. As part of the agreement, By2 completed an advertisement campaign in 2010 for a new apparel line of ours and filmed a television commercial to build awareness of the Xidelong brand, and participated in a variety of promotional activities. We launched our first television commercial featuring By2 on the China Central Television Channel 5 (CCTV-5) in July 2010. We believe we had been successful in leveraging the innovative talent, dynamic personalities and high energy performances of By2, to promote our products as a convergence of fashion and sportswear and our brand as a symbol for the core values of energy and happiness.

In 2011, we engaged a leading advertising company, a member of the American Association of Advertising Agencies, to design and produce television commercials for our spokespersons, By2, and to design and print advertisement for our products. The commercials feature Xidelong as a sports brand that emphasizes a “Happy Lifestyle”. We believe these commercials and advertisements had successfully promoted Xidelong as a sportswear brand emphasizing a cheerful lifestyle and exemplified the core value of our products represented by our slogan of “Freedom Comes First”.

Sponsorship and endorsement

To support our advertising and promotional initiatives, we have engaged Genedigi, one of the largest and longest standing marketing and public relations firms in China. We sponsor various sporting or festive events to promote our products. Examples include:

· We have been the sponsor of the “Fitness for All” program for four consecutive years. The "Fitness for All" campaign has been highly successful since its inception in raising the public awareness of the benefits of sport and an active lifestyle, drawing participants from 30 colleges and 60 communities, and developed 20 venues for fitness practices to date. On June 8, 2013, the program hosted a launching ceremony in Beijing with the support by the General Administration of Sport of China and China Sports Publications Corporations. The theme of the event was “Fitness Moves, Happy Chinese Joins”, which sought to convey the message of actively promoting scientific fitness and the happy life philosophy through a variety of fitness activities. We received the “Outstanding Contribution” award from the General Administration of Sport of China for our sponsorship of the “Fitness for All Campaign – Walking to 100 Universities” program in 2011.

· We have been cooperating with the Municipal Government of Jinjiang city to run the “The 6^th Creative Design Contest of International Footwear Culture” for the fifth consecutive year. The contest helps to promote the energetic and creative image of the “Xidelong” brand. The contest drew attention from local schools, teenagers and enthusiastic individuals. The geographical locations of the contestants in 2013 extended from Fujian Province to other provinces.

· We sponsored the “Inter-City” television program, a popular entertainment show featuring athletic challenges that aired on channels CCTV 1 and 5, from April to December 2011.

Pricing

We determine the prices of our products based on a variety of factors, including the costs of raw materials and production, market conditions (including the spending power of consumers) and the prices of our competitors’ products.

We have adopted a suggested retail price system that is applied nationwide to all retail selling locations operated by our distributors or third-party retailers to maintain brand image and avoid price competition among distributors and third-party retailers. In addition, our distributors must obtain our prior written approval before carrying out any promotional events or selling our products (including newly launched products) at a discount. On a case-by-case basis, we permit sales of our products that deviate from their manufacturing specifications at a discount to suggested retail prices to end customers.

Competition

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

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

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Insurance

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

We maintain property insurance policies covering our equipment and facilities for losses due to fire, earthquake, flood and a wide range of other natural disasters. Insurance coverage for our property, plant and equipment other than land and inventory amounted to approximately RMB91.0 million (US$15.0 million) as of December 31, 2013. We also maintain insurance for inventory of raw materials, work-in-progress and finished goods for an aggregate coverage amount of RMB250.0 million (US$41.3 million).

We do not maintain general product liability insurance for any of our products. Nevertheless, we believe that our practice is in line with the general industry practice in China, as product liability insurance is not required under PRC law. In 2011, 2012 and 2013, we did not receive any material claims from customers or consumers relating to our products.

Regulation

Operation as foreign-owned enterprises

We conduct our operations in China through three wholly-owned subsidiaries: XDLong Fujian, XDLong China and XDLong Jiangxi. The subsidiaries were established in the PRC as “wholly foreign-owned enterprises”.

The establishment, operation and management of corporate entities in the PRC are governed by the PRC Company Law, effective as of 1994, as amended in 1999, 2004 and 2005. The PRC Company Law is applicable to our PRC subsidiaries, except where the PRC laws on foreign investment have stipulated otherwise.

The establishment, approval, registered capital requirement and day-to-day operational matters of corporate entities that are wholly foreign-owned enterprises are also regulated by the Wholly Foreign-owned Enterprise Law of the PRC, effective in 1986, as amended in 2000, and its Implementation Rules effective as of 1990, as amended in 2001.

Foreign currency exchange

Pursuant to the Foreign Currency Administration Rules promulgated in 1996 and amended in 1997 and 2008 and other various regulations issued by SAFE and other relevant PRC government authorities, Renminbi is freely convertible only to the extent of current account items, such as trade-related receipts and payments, interests and dividends. An enterprise can choose to either keep or sell its foreign exchange income under current account to financial institutions authorized to engage in foreign exchange settlement or sales business. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC. Payments for transactions that take place within the PRC must be made in Renminbi.

Dividend distribution

The principal PRC laws and regulations governing distribution of dividends of wholly foreign-owned enterprise include the Wholly Foreign-owned Enterprise Law promulgated by the Standing Committee of the National People’s Congress, effective in 1986, as amended on October 31, 2000, and its Implementation Rules issued by the State Council, effective in 1990, as amended on April 12, 2001.

Under these laws and regulations, wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with the PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in the PRC are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain statutory reserves unless these reserves have reached 50% of the registered capital of the wholly foreign-owned enterprises. These statutory reserves are not distributable as cash dividends.

Employee stock options

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, or the PBOC Regulation, setting forth the respective requirements for foreign exchange transactions by PRC individuals under either the current account or the capital account. In January 2007, SAFE issued implementing rules for the PBOC Regulation, which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the equity incentive plan of an overseas publicly listed company. On March 28, 2007, SAFE issued the Stock Option Rule. On February 15, 2012, SAFE issued the Updated Stock Option Rule, which replaced the Stock Option Rule issued by SAFE in March 2007. The purpose of the Updated Stock Option Rule is to regulate foreign exchange administration of PRC citizens who participate in equity incentive plans of overseas-listed companies.

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According to the Updated Stock Option Rule, if a PRC citizen participates in any equity incentive plan of an overseas-listed company, a PRC domestic agent or the PRC related company of such overseas listed company (such as the overseas-listed company itself, its parent company or its subsidiaries or branches in China) must, among others things, file an application with SAFE on behalf of such individual to obtain approval for an annual quota with respect to the purchase of foreign exchange in connection with stock holding or stock option exercises. This is because PRC citizens may not directly use overseas funds to purchase stock or exercise stock options. Concurrent with the filing of such application with SAFE, the PRC domestic agent or the PRC-related company must obtain approval from SAFE to open a special foreign exchange account at a PRC domestic bank to hold the funds required in connection with the stock purchase or option exercise, any returned principal or profits upon sales of stock, any dividends issued upon the stock and any other income or expenditures approved by SAFE. The PRC domestic agent also is required to obtain approval from SAFE to open an overseas special foreign exchange account at an overseas bank as trustee to hold overseas funds used in connection with any stock purchase.

All proceeds obtained by PRC citizens from dividends acquired from the overseas-listed company through an employee stock holding plan or stock option plans or sales of the overseas-listed company’s stock acquired through other methods must be fully remitted back to China after deducting the relevant overseas expenses. The foreign exchange proceeds from these sales can be converted into Renminbi or transferred to the PRC citizen’s foreign exchange savings account after the proceeds have been remitted back to the special foreign exchange account opened at the PRC domestic bank. If stock options are exercised in a cashless transaction, the PRC option holder is required to remit the proceeds to the special foreign exchange account.

We and our employees who are PRC citizens and individual beneficiary owners of restricted shares granted under our equity incentive plan are subject to the Updated Stock Option Rule.

In addition, the State Administration for Taxation has issued circulars concerning employee stock options. Under these circulars, our employees working in the PRC who exercise stock options will be subject to PRC individual income tax. Our PRC subsidiary has obligations to file documents related to restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who dispose of any vested shares. If our employees fail to pay their income taxes, or we fail to withhold them, we may face sanctions imposed by the tax authorities or other PRC government authorities. As of the date of this annual report on Form 20-F, we have granted 534,935 restricted shares to our non-executive directors, senior management and certain other employees.

Environmental matters

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

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

Companies in the PRC are also required to carry out an environment impact assessment before commencing construction of production facilities and the installation of pollution treatment facilities that meet the relevant environmental standards and treat pollutants before discharge. We carried out the required environment impact assessment before commencing construction of our production facilities and have obtained all the required permits and environmental approvals for our production facilities. Under PRC law, a company must apply to the environmental protection authority in the PRC for an environmental protection examination and acceptance after completion of a construction project.

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

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

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Health and safety matters

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

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

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

We believe that we are in compliance with all applicable labor and safety laws and regulations in all material respects and have implemented internal safety guidelines and operating procedures. We do not expect the new PRC Labor Contract Law, which became effective in 2008, will have any material impact on our business and operations. Since the commencement of our business, none of our employees has been involved in any major accident in the course of their employment and we have never been subject to disciplinary actions with respect to the labor protection issues.

In September 2011, we received from Jinjiang Municipal People’s Government an award for our successful maintenance of the safety production and operation.

Labor contracts

On June 29, 2007, the Standing Committee of the PRC National People’s Congress enacted the PRC Labor Contract Law, or the Labor Contract Law, which became effective on January 1, 2008. The Implementation Regulation for the PRC Labor Contract Law, or the Implementation Regulation, was promulgated by the State Council and took effect on September 18, 2008. The Labor Contract Law and the Implementation Regulation formalize, among others, workers’ rights concerning overtime hours, pensions and layoffs, the execution, performance, modification and termination of labor contracts, the clauses of labor contracts and the role of trade unions. In particular, they provide for specific standards and procedures for entering into non-fixed-term labor contracts as some of our sales professionals and staff do. Either the employer or the applicable sales professional or staff is entitled to terminate the labor contract in circumstances as prescribed in the Labor Contract Law and the Implementation Regulation or if certain preconditions are fulfilled, and in certain cases, the employer is required to pay a statutory severance upon the termination of a labor contract pursuant to the standards provided by the Labor Contract Law.

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C. ORGANIZATIONAL STRUCTURE

Exceed is our investment holding company incorporated in the British Virgin Islands and we conduct our operations through our PRC subsidiaries, which are our indirect wholly owned subsidiaries. The following diagram illustrates our significant direct and indirect subsidiaries as of April 30, 2014:

Subsidiaries

The following table sets forth information relating to our direct and indirect subsidiaries as of February 28, 2013:

	Beneficial Ownership Percentage	Jurisdiction of Incorporation
Windrace International Company Limited	100%	Cayman Islands
Windrace Investment Holding Limited	100%	British Virgin Islands
Hei Dai Lung Group Company Limited	100%	Hong Kong
Fujian Xidelong Sports Goods Co., Ltd.	100%	PRC
Xidelong (China) Co., Ltd.	100%	PRC
Xidelong (Jiang Xi) Athletic Equipment Co., Ltd.	100%	PRC

D. PROPERTY, PLANTS AND EQUIPMENT

We own several land parcels in the PRC through our subsidiaries, details of which are summarized below:

Ÿ XDLong China owns a land parcel in Jinjiang, Fujian Province with an aggregate site area of 38,784 square meters. Buildings with an aggregate gross floor area of 99,024 square meters were constructed upon this land parcel. The buildings consist of a production facility, which is equipped wtih nine production lines with an annual production capacity of approximately nine million pairs of footwear; a research and development center; office space; staff quarters; a recreation center and various sports facilities. We possess the land use rights certificate in relation to the land parcel and the property ownership certificates for the buildings. The land use rights were granted for industrial use for a term of 50 years beginning on December 25, 2006. The utilization rates of the production facility were approximately 79% for 2011, 70% for 2012 and 70% for 2013.

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· XDLong Fujian owns a land parcel with an aggregate site area of approximately 15,277 square meters in Jinjiang, Fujian Province. The land parcel is located at a site close to our production facility. The land use rights to the land parcel was acquired from the PRC government in 2005 for an aggregate consideration of RMB531,000 as land grant fees. Pursuant to the terms of grant, XDLong Fujian was required to construct a production facility on the land parcel no later than February 28, 2006. XDLong Fujian had not commenced construction by such date because we decided to construct our production facility on a larger land parcel. On May 14, 2008, XDLong Fujian applied for local government approval to postpone construction. On July 1, 2012, the Ministry of Land and Resources promulgated a new regulation titled Measures on Disposing Idle Land, which emphasizes that the land authority shall repossess an idle land parcel without any compensation if the scheduled construction has not commenced for two years since the scheduled date set forth in the land grant contract. The new regulation also stipulates the procedures, results and other details regarding the repossession of idle land.

We do not believe that the land parcel held for use by XDLong Fujian met the definition of idle land under the Measures on Disposing Idle Land. Local government has verbally confirmed to us that it does not intend to repossess the land parcel held for use by XDLong Fujian, or otherwise cancel the underlying contract. Management based its conclusion on the fact that the local government has been advised that we intend to commence construction on the land parcel and officials have provided verbal assurances that they do not intend to take punitive action for our failure to commence construction on a timely basis. Consistent with the objectives of the local government, the construction of the additional facilities in Jinjiang will have a positive impact on the local economy and result in an expansion of our local workforce. As a result, we have concluded that the possibility of incurring impairment in value or loss of land use is remote.

· XDLong China owns land parcels with an aggregate site area of 22,160 square meters in Jinjiang, Fujian Province. The land parcels are adjacent to our existing production facility. We acquired our land use rights to the land parcels from independent third parties pursuant to purchase agreements dated May 17, 2010, May 20, 2010, November 18, 2010 and January 3, 2011, respectively. The land will be used for our new staff quarters, for which construction has been completed and internal renovation is expected to be completed in 2014. As of December 31, 2013, we had paid the required deposit of RMB26.2 million (US$4.3 million) in full and are in the process of applying for a certificate of land use rights to the land parcels. Under the PRC law, a company does not have the title to a land parcel until it obtains the relevant certificate of land use rights. Therefore, XDLong China does not have the title to the land parcel at this point, although it may have contractual remedies under the purchase agreements.

· XDLong Jiangxi is committed to acquire land parcels in Ruichang, Jiangxi Province with an aggregate site area of 400,000 square meters from the Municipal Government of Ruichang City pursuant to an agreement in December 2011. The land will be used for a new production facility, the first phase of which is expected to be completed by the end of 2014. On December 1, 2012, we completed the acquisition of the land use rights to a land parcel with a site area of 193,333 square meters. The purchase for the remaining land parcels with an aggregate site area of 206,667 square meters has not been finalized and is subject to municipal and administrative approvals.

The total consideration for the land parcels will amount to RMB198 million ($32.7 million), of which a deposit of RMB46.8 million ($7.7 million) was paid as a performance bond on December 28, 2011 and an additional premium of RMB73.1 million (US$12.1 million) was paid on December 27, 2012. The remaining amount of RMB78.1 million ($12.9 million) is disclosed as a capital commitment in Item 5.F. “Contractual Obligations and Commercial Commitments.” We financed the paid deposit and additional premium through our working capital and a shareholder loan and intend to finance the remaining amount in cash through our working capital.

Item 4A. UNRESOLVED STAFF COMMENTS

None.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

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

Overview

We design, develop and wholesale footwear, apparel and accessories under the “” (Xidelong) brand name and the “” trademark. We have three principal categories of products: (i) footwear, which mainly comprises running, leisure, basketball, skateboarding, canvas, tennis and outdoor footwear, (ii) apparel, which mainly comprises sports tops, pants, jackets, track suits and coats, and (iii) accessories, which mainly comprise bags, socks, hats and caps. Revenue from our footwear, apparel and accessories represented 46.1%, 52.4% and 1.5%, respectively, of our total revenue in 2013. Our most popular footwear products are skateboarding and leisure footwear, whose aggregate revenue represented 25.5% of our total revenue in 2013.

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We sell our products only to distributors, which resell our products mainly to consumers through Xidelong retail selling locations owned, managed and operated by them pursuant to the terms of individual distribution agreements. We believe this business model has enabled us to grow by leveraging on our distributors’ regional retail expertise and economies of scale. We provide our distributors with retail policies and guidelines, training, advertising and marketing support to assist them to manage and expand the Xidelong retail sales network. The number of Xidelong retail selling locations decreased from 4,844 as of December 31, 2011, to 4,909 as of December 31, 2012 to 3,080 as of December 31, 2013. The net decrease of retail selling locations was caused by the closure of the relatively small and inefficient retail selling locations.

We produce a portion of our footwear products ourselves and outsource the remaining portion of our footwear production and all of our apparel and accessories production to third-party contract manufacturers. Our production facility in Jinjiang, Fujian Porvince has a gross floor area of 66,102 square meters and is equipped with nine production lines with an aggregate annual production capacity of approximately nine million pairs of footwear. In 2011, 2012 and 2013, approximately 64.5%, 57.0% and 36.2%, respectively, of our footwear in terms of sales volume were produced through outsourced manufacturing. Our reduced reliance on contract manufacturers in 2013 was mainly attributable to the decrease in our overall sales.

We have a middle-market pricing strategy and focus primarily on second and third-tier cities in China, particularly in Southwest China and Northwest China. Our revenue decreased from RMB3,288.6 million in 2011 to RMB2,383.5 million in 2012 and further decreased to RMB1,629.6 million (US$269.2 million) in 2013. The decrease was primarily due to weakening consumer demand in China, which was largely attributable to the economic slowdown in China.

Factors Affecting Our Results of Operations and Financial Condition

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

Macroeconomic conditions in China

All of our revenue was derived from sales in China. Our financial condition and results of operations have been dependent upon macroeconomic conditions in China. The global macroeconomic slowdown such as the weakness of the U.S. economy and the debt crisis of several European countries continued to impact China’s economy by the weakening of both domestic and overseas demand in 2012. Furthermore, China is going through a once-every-five-year leadership changeover in 2012. This created uncertainties in its long-term policies regarding economic development and development in different sectors and further hurt confidence in both consumption and investment expenditure in 2013. According to the National Bureau of Statistics of China, the PRC economy grew by 7.7% in 2013, which was down by a 0.1 percentage point as compared with 2012. Total retail sales of consumer products, the primary gauge of consumer spending in China, increased less significantly in 2013, by 13.1% in 2013, representing a decrease of 1.2 percentage points compared to 2012.

We focus primarily on second and third-tier cities in China, particularly in Southwest China and Southern China, the regions that we believe present the best opportunity for retail sales growth due to rapid urbanization and economic development despite the economic slow-down in China overall. Urban consumption is expected to continue to be the primary contributor to consumer consumption in China. According to the National Bureau of Statistics of China, urban retail sales accounted for nearly 86.6% of total retail sales in 2013. We believe that we will be able to continue capturing the retail sales growth opportunities in our target markets.

Sportswear market in China

Sportswear brands have been suffering from excessive inventory, deep discounting, over-expansion of stores and intense competition in distribution channels in China in recent years. Most sportswear brands, including us, have taken cautious approach to reduce future orders, close less efficient stores, and improve efficiency of existing stores. Depending on the amount of inventory, the time required for the inventory returning to a normal level may vary among different brands. Despite such negative conditions, we expect that the adjustment of sportswear industry will lead to some positive developments which include lower rentals, market consolidation, decreased cost of raw materials and stabilized cost of labor. We believe that these developments are not only promoting a recovery but also preparing for sustainable growth of the sportswear industry in near future.

Consumer demand for sportswear in China

Consumer demand for sportswear in China is one of the key drivers of our revenue. Our success depends on the growth in such demand and the overall growth in the consumer market in China. Statistics published by the General Administration of Sport of China suggest that there is a general correlation between disposable income and sports participation in China. According to the National Bureau of Statistics of China, PRC per capita annual disposable income of urban households grew at a CAGR of 11.0% from 1999 to 2013. Consumer confidence index published by Nielsen, which seeks to gauge consumer sentiment toward the economy by asking consumers about their job prospects, personal finances and spending and saving intentions, also increased to 111 points in 2013 compared with 106 points in 2012, which we believe was partly attributable to the rising disposable income and opportunities in the job market. Although under the unstable economy condition in recent years, people have tended to save a higher portion of their income, the average urban household spending is expected to continue to increase and urbanization are expected to continue for another two decades. As the general living standards in China continue to improve, we expect that the consumer demand in China to shift increasingly towards lifestyle-enhancing products such as sportswear. We believe the trend will benefit our sales.

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Ability to maintain an attractive product portfolio at competitive prices

Our success depends to a large extent on our ability to maintain an attractive product portfolio at competitive prices. We have a diversified product portfolio, and most Xidelong retail selling locations carry a broad range of merchandise. We monitor market response to our different products and adjust our product mix from time to time. For instance, we introduced vintage design and cross-training footwear as new categories starting from June 2011. In order to increase our average selling prices, revenue and gross profit margins, we intend to continue monitoring the changing consumer demand and adjust our product mix as we deem necessary.

We have a middle-market pricing strategy, and our target customers are between 15 to 35 years old. To target different segments within our target market, we price our products at different price points. In order to maintain our price competitiveness and sales volume, we review our pricing strategy regularly and make adjustments based on various factors, including market response to our recommended retail prices, the level of sales, the expected product margins on individual products, the prices of our competitors’ products and the anticipated market trends and expected demand from customers. Thus we focus on maintaining the quality of our advertising and promotion strategies, distribution networks, operational systems and product innovation.

Brand recognition is crucial to the consumers’ purchasing decisions and may have a direct impact on our ability to maintain an attractive product portfolio at competitive prices. We position Xidelong as a high-quality sports and leisurewear brand in China and place great emphasis on brand building and promote Xidelong products through advertisements in the media, sponsorship of PRC sports events and various other promotional activities. For 2011, 2012 and 2013, our advertising and promotion expenses accounted for approximately 10.7%, 13.8% and 15.1%, respectively, of our total revenue. We intend to increase our marketing budgets for promotional activities in the future to further enhance our brand recognition and strengthen our market position.

Ability to sustain and optimize our distribution network

We distribute our products mainly through Xidelong retail selling locations owned, managed and operated by our distributors. These retail selling locations include Xidelong retail stores, which sell our products exclusively, department concessionary counters, and stores-within-stores. As of December 31, 2013, we had 3,080 Xidelong retail selling locations located in 30 provinces and municipalities in China. The number of Xidelong retail selling locations decreased from 4,909 as of December 31, 2012 to 3,080 as of December 31, 2013. Our focus in 2013 was not to open more new retail selling locations but to close the relatively small and inefficient retail selling locations and improve the efficiency of our existing ones. We believe that our success depends on our ability to sustain and optimize our distribution network, which in turn depends to a large extent on the performance of our distributors.

Ability to manage production costs and product quality

To meet production requirements and to remain profitable, we must obtain sufficient quantities of good quality raw materials from our suppliers in a timely manner and at commercially reasonable prices. The major raw materials used in the production of our footwear products are natural and synthetic leather, nylon, canvas, rubber and plastics. In addition, we use crude oil and electricity in our production. Therefore, increases in crude oil prices and electricity costs would increase our production costs, although a portion of any such increased costs can sometimes be alleviated by raising our production efficiency and leveraging our economies of scale. Historically, we have been successful in reducing the costs of raw materials as a percentage of our total cost of sales. We seek to capitalize on our purchasing and bargaining power to continue to obtain favorable prices from our major suppliers. We believe that effective cost management will enable us to sustain our profitability.

We outsource a portion of our footwear production to contract manufacturers and all of our apparel and accessories production to third-party contract manufacturers. Our agreements with contract manufacturers are generally for a term of two years. We have not terminated our contractual relationship with any of our contract manufacturers of our footwear during the term of the agreements. Due to a larger pool of contract manufacturers of apparel and accessories available for selection, we have been using such contract manufacturers that are capable of supplying goods with better quality at more competitive prices. We believe that long-term contracts with contract manufacturers as well as the relationship we have established with them over the years will enable us to procure quality contract manufacturers to meet our production and product quality requirements at commercially reasonable terms.

Seasonality

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

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Income tax rates and preferential tax treatment

Our profit is affected by the PRC enterprise income tax that we pay and any preferential tax treatments that we receive. As a foreign-invested enterprise engaged in the manufacturing business, XDLong China was entitled to the preferential tax treatments available under the Foreign Enterprise Income Tax Law. XDLong China was fully exempted from the enterprise income tax during its first two profitable years in 2008 and 2009, followed by a 50% tax reduction for the next three years. Such tax treatment had a significant positive effect on our profit after taxation in 2010, 2011 and 2012. Because this tax reduction expired on December 31, 2012 XDLong China is currently subject to an enterprise income tax rate of 25%, which has negatively impacted our profit.

Pursuant to the agreement between XDLong Jiangxi and the Municipal Government of Ruichang City, XDLong Jiangxi is exempted from the PRC corporate local income tax for its first two years and is entitled to a 50% reduction in the PRC corporate local income tax for the subsequent three years, since the first year of production. As of December 31, 2013, XDLong Jiangxi did not commence any production.

A. OPERATING RESULTS

Basis of Presentation

The following discussion and analysis of our financial condition and results of operations is based on the selected financial information as of and for the years ended December 31, 2011, 2012 and 2013 and has been prepared based on the financial statements of the companies that comprised Exceed and its consolidated subsidiaries, after elimination of inter-company transactions. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 20-F.

Critical Accounting Policies and Estimates

We prepare our financial information in accordance with IFRS. The preparation of our financial information in accordance with IFRS requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, contingent liabilities, revenue and expenses. The following sets forth the principal accounting policies applied in preparing our financial statements that management believes are critical not only because they are important to the portrayal of our financial condition and results of operations, but also because the application and interpretation of these policies require both judgments and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue recognition

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

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

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

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

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

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

To facilitate the operation and development of our business and to promote and enhance our brand recognition nationwide, we provide after-sales assistance and guidance to distributors. Such after-sale assistance and guidance generally include training of distributors’ employees and provision of promotional equipment and marketing brochures. Distributors are required to sell our products on an exclusive basis to be eligible for such assistance and guidance.

Impairment allowances for trade and other receivables

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

Historically, we have no experience of bad debts. All the customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and we have the sole discretion to cease business with customers who fail to pay within the credit period.

Inventory

Inventories are stated at the lower of cost and net realizable value after making allowances for obsolete or slow moving items. Cost is calculated using the weighted average cost formula and comprises all costs incurred in bringing the inventories to their present location and condition. When inventories are sold, the carrying amount of those inventories is recognized as cost of sales in the period in which the related revenue is recognized. Net realizable value is based on the estimated selling prices less any estimated costs to be incurred for completion of the production process and disposal upon delivery of finished goods to distributors. If net realizable value is less than cost at the balance sheet date, the carrying amount is reduced to the realizable value, and the difference is recognized as a loss on valuation of inventories. Write-down of inventories to net realizable value is made based on the estimated net realizable value of the inventories. The assessment of the write-down amounts and the timing of such write-downs require estimates and management’s judgment. Where the actual outcome or expectation in future periods is different from management’s estimates, such differences may have a material impact on the carrying amounts of our inventories and any write-down amounts and write-back amounts in the period in which such estimate has been changed. Inventory amounts were stated at net realizable value in each of 2011, 2012 and 2013 and we did not make any provisions for inventories during the same periods.

Useful lives and impairment of assets

Property, plant and equipment

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

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

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Financial assets

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

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

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

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

Non-financial assets

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

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

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

Earn-out obligation

Pursuant to the terms of the 2009 business combination, we released shares from the escrow account to the former shareholders of Windrace for each of 2009, 2010 and 2011 and issued additional shares to the former shareholders of Windrace as earn-out shares in 2011 because the audited result of our financial results for each of the relevant periods fulfilled the conditions stipulated. The details with respect to the contingent share obligation are discussed in Note 24(a)(i) to our consolidated financial statements included in this Annual Report on Form 20-F.

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Until the escrow shares were released and the earn-out shares were issued, the contingent shares issuable were accounted for as a financial instrument liability adjusted to fair value at each reporting date, with changes in fair value being recognized in the consolidated statements of comprehensive income. When a measurement period for the issuance of such contingent shares ended, the contingent share liability related to that period was no longer conditional, the obligation was reclassified from a liability to equity based on the fair value of the obligation at the end of the measurement period.

Consolidated Income Statements

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

	Year ended December 31,
	2011			2012			2013
	(RMB in thousands)
Revenue		3,288,561			2,383,516			1,629,616
Cost of sales		(2,296,298	)		(1,707,801	)		(1,188,657	)
Gross profit		992,263			675,715			440,959
Other income and gains		14,791			15,917			12,150
Selling and distribution costs		(377,903	)		(347,680	)		(260,828	)
Administrative expenses		(77,073	)		(67,932	)		(51,203	)
Research and development expenses		(53,863	)		(44,227	)		(46,613	)
Finance costs		(856	)		(638	)		(1,122	)
Gain from change in fair value of contingent share liability		38,645			—			—
Profit before tax		536,004			231,155			93,343
Tax		(65,922	)		(32,213	)		(27,801	)
Profit for the year		470,082			198,942			65,542

Description of Selected Income Statement Items

Revenue

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

	Year ended December 31,
	2011					2012					2013
	Revenue		% of Total			Revenue		% of Total			Revenue		% of Total
	(RMB in thousands, except for %)
Footwear		1,514,096		46.0	%		1,144,843		48.0	%		750,448		46.1	%
Apparel		1,731,482		52.7	%		1,198,186		50.3	%		854,391		52.4	%
Accessories		42,983		1.3	%		40,487		1.7	%		24,777		1.5	%
Total		3,288,561		100.0	%		2,383,516		100.0	%		1,629,616		100.0	%

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

· Footwear. Revenue from footwear accounted for approximately 46.1% of our total revenue in 2013 and includes mainly nine categories of footwear: running footwear, leisure footwear, basketball footwear, skateboarding footwear, canvas footwear, tennis footwear, outdoor footwear, vintage design footwear and cross-training footwear. A portion of our footwear production is outsourced.

· Apparel. Revenue from sports apparel accounted for approximately 52.4% of our total revenue in 2013 and includes mainly sports tops, sports pants, jackets and track suits. All of our apparel production is outsourced.

· Accessories. Revenue from accessories accounted for approximately 1.5% of our total revenue in 2013 and includes mainly bags, socks, hats and caps. All of our accessories production is outsourced.

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Cost of sales

The following table sets forth our cost of sales and gross profit as percentages of our net sales for each of the periods indicated.

	Year ended December 31,
	2011				2012				2013
	(RMB in thousands)		(% of Net sales)		(RMB in thousands)		(% of Net sales)		(RMB in thousands)		(% of Net sales)
Sales		3,288,561		100.0%		2,383,516		100.0%		1,629,616		100.0%
Cost of sales		2,296,298		69.8%		1,707,801		71.7%		1,188,657		72.9%
Gross profit		992,263		30.2%		675,715		28.3%		440,959		27.1%

Our cost of sales consists of:

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

· Direct labor cost: Direct labor cost represents salaries of production workers.

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

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

Ÿ Purchase of finished goods: Purchases of finished goods are the purchases of finished products including footwear, apparel and accessories that we outsource to contract manufacturers.

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

Gross profit

We have a diverse product portfolio comprising a range of products across our three key segments: footwear, apparel and accessories. In 2011, 2012 and 2013, our gross profit was RMB992.3 million, RMB675.7 million and 441.0 million (US$72.8 million), respectively, and our overall gross profit margin was 30.2%, 28.3% and 27.1%, respectively.

Other income and gains

Other income and gains primarily consist of income from bank interest, and an award from the PRC government for technological innovation and business development. Other income and gains represented 0.4%, 0.7% and 0.7%, respectively, of our revenue in 2011, 2012 and 2013.

Operating expenses

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

	Year ended December 31,
	2011				2012				2013
	(RMB in thousands)		(% of Net sales)		(RMB in thousands)		(% of Net sales)		(RMB in thousands)		(% of Net sales)
Selling and distribution costs		377,903		11.4%		347,680		14.6%		260,828		16.0%
Administrative expenses		77,073		2.3%		67,932		2.9%		51,203		3.1%
Research and development expenses		53,863		1.6%		44,227		1.9%		46,613		2.9%
Finance costs		856		0.1%		638		0.1%		1,122		0.1%
Gain from change in fair value of contingent share liability		38,645		1.2%		-		-		-		-

Selling and distribution costs

Our selling and distribution costs consist primarily of advertising and promotional expenses and sales fair expenses. In 2011, 2012 and 2013, selling and distribution costs represented approximately 11.4%, 14.6% and 16.0%, respectively, of our revenue. Advertising and promotional expenses consist primarily of fees for advertising on television and other mass media, advertisement production costs, sponsorship fees for sporting events and television programs, store refurbishment and renovation activities, rental and marketing subsidies, and fees for brand spokespersons. Sales fair expenses consist primarily of accommodation, travelling and meals provided to our distributors and third-party retailers for the attendance at our sales fairs.

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Administrative expenses

Our administrative expenses consist primarily of salaries of administrative staff, depreciation, professional fees, share-based compensation, and miscellaneous taxes and duties. In 2011, 2012 and 2013, administrative expenses represented approximately 2.3%, 2.9% and 3.1%, respectively, of our revenue. Salaries of administrative staff consist primarily of salaries and benefit expenses for our administrative staff. Depreciation consists primarily of depreciation expenses of our office building and equipment at our production facility in Jinjiang, Fujian Province. Miscellaneous taxes and duties consist primarily of stamp duties, Urban Maintenance and Construction Tax (“UMC Tax”) and Educational Surcharge. Others under administrative expenses consist primarily of social insurance and other employee expenses for our administrative staff, amortization of prepaid land lease payments, donations, entertainment expenses, office expenses, rental expenses, utility expenses and professional fees.

Research and development expenses

In 2011, 2012 and 2013, research and development expenses represented approximately 1.6%, 1.9% and 2.9%, respectively, of our revenue. Research and development expenses consist primarily of salaries paid to our research and development center staff, materials consumed for our product research and development projects and expenses incurred for our cooperation with the China Institute of Sport Science.

Finance costs

Finance costs are our interest expenses on short-term bank loans. In 2011, 2012 and 2013, finance costs represented approximately 0.1%, 0.1% and 0.1% of our revenue, respectively.

Gain from change in fair value of contingent share liability

Gain from the change in contingent share liability was RMB38.6 million in 2011, reflecting the decrease in the fair value of the conditional obligation to release and issue shares to the former shareholders of Windrace as part of the reverse recapitalization transaction effective on October 21, 2009. No such item was charged in 2012 and 2013 because all the escrow and earn-out shares were released to the former shareholders of Windrace in accordance with the terms of the 2009 business combination.

Tax

Pursuant to the relevant rules and regulations of the British Virgin Islands and the Cayman Islands, we are not subject to any income tax in such jurisdictions. No tax provision for Hong Kong profits has been made as we did not generate any assessable profits arising in Hong Kong during the reporting periods. Taxes on profits assessable in the PRC have been calculated at the prevailing rates, based on existing legislation, interpretations and practices in respect thereof.

Under the PRC Enterprise Income Tax Law and its Implementation Rules, which became effective on January 1, 2008, the PRC enterprise income tax rate for domestic-invested and foreign-invested enterprises is 25%.

The applicable tax rate for XDLong Fujian was 25% in 2011, 2012 and 2013.

Pursuant to the Income Tax Law of the PRC for Foreign Investment Enterprises and Foreign Enterprises, foreign-invested enterprises are exempted from PRC enterprise income tax for its first two profitable years and are entitled to a 50% reduction in the PRC enterprise income tax for the subsequent three years. As a result, XDLong China was exempted from PRC enterprise income tax in 2008 and 2009 and enjoyed a 50% reduction in the applicable tax rate in 2010, 2011 and 2012. The tax rate applied to XDLong China’s pre-tax profit was 25% in 2013, and 12.5% in 2012 and 2011, respectively.

Pursuant to the agreement between XDLong Jiangxi and the Municipal Government of Ruichang City, XDLong Jiangxi will be exempted from local income tax for its first two years since production and be entitled to a 50% reduction in local income tax for the subsequent three years. As of December 31, 2013, XDLong Jiangxi had not commenced any production.

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

	Year ended December 31,
	2011			2012			2013
	(RMB in thousands)
Profit before tax		536,004			231,155			93,343
Tax at the applicable rates (Note)		132,618			59,905			24,708
Lower tax due to tax holidays		(64,041	)		(31,890	)		-
Tax effect of expenses not deductible for taxation purposes		3,721			4,198			3,093
Income not subject to tax		(6,376	)		-			-
Tax charge at our effective rate		65,922			32,213			27,801

Note: The applicable tax rates for entities operating in China and Hong Kong were 25% and 16.5%, respectively.

According to the Enterprise Income Tax Law and its Implementation Rules, dividends receivable by non-PRC corporate residents from PRC enterprises are subject to withholding tax at a rate of 10%, unless reduced by tax treaties or arrangements, for profits earned since January 1, 2008. In addition, under the Sino Hong Kong Double Tax Arrangement and its relevant regulations, a qualified Hong Kong tax resident will be liable for withholding tax at the rate of 5% for dividend income derived from the PRC if the Hong Kong tax resident is the “beneficial owner” and holds 25% or more of the equity interests of the PRC company.

As of December 31, 2013, we had not recorded any withholding tax on the retained earnings of our PRC subsidiaries in the PRC, since we intend to reinvest our earnings to further expand our businesses in mainland China, and our PRC subsidiaries do not intend to declare dividends to their immediate non-PRC parent companies.

Results of Operations

Year ended December 31, 2013 compared to the year ended December 31, 2012

Revenue. Although a slow recovery occurred towards the end of 2013, the global macroeconomic environment had remained difficult for much of the year, which had an adverse impact on the Chinese economy and its sportswear industry. In addition, initial forecasts for sports products demand in preceding years proved to be overly optimistic, leading to an industry-wide build-up in inventory levels. In response, most sportswear brands aggressively cleared their excessive inventory. In an effort to maintain our competitive position, pricing power and to manage inventory levels and the efficiency of our distribution network, we enacted a number of strategic initiatives throughout the year. Among others, as all of our products are sold to distributors, we actively engaged our distributors and authorized third party retailers to manage the level of wholesale orders placed with us but not yet manufactured.

In anticipation of weaker consumer demand in 2013, and to prevent a buildup of inventory at distributors, we trimmed our production and delivery activities, resulting in a 31.6% decrease in revenue from RMB2,383.5 million for the year ended December 31, 2012 to RMB1,629.6 million (US$269.2 million) for the year ended December 31, 2013.

· Revenue from footwear decreased by 34.5%, from RMB1,144.8 million for the year ended December 31, 2012 to RMB750.4 million (US$124.0 million) for the year ended December 31, 2013, primarily due to a 32.7% decrease in sales volume and a 2.7% decrease in the average selling price (“ASP”). The decrease in ASP was attributable to the introduction of a range of lower priced footwear products to target the mass market and to better align with customer preferences.

· Revenue from apparel decreased by 28.7%, from RMB1,198.2 million for the year ended December 31, 2012 to RMB854.4 million (US$141.1 million) for the year ended December 31, 2013. This decrease was primarily due to a 42.8% decrease in sales volume, which was partially offset by a 24.6% increase in ASP. The increase in ASP was primarily caused by the improvement of the design and quality of certain of our apparel products to better align with consumer demand. To a lesser extent, the increase in ASP was also attributable to the increase in the proportion of sales of higher priced winter collection. For 2013, higher priced winter collection apparel accounted for 19.6% of the total apparel sales, compared with 9.4% for 2012.

· Revenue from accessories decreased by 38.8%, from RMB40.5 million for the year ended December 31, 2012 to RMB24.8 million (US$4.1 million) for the year ended December 31, 2013. This decrease was primarily caused by the decline in overall sales of our main products.

Cost of sales. Cost of sales decreased by 30.4% from RMB1,707.8 million in 2012 to RMB1,188.7 million (US$196.4 million) in 2013. The decrease in cost of sales was primarily due to a decrease of purchases of raw materials and finished products by RMB488.5 million (US$80.7 million) from suppliers and contract manufacturers because of our decline in sales.

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Gross profit. Our gross profit decreased by 34.7% from RMB675.7 million in 2012 to RMB441.0 million (US$72.8 million) in 2013 primarily as a result of the decrease in revenue. Our overall gross profit margin decreased by 1.2 percentage points from 28.3% in 2012 to 27.1% in 2013, primarily as a result of the increase in supply and outsourcing cost, which was largely attributable to the increasing costs of raw materials and labor and costs of finished goods purchased from contract manufacturers. We will continue our efforts to maintain our gross margin by balancing product pricing and production cost moving forward.

Other income and gains. Other income and gains decreased by 23.3% from RMB15.9 million in 2012 to RMB12.2 million (US$2.0 million) in 2013. The decrease was mainly attributable to the decrease in the average interest rate and the average amount of deposits. Other income and gains in 2013 mainly consisted of interest income derived from short-term bank deposits, with an average outstanding balance of RMB371.0 million (US$61.3 million) for 2013, bearing interest of 2.85% per annum.

Selling and distribution costs. Selling and distribution costs decreased by 25.0% from RMB347.7 million in 2012 to RMB260.8 million (US$43.1 million) in 2013 primarily due to a decrease in advertising and promotional expenses. Advertising and promotional expenses decreased from RMB328.4 million for 2012 to RMB246.6 million (US$40.7 million) for 2013, primarily because of the decrease of renovation subsidies provided to our distributors and third-party retailers for their renovation of certain existing Xidelong retail selling locations, some of which were received in the form of standardized promotional materials and display equipment. The decrease was mainly due to the decrease in the average size of retail selling locations renovated. The average size of retail selling locations renovated decreased from 87 sq. meters in 2012 to 74 sq. meters in 2013. We focused on renovating retail selling locations with relatively smaller areas in 2013. Moreover, in 2013, our advertising and promotional activities continued to focus on events relating to the Nationwide “Fitness for All” Sports Campaign organized by China’s General Administration of Sport, the government agency responsible for sports activities administration in China.

Administrative expenses. Administrative expenses decreased by 24.6% from RMB67.9 million in 2012 to RMB51.2 million (US$8.5 million) in 2013 primarily due to the decrease in other taxes, employee share-based payment and professional and consultancy fees. Other taxes, including Urban Maintenance Construction Tax, Educational Surcharge, Local Educational Surcharge, etc., decreased from RMB16.9 million for the year ended December 31, 2012 to RMB11.8 million (US$1.9 million) for the year ended December 31, 2013, primarily because of the decline in our revenue. Employee share-based payment expenses decreased from RMB5.9 million for the year ended December 31, 2012 to RMB2.0 million (US$0.3 million) for the year ended December 31, 2013, because most of the shares previously granted under our equity incentive plan had been fully vested as of June 30, 2013. The decrease in professional and consultancy fees from RMB9.1 million for the year ended December 31, 2012 to RMB7.1 million (US$1.2 million) for the year ended December 31, 2013 was a result of our continuing efforts in cost control, which resulted in a decrease in the amount of professional and consulting service procured from our service providers. Merger related expenses of RMB2.7 million (US$0.5 million) incurred in relation to our going private transaction were included in the professional and consultancy fee.

Research and development expenses. Research and development expenses increased by 5.4% from RMB44.2 million in 2012 to RMB46.6 million (US$7.7 million) in 2013 as we continued to allocate resources towards research and development work as well as our research and development efforts in cooperation with the General Administration of Sport of China to increase the quality and sophistication of our products so as to enhance our brand recognition.

Finance costs. Finance costs increased by 83.3% from RMB0.6 million in 2012 to RMB1.1 million (US$0.2 million) in 2013 primarily due to the increase in the average outstanding balance of our short-term bank borrowings for 2013.

Gain from change in fair value of contingent share liability. No such item was charged in 2012 and 2013 as all the escrow and earn-out shares were released to the former shareholders of Windrace. The gain from the change in the fair value of contingent share liability was RMB38.6 million in 2011. This reflected the decrease in the fair value of the conditional obligation to release and issue shares to the former shareholders of Windrace as part of the reverse recapitalization transaction effective on October 21, 2009.

Profit before tax. As a result of the foregoing, our profit before tax decreased by 59.6% from RMB231.2 million in 2012 to RMB93.3 million (US$15.4 million) in 2013.

Tax. Tax decreased by 13.7% from RMB32.2 million in 2012 to RMB27.8 million (US$4.6 million) in 2013 primarily due to the decrease in profit before tax, partially offset by the increase in the applicable tax rate of Xidelong (China) Co., Ltd. Xidelong (China) Co., Ltd. was entitled to a 50% reduction in the PRC enterprise income tax until December 31, 2012, after which it was subject to the standard tax rate of 25%. Therefore, the tax rates applied to Xidelong (China) Co., Ltd. was 12.5% in 2012 and 25% in 2013, respectively. The effective tax rates for 2012 and 2013 were 13.9% and 29.8%, respectively.

Profit for the year. As a result of the foregoing, our profit for the year ended December 31, 2013 was RMB65.5 million (US$10.8 million), representing a decrease of 67.1% from RMB198.9 million for the year ended December 31, 2012.

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Year ended December 31, 2012 compared to the year ended December 31, 2011

Revenue. The global macroeconomic environment remained uncertain throughout 2012, which had an adverse impact on the domestic Chinese economy and sportswear industry. In addition, initial forecasts for sports product demand for 2012 proved to be overly optimistic, leading to an industry-wide build-up of inventory levels. In response, most sportswear brands aggressively cleared their excessive inventory during the period. In light of the impact that the market downturn has had on the Chinese sportswear industry and Exceed specifically in 2012, and in an effort to maintain our competitive position, pricing power and to manage inventory levels and the efficiency of our distribution network, we enacted a number of strategic initiatives throughout the year. Among others, we actively engaged our distributors and authorized third party retailers to manage the level of wholesale orders placed with us but not yet manufactured.

In anticipation of weaker consumer demand in 2012, and to prevent a buildup of inventory at distributors, we trimmed our production and delivery activities, resulting in a 27.5% decrease in revenue from RMB3,288.6 million for the year ended December 31, 2011 to RMB2,383.5 million (US$382.6 million) for the year ended December 31, 2012.

· Revenue from footwear decreased by 24.4%, from RMB1,514.1 million for the year ended December 31, 2011 to RMB1,144.8 million (US$183.8 million) for the year ended December 31, 2012, primarily due to a 27.0% decrease in sales volume, which was partially offset by a 3.6% increase in the average selling price (“ASP”). The increase in ASP was mainly attributable to the improvement of the design and quality of certain of our footwear products lines to better align with consumer demand. Furthermore, our continuous marketing and brand promotion efforts also contributed to the increase in the ASP of our footwear products.

· Revenue from apparel decreased by 30.8%, from RMB1,731.5 million for the year ended December 31, 2011 to RMB1,198.2 million (US$192.3 million) for the year ended December 31, 2012. This decrease was primarily due to a 26.3% decrease in sales volume and a 6.1% decrease in ASP. The decrease in ASP was mainly due to the increase in thesales of lower priced spring/summer collection apparel as a percentage of total apparel sales. For 2012, lower priced spring/summer collection apparel accounted for 51.3% of the total apparel sales, compared with 43.8% for 2011. To a lesser extent, the decrease in ASP was also attributable to the introduction of a range of popular priced apparel products to target the mass market and to better align with customer preferences.

· Revenue from accessories decreased by 5.8%, from RMB43.0 million for the year ended December 31, 2011 to RMB40.5 million (US$6.5 million) for the year ended December 31, 2012. This decrease was primarily caused by the decline in overall sales of our main products.

Cost of sales.  Cost of sales decreased by 25.6% from RMB2,296.3 million in 2011 to RMB1,707.8 million (US$274.1 million) in 2012. The decrease in cost of sales was primarily due to a decrease of purchases of raw materials and finished products by RMB586.0 million (US$94.1 million) from suppliers and contract manufacturers because of our decline in sales.

Gross profit.  Our gross profit decreased by 31.9% from RMB992.3 million in 2011 to RMB675.7 million (US$108.5 million) in 2012 primarily as a result of the decrease in revenue. Our overall gross profit margin decreased from 30.2% in 2011 to 28.3% in 2012, primarily as a result of the increase in supply and outsourcing cost, which was largely attributable to the increasing costs of raw materials and labor of suppliers and contract manufacturers. We will continue our efforts to maintain our gross margin by balancing product pricing and production cost moving forward.  

Other income and gains.  Other income and gains increased by 7.4% from RMB14.8 million in 2011 to RMB15.9 million (US$2.6 million) in 2012. Other income and gains in 2012 included a governmental award of RMB0.8 million (US$0.1 million) for technological innovation and business development, and interest income of RMB15.1 million (US$2.4 million). The increase in other income and gains for 2012 was mainly attributable to an increase in interest income, which was derived from short-term time deposits with an average outstanding balance of RMB400.0 million (US$63.6 million) in 2012, bearing interest ranging from 2.85% to 3.10% per annum. The increase was primarily due to the increase in the average interest rate for our short-term bank deposits.

Selling and distribution costs.  Selling and distribution costs decreased by 8.0% from RMB377.9 million in 2011 to RMB347.7 million (US$55.8 million) in 2012 primarily due to a decrease in advertising and promotional expenses, salary, travelling and entertainment. Advertising and promotional expenses decreased from RMB352.4 million for 2011 to RMB328.4 million (US$52.7 million) for 2012, primarily because fewer Xidelong retail selling locations were opened during 2012. During 2012, 188 new Xidelong retail selling locations were opened and over 900 existing Xidelong retail selling locations were renovated either by our distributors or by third-party retailers, some of which received renovation subsidies from us in the form of standardized promotional materials and store displays. In contrast, in 2011, 585 new Xidelong retail selling locations were opened and over 400 existing Xidelong retail selling locations were renovated. We continued to invest resources in marketing and advertising to build our brand recognition, enhance market penetration, and maintain unique store images. In 2012, our advertising and promotional activities continued to focus on events relating to the Nationwide “Fitness for All” Sports Campaign organized by China’s General Administration of Sport, the government agency responsible for sports activities in China, and we continued our engagement of By2 as our official product spokespersons. Furthermore, the decrease in salaries of marketing personnel was primarily due to the decrease in the number of staff in 2012. The decrease in selling and distribution costs reflects the effect of the Company’s cost-cutting initiatives, which resulted in a decrease in travelling and entertainment expenses.

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Administrative expenses.  Administrative expenses decreased by 11.9% from RMB77.1 million in 2011 to RMB67.9 million (US$10.9 million) in 2012 primarily due to the decreases in Urban Maintenance and Construction (“UMC Tax”), Educational Surcharge, Local Educational Surcharge, salaries of administrative staff, rental expenses and employee share-based payment. Such decreases, however, were partially offset by an increase in professional fees and consultancy fees. Other taxes, including UMC Tax, Educational Surcharge, Local Educational Surcharge, etc., decreased from RMB23.1 million for the year ended December 31, 2011 to RMB16.9 million (US$2.7 million) for the year ended December 31, 2012, primarily because of the decline in revenue. Rental expenses decreased from RMB3.7 million for the year ended December 31, 2011 to RMB1.3 million (US$0.2 million) for the year ended December 31, 2012 mainly due to the reduction in size of our Beijing branch office.

Research and development expenses.  Research and development expenses decreased by 18.0% from RMB53.9 million in 2011 to RMB44.2 million (US$7.1 million) in 2012 primarily due to improved efforts to increase the efficiency of our research and development activities and practices and the effect of our cost-cutting initiatives.

Finance costs.  Finance costs decreased by 33.3% from RMB0.9 million in 2011 to RMB0.6 million (US$0.1 million) in 2012 primarily due to the decrease in the average outstanding balance of our short-term bank borrowings for 2012 and the decrease in the average interest rate for our short-term bank borrowings.

Gain from change in fair value of contingent share liability.  No such item was charged in 2012 as all the escrow and earn-out shares were released to the former shareholders of Windrace. The gain from the change in the fair value of contingent share liability was RMB38.6 million in 2011. This reflected the decrease in the fair value of the conditional obligation to release and issue shares to the former shareholders of Windrace as part of the reverse recapitalization transaction effective on October 21, 2009.

Profit before tax.  As a result of the foregoing, our profit before tax decreased by 56.9% from RMB536.0 million in 2011 to RM231.2 million (US$37.1 million) in 2012.

Tax. Tax decreased by 51.1% from RMB65.9 million in 2011 to RMB32.2 million (US$5.2 million) in 2012 primarily due to the decrease in profit before tax by 56.9% from RMB536.0 million in 2011 to RMB231.2 million (US$37.1 million) in 2012. Xidelong (China) Co., Ltd. was entitled to a 50% reduction in the PRC enterprise income tax until December 31, 2012, after which it was subject to the standard tax rate of 25%. The effective tax rate for 2011 and 2012 were 12.3% and 13.9%, respectively.

Profit for the year.  As a result of the foregoing, our profit for the year ended December 31, 2012 was RMB198.9 million (US$31.9 million), representing a decrease of 57.7% from RMB470.1 million for the year ended December 31, 2011.

B. LIQUIDITY AND CAPITAL RESOURCES

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

	Year ended December 31,
	2011			2012			2013
	(RMB in thousands)
Net cash inflow/(outflow) from operating activities		320,435			(229,319	)		56,615
Net cash outflow from investing activities		(87,120	)		(123,391	)		(234,247	)
Net cash inflow/(outflow) from financing activities		(29,079	)		25,707			26,814

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

The market performance downturn in 2013 could adversely affect our liquidity position. While the global and the Chinese economy have been improving, the full scope of any recovery is not yet known. If such economies do not continue to improve, our cash from operations could be adversely affected by decreased consumer spending or longer collection periods of trade receivables from our distributors whose liquidity positions may be negatively impacted by worsening financial and economic conditions. Additional financing from investors, banks or the capital market may be limited as a result of the tight credit market and volatile capital market that might result if economic conditions deteriorate. As of December 31, 2013, we had cash and cash equivalents totaling approximately RMB486.6 million (US$80.4 million). We believe that our liquidity position exceeds the minimum required to sustain our business adequately and our working capital is sufficient for our present requirements. We also believe that additional sources of liquidity are available to us, if they are needed, through bank facilities.

Cash outflows from operating activities

For 2013, net cash inflow from our operating activities was RMB56.6 million (US$9.4 million) and was primarily attributable to profit before tax of RMB93.3 million (US$15.4 million), an increase in trade payables of RMB50.3 million (US$8.3 million) and non-cash expenses in the amount of RMB20.2 million (US$3.3 million), including depreciation of property, plant and equipment, amortization of intangible assets and expense recognized in respect of equity-settled share-based payments, which was partially offset by an increase in trade receivables of RMB59.3 million (US$9.8 million) and PRC tax payment of RMB20.5 million (US$3.4 million).

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Cash outflows from investing activities

For 2013, net cash outflow from our investing activities was RMB234.2 million (US$38.7 million), which was mainly due to an increase in construction-in-progress in Jiangxi Province and Fujian Province of RMB246.8 million (US$40.8 million).

Cash inflows from financing activities 

For 2013, net cash inflow from our financing activities was RMB26.8 million (US$4.4 million) due to a new loan of HKD60.0 million (US$7.7 million) from a shareholder.

Summary of Existing Borrowing and Financing Instruments

Our existing borrowing as of December 31, 2013 included a short-term bank loan and a loan from a shareholder. The following table sets forth the details :

	Interest rate	Maturity date	Denominated currency in thousands	RMB in thousands
Current bank loan – unsecured and repayable	6.00% per annum	Dec 8, 2014	RMB10,000		10,000
Loan from a shareholder – repayable	7.00% per annum	May 31, 2015	HKD60,000		48,747
					58,747

We are eligible to borrow up to RMB550.0 million (US$90.9 million) in the form of term loans plus accrued and unpaid interest pursuant to a bank facility. As of December 31, 2013, an aggregate principal amount of RMB10.0 million (US$1.7 million) was outstanding under the bank facility. Our performance of the obligations under the bank facility was secured by personal guarantees provided by Mr. Lin; Ms. Chen Xiayu, the spouse of Mr. Lin; and Mr. Ding, a director of the Company and the brother in-law of Mr. Lin. Because of the short maturity, the carrying amounts of bank loan approximates to its fair value.

In June 2013, the Company obtained a loan of HKD60.0 million (RMB48.7 million) from a shareholder. The loan bears an annual interest rate of 7.0% and is repayable on May 31, 2015. During the year, interest expenses of RMB1.9 million were incurred and remained outstanding as of December 31, 2013. The shareholder loan was obtained to finance the construction project in Jiangxi Province. The carrying amount approximates to its fair value.

Capital Expenditures

Our capital expenditures principally include expenditures on property, plant and equipment and construction in progress for our new buildings. We financed our capital expenditure requirements primarily through cash flow from operations and loan from a shareholder.

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

	Year ended December 31,
	2011		2012		2013
	(RMB in thousands)
Property, plant and equipment		8,533		707		4
Construction in progress		30,188		64,844		246,753
Total		38,721		65,551		246,757

For the details of our material commitments for capital expenditures as of December 31, 2013, please refer to Item 5.F. “Contractual Obligations and Commercial Commitments.”

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Restrictions on our Liquidity

Substantially all of the revenue and operating expenses of our businesses are generated by our subsidiaries in the PRC denominated in Renminbi. Renminbi is convertible into foreign currency with respect to “current account” transactions, but not with respect to “capital account” transactions. Current account transactions include ordinary course import/export transactions, payments for services rendered and payments of license fees, royalties, interest on loans and dividends. Capital account transactions include cross-border investments and repayments of principal of loans. Currently, our PRC subsidiaries may purchase foreign exchange currencies for settlement of “current account transactions,” including payment of dividends to us and payment of license fees to content licensors, without the approval of the State Administration for Foreign Exchange, or SAFE. Our PRC subsidiaries may also retain foreign exchange currencies in their current accounts, subject to a ceiling approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC governmental authorities may limit or eliminate the ability of our PRC subsidiaries to purchase and retain foreign currencies in the future. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from or registration with SAFE. This could affect our PRC subsidiaries’ ability to obtain debt or equity financing from outside the PRC, including by means of loans or capital contributions from us.

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

Design, Research and Development

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

Product design

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

As of December 31, 2013, our research and development department had a staff of 117. Our design team formulates new designs for products, tests prototype designs by obtaining feedback from other internal departments and distributors, and assesses demand at sales fairs. When a prototype is approved for production, the design team sends the design specifications to the production team. During the year ended December 31, 2013, we launched over 1,700 designs at the sales fairs in 2013.

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

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

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

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

Research and development activities

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

China Institute of Sport Science

We are the exclusive partner of the China Institute of Sport Science in their research and development projects. The institute is a PRC government agency established by the General Administration of Sport of China in 1958 as China’s first governmental agency dedicated to research in the field of sports science. The functions of the China Institute of Sport Science include strengthening public fitness and enhancing the performance of Chinese athletes through research and development. The China Institute of Sport Science has six research centers focusing on four main areas of research: (i) developing Chinese athletes; (ii) monitoring and developing public fitness conditions; (iii) studying sports sociology; and (iv) improving sports equipment.

Under our agreement with the China Institute of Sport Science:

Ÿ We pay an annual fee of RMB0.5 million to the China Institute of Sport Science for its assistance in the research and development of technologies for our sports footwear and apparel and its promotion of the technology content of our products. Other than the annual fee, we do not pay any other fees, including usage fees, to the institute.

Ÿ We allow the China Institute of Sport Science to use our research and development center in our production facility in Jinjiang, Fujian Province.

Ÿ We have the exclusive right to use the endorsement, “The Strategic Partner of the China Institute of Sport Science”, in our products.

Ÿ The institute will assist us with the research and development of technology for our sports footwear and apparel.

Ÿ We will have priority to use the know-how developed under the agreement, but the institute will own the know-how.

Our current collaborative projects with the China Institute of Sport Science include research initiatives to establish a national database of different foot shapes and characteristics of the PRC population. In April 2007, we launched a nationwide foot measurement campaign where we collected foot measurement data from consumers across China, using the foot shape measurement equipment developed in conjunction with the China Institute of Sport Science, which helped analyze the data in the foot shape database, and which we subsequently incorporated into the design and development of footwear. On October 20, 2011, we renewed our technology cooperation agreement with the China Institute of Sport Science for an additional term of five years.

Key achievements

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

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

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

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

For 2011, 2012 and 2013, our total expenditure on research and development amounted to RMB53.9 million, RMB44.2 million and RMB46.6 million (US$7.7 million), respectively, representing 1.6% , 1.9% and 2.9% of our total revenue during the same periods, respectively.

Intellectual Property Rights 

As of December 31, 2013, we have registered 23 trademarks, including and , with the Trademark Office of the State Administration for Industry and Commerce in the PRC. As of December 31, 2013, we had 10 pending applications for the registration of trademarks in the PRC. In addition, we have registered four domain names.

We recognize the importance of protecting and enforcing our intellectual property rights. We safeguard our intellectual property rights through the registration of trademarks, and may include the relevant protective provisions in contracts with third parties. Our employees and contract manufacturers are subject to confidentiality agreements but there has been no action taken against any employee or contract manufacturers for a breach of such confidentiality. In addition, we plan to apply for intellectual property rights to any new technologies developed together with scientific and educational institutions. We mitigate the risks of infringement by others through obtaining the appropriate legal services and advice to ensure that our trademarks are adequately protected. For example, in December 2005, Liu Dingyi registered the Chinese domain name “.com” on the China Internet Network Information Center (CNNIC) and used the website to promote and sell travel products and services. On June 8, 2006, we obtained an injunction from the Hubei Province Jingzhou City Intermediate People’s Court restraining Liu Dingyi from infringing on our trademark and ordered the termination of the domain name registration. In addition, the court awarded us RMB5,000 in damages.

D. TREND INFORMATION

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2013 to December 31, 2013 that are reasonably likely to have a material effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to not be indicative of future operating results or financial conditions.

E. OFF-BALANCE SHEET ARRANGEMENTS

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

F. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Our contractual obligations primarily consist of a capital contribution commitment, short-term debt obligations, operating lease obligations and purchase obligations. The following table sets forth a breakdown of our contractual obligations as of December 31, 2013 and their maturity profile:

	Payment Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(RMB in thousands)
Capital contribution XDLong Jiangxi		265,448		265,448		―		―		―
Acquisition of land in Jiangxi Province		78,120		78,120		―		―		―
Construction of new staff quarter in Fujian Province		12,741		10,388		2,353		―		―
Construction of new production facility in Jiangxi Province		117,687		98,305		19,382		―		―
Operating lease obligations (1)		30		30		―		―		―
Purchase obligations (2)		25,200		3,892		11,678		9,630		―
Annual fee for research and development assistance (3)		1,642		767		875		―		―
Total		500,868		456,950		34,288		9,630		―

(1) Lease obligations for our office premises.

(2) Includes advertising and promotional expenses.

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(3) Under the agreement with the China Institute of Sport Science, we have committed to pay predetermined annual fees of RMB0.5 million to the China Institute of Sport Science annually from October 2011 to October 2016 for their assistance with the research and development of technology for sports footwear and apparel, and the promotion of the technology content of our products.

As of December 31, 2013, we had cash and cash equivalents totaling approximately RMB486.6 million (US$80.4 million). We believe that our liquidity position exceeds the minimum required to sustain our business adequately and our working capital is sufficient for our present requirements. We also believe that additional sources of liquidity are available to us, if they are needed, through bank facilities.

G. SAFE HARBOR

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

· our goals and strategies;

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

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

· expected changes in our margins and certain costs or expenditures;

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

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

· our plans to launch new products or investment in distributors;

· competition in the sportswear industry in China;

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

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

· PRC governmental policies relating to the sportswear manufacturing industry.

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

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Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth certain information relating to our directors as of March 31, 2014. The business address of each of our directors and executive officers 12/F, China Minmetals Tower, 79 Chatham Road South, Tsim Sha Tsui, Kowloon, Hong Kong.

Name	Age	Position
Lin Shuipan	45	Director, Chairman of the Board and Chief Executive Officer
Ding Dongdong	32	Director
Jin Jichun	72	Director
Yea-Mow Chen	61	Director
Pang Xiaozhong	61	Director
Tai Yau Ting	34	Chief Financial Officer and Company Secretary
Yu Shulong	51	Deputy Financial Officer

Directors

Mr. Lin Shuipan is our founder, executive director, chairman of the board and chief executive officer. He is responsible for our overall corporate strategies, planning and business development. Mr. Lin has over 16 years of experience in the sportswear industry. From 1993 to 1997, he was the technical engineer and factory manager of Huatingkou Footwear Manufacturing Factory in Chendai Town, Jinjiang. From 1997 to 2000, he was the general manager of Jiuzhou Footwear Business Company Limited in Chendai Town, Jinjiang. In 2001, Mr. Lin founded XDLong Fujian and was its vice-chairman from 2001 to September 2007 and has been its chairman since September 2007. He has been the general manager of XDLong Fujian since its establishment. Mr. Lin has also been the chairman and general manager of XDLong China since its establishment in April 2004. In 2003, he was named as one of the 100 Outstanding Persons in China’s Economy. In 2003, he was appointed as a representative of the 14^th Jinjiang People’s Congress and the executive director of Jinjiang Chendai Chamber of Commerce. In 2004, Mr. Lin was appointed as vice president of Jinjiang Footwear Manufacturing Association. In 2005, he was appointed as a member of the standing committee of Quanzhou Foreign Invested Enterprises Association and, in 2007, as vice president of Jinjiang Youth Chamber of Commerce. In 2006, he was appointed as a representative of the 14^th Quanzhou People’s Congress. He was also appointed as a representative of the 14^th,15^th and 16^th Jinjiang People’s Congress in 2003, 2006 and 2011, respectively. In 2010, Mr. Lin was appointed as the first Executive Vice President of Jinjiang Federation of Enterprise & Entrepreneur.

Mr. Ding Dongdong has been our executive director since August 2013. He is primarily responsible for the design, research and development of footwear and apparel. Mr. Ding joined us in September 2001. He was the development manager of the apparel department of XDLong Fujian from 2002 to 2003, and was promoted to the position of manager in 2003. He is responsible for data collection, apparel design, processing and production, quality control and after-sales of the apparel department. Mr. Ding obtained a diploma in apparel design from the Guangdong Apparel Institute in July 2002. Mr. Ding is the brother-in-law of Mr. Lin Shuipan, an executive Director.

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

Mr. Yea-Mow Chen is an independent non-executive director and a member of the independent committee of the board set up for the consideration of the going private transaction. He has been a member of our board of directors since February 2012. Mr. Chen is a professor of finance at the San Francisco University. Mr. Chen is also the chairman and chief executive officer of Intelliwise Financial Engineering Advisory Corp. Ltd., a financial advisory firm at Taipei, and an advisor of Taiwan Securities Association. Mr. Chen received a B.A from the National Taiwan University in 1976, a M.A in Economics from the Ohio State University in 1980, and a Ph.D in Economics from the Ohio State University in 1984.

Mr. Pang Xiaozhong is an independent non-executive director and a member of the independent committee of the board set up for the consideration of the going private transaction. He has been a member of our board of directors since August 2013. He is a former director of the research and development department of the Institute of Sports Science under the General Administration of Sport in China. Mr. Pang has been working in the sports science area and dedicating to the promotion of sports science in China for over 30 years. Mr. Pang has organized and coordinated the implementation of a number of major national key projects. He has a deep understanding of the national science and technology policies, domestic and international sports technological development, and domestic and international sports industry. Mr. Pang has been recognized by the government and enterprises for promotion of social and economic benefits through his success in organizing various technology projects in sports industry campaigns.

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Senior Management

Ms. Tai Yau Ting is our Chief Financial Officer and Company Secretary. Ms. Tai is a qualified accountant and was appointed as our Chief Financial Officer in August 2011. Prior to her appointment as our Chief Financial Officer, Ms. Tai served as our Vice President of Finance. Ms. Tai joined us in February 2008 and is primarily responsible for our financial management, internal control, risk management and corporate secretarial matters. Ms. Tai graduated from the University of Toronto with a bachelor’s degree in applied science in 2002 and a master’s degree in applied science in 2004. Ms. Tai is also a member of the American Institute of Certified Public Accountants and a member of CPA Australia. Prior to joining us, she worked for Ernst & Young and has over four years’ auditing, accounting and financing experience, mainly focused on auditing Hong Kong listed companies and Hong Kong initial public offering projects.

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

B. COMPENSATION

We offer our directors and executive officers competitive remuneration packages to attract and retain management talent. The principal component of our compensation for directors and executives are their basic salaries. In addition, we make statutory contributions to the social insurance scheme for our executive officers.

In 2013, the aggregate cash compensation we paid to our directors and executive officers was approximately RMB3.0 million (US$0.5 million) and the total social insurance contributions made on behalf of our executive officers was approximately RMB32,000 (US$5,300).

In 2013, we did not grant any restricted shares to our directors and senior management. Share-based compensation expense of RMB2.0 million (US$0.3 million) was recognized in 2013 in relation to the vesting of restricted shares granted under our equity incentive plan (see Item 6.E for the details of the equity incentive plan) in 2010 and 2011. All restricted shares granted to our directors and senior management but not vested under the equity incentive plan will survive the merger contemplated by the going private transaction with their terms remain unchanged.

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

The primary goal of our remuneration policy is to enable us to retain and motivate management by offering them compensation commensurate with their performance.

Determination of Compensation

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

C. BOARD PRACTICES

Independence of Directors

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

Each of our audit committee, compensation committee and nominations committee is comprised of three independent directors.

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Audit Committee

We have established an audit committee. Messrs. Chen (chair), Jin and Pang are members of the audit committee. Messrs. Chen, Jin and Pang have an understanding of generally accepted accounting principles and financial statements, the ability to assess the general application of such principles in connection with our financial statements, including estimates, accruals and reserves, experience in analyzing or evaluating financial statements of similar breadth and complexity as the Company’s financial statements, an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions.

Audit Committee Financial Expert

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

Audit Committee Pre-Approval Policies and Procedures

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

Code of Conduct

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

Compensation Committee

We have established a compensation committee. The purpose of the compensation committee is to administer our equity incentive plan, including authority to make and modify awards under such plan. Messrs. Jin (chair), Chen and Pang are members of the compensation committee.

Nominations Committee

We have formed a nominating and corporate governance committee. The nominations committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominations committee will consider persons identified by our members, management, stockholders, investment bankers and others. Messrs. Jin (chair), Chen and Pang are members of the nominating and corporate governance committee.

Independent Committee

We have formed an independent committee. The independent committee was established to consider the going private transaction on behalf of the Company.

Employment Agreement with Executive Director

Neither our Company nor any of its subsidiaries has entered into any service contracts with any of our directors that contain any provisions for benefits upon termination of employment (“golden parachute” or “handshake” or similar arrangements).

Terms of Directors and Officers

Our officers are elected by and serve at the discretion of our shareholders and the board of directors in accordance with our memorandum and articles of association. Our directors are not subject to a term of office and hold office until such time as they are removed from office by resolution of the majority of the directors or a resolution by the shareholders holding a majority of the voting rights. A director holds office until (i) his death; (ii) his resignation; (iii) the effective date of his removal by resolution of directors or resolution of shareholders; or (iv) his disqualification to act as a director under section 111 of the BVI Business Companies Act, 2004 (as amended) (on which his office as director shall be automatically terminated if he has not resigned in accordance with section 115(2) of the BVI Business Companies Act, 2004 (as amended)).

D. EMPLOYEES

Employees

As of December 31, 2013, we had 2,016 full-time employees, 2014 of whom were located in the PRC and the remaining 2 were located in Hong Kong. The following sets forth the number of employees as of December 31, 2013:

	Number of employees
Footwear production department		1,602
Research and development center		117
Quality control department		24
Sales and marketing center		104
Administration department		100
Apparel business department		13
Finance department		33
Brand and promotion department		3
Senior management		11
Human resources department		9
Total		2,016

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We have made contributions in relation to the retirement of our employees in accordance with applicable laws and regulations in the PRC, which require contribution by both employees and the company at a fixed percentage of the salaries of such employees. For 2011, 2012 and 2013, the employee social insurance (including our retirement contribution) paid by us amounted to approximately RMB20.1 million, RMB21.7 million and RMB22.6 million (US$3.7 million), respectively, which represented 19.6%, 23.6% and 26.2% of the total salaries of our employees during the same periods, respectively.

For the year ended December 31, 2011, we paid year-end bonuses of RMB7.1 million to 645 employees meeting performance targets in that year. For the year ended December 31, 2012, we paid year-end bonuses of RMB8.6 million to 460 employees meeting performance targets in that year. For the year ended December 31, 2013, we paid year-end bonuses of RMB6.1 million (US$1.0 million) to 380 employees meeting performance targets in that year.

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

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

None of our employees is currently represented by a union and/or collective bargaining agreements. We believe that we have good relations with our employees and we have had no history of work stoppages or union-organized campaigns.

E. SHARE OWNERSHIP

Please see Item 7.A. for share ownership held by our directors and senior management.

Equity Incentive Plan

The Company’s equity incentive plan was adopted by the board of directors on June 3, 2010 and approved by a majority of our shareholders voting at the Annual General Meeting held on June 30, 2010. The plan was adopted to attract and retain directors, officers, other employees and consultants of the Company and its subsidiaries and to provide to such persons incentives and rewards for superior performance.

Under the equity incentive plan, the Company may issue or transfer 1,000,000 shares of ordinary shares plus, during each calendar year of the Company during which this plan is in effect, an additional number of shares equal to the lesser of (1) 1,000,000 ordinary shares, (2) ten percent (10%) of the ordinary shares of the Company outstanding on the first business day of the Company’s fiscal year, and (3) such lesser number as may be determined by the Committee, in the aggregate not to exceed 10,000,000 ordinary shares plus, in each case, any ordinary shares relating to awards that expire or are forfeited or cancelled under this plan. Such ordinary shares may be shares of original issuance or treasury shares or a combination of the foregoing. Each grant will specify an option price per share, which may not be less than the market value per share on the date of grant. No option right will be exercisable more than ten (10) years from the date of grant; provided that no incentive stock option right granted to a ten percent participant will be exercisable more than five (5) years from the date of grant.

As of the date of this annual report on Form 20-F, we have granted 534,935 restricted shares to our non-executive directors, senior management and certain employees, of which 50,086 restricted shares were granted outright to the non-executive directors and certain employees, 138,100 restricted shares will be vested 25%, 30% and 45% after the first year, second year and third year, respectively, and the remaining granted restricted shares will be generally vested in equal installments over three years.

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Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS

The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 of the U.S. the Exchange Act, of our ordinary shares, as of March 31, 2014:

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

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

Beneficial ownership includes voting or investment power with respect to the securities. Except as indicated below, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them. Percentage of beneficial ownership is based on 33,141,016 ordinary shares outstanding as of March 31, 2014.

Beneficial Owner	Ordinary Shares Beneficially Owned		Percentage of Ordinary Shares Beneficially Owned
Directors and executive officers
Lin Shuipan(1)		12,822,986		38.7	%
Tai Yau Ting		89,765		*
Jin Jichun		6,000		*
Ding Dongdong		100,000		*
All directors and executive officers as a group (4 persons)		13,018,751		39.3	%
Major shareholders
Windtech Holdings Limited(2)		3,957,784		11.9	%
Tiancheng Int’l Investment Group Limited (3)		2,037,053		6.1	%

The percentages shown in the table are based on 33,141,016 ordinary shares outstanding on March 31, 2014. None of our existing shareholders has different voting rights from other shareholders. Other than the proposed going-private transaction as described in Item 4A hereto, we are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

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

(1) Represents 7,730,354 shares held by Mr. Lin Shuipan and the remaining 5,092,632 ordinary shares held on trust for the benefit of Ms. Chen Xiayu, the spouse of Mr. LinShuipan. The business address of Mr. Lin Shuipan and Ms. Chen Xiayu is No. 103, Qiancanggong Road, Huatingkou Village, Chendai Town, Jinjiang City, Fujian Province, the PRC.

(2) Represents 1,583,114 ordinary shares owned by Wisetech and 2,374,670 ordinary shares owned by Windtech. Each of Wisetech and Windtech is controlled by its sole director Yuk Mei Tsui, an employee of New Horizon Capital Advisors Ltd. Yuk Mei Tsui disclaims beneficial ownership of shares of Exceed held or to be held by Wisetech and Windtech except to the extent of her pecuniary interest therein. Wisetech and Windtech operate as a group with respect to their interests in us within the meaning of the United States federal securities laws.

(3)  As of March 31, 2014, Tiancheng Int’l Investment Group Limited (“Tiancheng”) held 2,037,053 ordinary shares of Exceed, representing 6.1% shareholding of Exceed. Ms. Chen Shuli, the mother of Mr. Lin Shuipan, is the beneficial owner of Tiancheng.

B. RELATED PARTY TRANSACTIONS 

Going-private transaction

An extraordinary general meeting of shareholders will be convened in the near future to consider the going private transaction, details of which are further described in Item 4A. The going private transaction will involve Pan Long’s acquisition of all the outstanding ordinary shares of the Company, other than shares owned by the Rollover Shareholders, at a proposed price of $1.78 per ordinary share in cash through a merger between a wholly-owned subsidiary of Pan Long into the Company, resulting in Pan Long becoming the sole shareholder of the Company.

Pan Long is an entity wholly owned by Mr. Lin our chairman and chief executive officer, for the purpose of the going private transaction. The Rollover Shareholders in the going private transaction include Mr. Lin; Mr. Ding, our executive director and the brother-in-law of Mr. Lin; and Windtech Holdings Limited and Tiancheng Int’l Investment Group Limited, our major shareholders. For your information purpose, with respect to this transaction, a Schedule 13D was filed by certain Rollover Shareholders on December 4, 2013, as subsequently amended.

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An independent committee of the board of directors, consisting of three independent directors unrelated to the Rollover Shareholders or any of the management members of the Company, negotiated the terms of the transaction on the Company’s behalf under the advice of its financial and legal advisors. For more information, please see the transaction statement on Schedule 13E-3 filed with the SEC, as amended, and other reports and documents furnished or filed with the SEC in connection with this proposed transaction.

Financial assistance

Mr. Lin Shuipan and his spouse and relatives have been providing financial assistance to support our operations from time to time, and such financial assistance is generally in the forms of interim financing and personal guarantee. 

As of December 31, 2013, Mr. Lin, Ms. Chen Xiayu and Mr. Ding were guarantors for certain bank loans made available to us for up to RMB550.0 million (US$90.9 million). Please see also note 22 of our consolidated financial statements included elsewhere in this form.

Loan from a shareholder

In June 2013, the Company obtained a loan of HKD60.0 million (RMB48.7 million) from a shareholder. The loan bears an annual interest rate of 7.0% and is repayable on May 31, 2015. During the year, interest expenses of RMB1.9 million were incurred. The total amount of principal and accrued unpaid interest under the loan outstanding was RMB53.4 million as of December 31, 2013. The shareholder loan was obtained to finance the construction project in Jiangxi Province.

C. INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

Item 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Consolidated Financial Statements

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

Legal Proceedings

We are not involved in any legal proceedings or arbitration proceedings that management believes will have a material adverse effect on the Company’s financial position or profitability.

Dividend Policy

The payment of dividends by us in the future will be contingent upon revenues and earnings, if any, capital requirements and our general financial condition. The payment of any dividends is within the discretion of the board of directors and subject to the limitations imposed by British Virgin Islands law and the Memorandum and Articles of Association of the Company. It is the present intention of the board of directors to retain all earnings, if any, for use in business operations and, accordingly.

Our Company is a holding company incorporated in the British Virgin Islands and relies principally on dividends paid by operating subsidiaries in the PRC for cash requirements, including the funds necessary to service any debt we may incur. PRC subsidiaries are restricted in their ability to transfer a portion of their net income to us, whether in the form of dividends, loans or advances. Further, if any of our subsidiaries incurs debt in their own name in the future, the instruments governing the debt may restrict dividends or other distributions on its equity interest to our Company. Any limitation on the ability of our subsidiaries to pay dividends could materially adversely limit our ability to pay dividends to our shareholders.

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. OFFER AND LISTING DETAILS

Price Range of Our Ordinary Shares, Warrants and Units

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

	Ordinary Shares				Warrants(1)				Units(1)
	High		Low		High		Low		High		Low
Yearly Highs and Lows
Year 2013	$	1.69	$	1.10	$	-	$	-	$	-	$	-
Year 2012	$	4.98	$	1.18	$	-	$	-	$	-	$	-
Year 2011	$	8.58	$	2.83	$	3.78	$	0.0002	$	10.25	$	0.51
Year 2010	$	10.30	$	6.21	$	4.80	$	1.91	$	12.60	$	10.00
Year 2009	$	13.69	$	7.25	$	4.85	$	0.03	$	19.98	$	7.13
Quarterly Highs and Lows
Fourth Quarter of 2013	$	1.69	$	1.41	$	-	$	-	$	-	$	-
Third Quarter of 2013	$	1.58	$	1.10	$	-	$	-	$	-	$	-
Second Quarter of 2013	$	1.38	$	1.12	$	-	$	-	$	-	$	-
First Quarter of 2013	$	1.55	$	1.23	$	-	$	-	$	-	$	-
Fourth Quarter of 2012	$	1.76	$	1.18	$	-	$	-	$	-	$	-
Third Quarter of 2012	$	2.35	$	1.60	$	-	$	-	$	-	$	-
Second Quarter of 2012	$	3.65	$	1.81	$	-	$	-	$	-	$	-
First Quarter of 2012	$	4.98	$	2.98	$	-	$	-	$	-	$	-
Monthly Highs and Lows
April 2014 (through April 29, 2014)	$	1.76	$	1.61	$	-	$	-	$	-	$	-
March 2014	$	1.75	$	1.71	$	-	$	-	$	-	$	-
February 2014	$	1.74	$	1.70	$	-	$	-	$	-	$	-
January 2014	$	1.73	$	1.67	$	-	$	-	$	-	$	-
December 2013	$	1.69	$	1.65	$	-	$	-	$	-	$	-
November 2013	$	1.54	$	1.41	$	-	$	-	$	-	$	-
October 2013	$	1.68	$	1.49	$	-	$	-	$	-	$	-

(1) The terms of our warrants and units expired on November 8, 2011.

The closing price of our ordinary shares on April 29, 2014 was US$1.62.

As of March 31, 2014, we had approximately 6 holders of record of our ordinary shares. Such number does not include beneficial owners holding shares through nominee names.

B. PLAN OF DISTRIBUTION

Not applicable.

C. MARKETS

Our ordinary shares are traded on NADAQ Global Market as of the date of this report under the symbols “EDS”.

Our warrants and units were previously traded in public markets. Each of our warrants was exercisable into one ordinary share. Each of our units consisted of one ordinary share and one warrant. Our warrants expired on November 8, 2011.

Trading of our ordinary shares, warrants and units previously took place on the NYSE Amex under the symbols “TTY”, “TTYWW” and “TTYUU,” respectively. Our units commenced trading on November 9, 2007. Our ordinary shares and warrants commenced trading separately from our units on December 3, 2007.

Trading of our ordinary shares, warrants and units were transferred to the NASDAQ Capital Market on October 13, 2009 and to the NASDAQ Global Market on June 28, 2010 under the symbols “EDS”, “EDSWW” and “EDSUU,” respectively. Our warrants and units were withdrawn from listing on November 8, 2011 due to the expiration of their terms.

D. SELLING SHAREHOLDERS

Not applicable.

E. DILUTION

Not applicable.

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F. EXPENSES OF THE ISSUE

Not applicable.

Item 10. ADDITIONAL INFORMATION

A. SHARE CAPITAL

Not applicable.

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

Our Amended and Restated Memorandum and Articles of Association were adopted on September 24, 2009.

The following are summaries of material terms and provisions of our Amended and Restated Memorandum and Articles of Association, and the BVI Business Companies Act, 2004 (as amended) (the "BVI Act").

Incorporation

We were incorporated in the British Virgin Islands as a business company on April 21, 2009, with company number 1529518. Clause 5 of our Amended and Restated Memorandum of Association (the "Memorandum") provides that the objects for which we are established are unrestricted and we shall have full power and authority to carry out any object not prohibited by the BVI Act or any other law of the British Virgin Islands.

Board of Directors

Article 15.9 of our Amended and Restated Articles of Association (the "Articles") provides that a director who is interested in a transaction entered into or to be entered into by us may (a) vote on a matter relating to the transaction; (b) attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and (c) sign a document on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.

Article 13.8 provides that the remuneration of directors (whether by way of salary, commission, participation in profits or otherwise) in respect of services rendered or to be rendered in any capacity shall be fixed by a resolution of directors or a resolution of our shareholders. There is no provision under the Memorandum and Articles or the BVI Act that the remuneration of directors be approved by independent directors.

Article 16.1 provides that the business of our Company shall be managed by the directors, who may exercise all such powers of our Company necessary for managing and for directing and supervising, the business and affairs of our Company as are not required by the BVI Act or by the Memorandum or the Articles required to be exercised by our shareholders.

There is no provision in the Articles requiring the retirement of directors. Article 13.7 provides that a director shall not require a share qualification.

Shares

Under the Memorandum we are authorized to issue a maximum of 60,000,000 shares with a par value of US$0.0001 each, divided into (a) 55,000,000 ordinary shares and (b) 5,000,000 preferred shares. Our directors may, by amending the Memorandum and the Articles, determine the designations, powers, preferences, participation, optional and other rights, if any, and the qualifications, limitations and restrictions, if any, including, without limitation, dividend rights, conversion rights, redemption privileges, voting powers and liquidation preferences that any Preferred Shares confers on the holder.

Our Company is a company limited by shares and the liability of each shareholder is limited to (a) the amount unpaid on that shareholder's shares; and (b) any liability to repay a distribution which is made when our Company is insolvent.

Each of our ordinary shares confers on the holder:

(a) the right to one vote on any resolution of our shareholders;

(b) the right to an equal share in any dividend paid by us in accordance with the BVI Act; and

(c) the right to an equal share in the distribution of our surplus assets on a liquidation.

There is no provision in our Articles imposing a limitation to the right to own our shares. There is no provision in the Memorandum and Articles or under the BVI Act governing the ownership threshold above which shareholder ownership must be disclosed.

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Redemption and Repurchase of Shares

Under our Articles, our directors may, on our behalf, purchase, redeem or otherwise acquire any of our shares for such consideration as our directors consider fit, and either cancel or hold such shares as treasury shares, provided that immediately after such purchase, redemption or other acquisition, (a) the value of our assets exceeds our liabilities; and (b) we are able to pay our debts as they fall due.

Modification of Rights

As permitted by the BVI Act and our Memorandum and Articles, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only with the consent in writing of the holders of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths of the issued shares of any other class of shares which may be affected by such variation. The creation or issue of shares ranking pari passu with a class of shares shall not be deemed to be a variation of that class of shares.

Shareholders Meetings

Under our Articles, the directors may convene meetings of our shareholders at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of the shareholders entitled to exercise at least thirty percent of the voting rights in respect of the matter for which the meeting is requested. Shareholders meetings shall take place at least annually.

A meeting may be called by not less than seven days' notice in writing. Notice of every shareholders meeting shall be given to all of our shareholders.

A meeting called by shorter notice will still be valid if the shareholders holding a ninety percent majority of the total voting rights on all the matters to be considered at the meeting have waived notice of the meeting and, for this purpose, the presence of a shareholder at the meeting shall constitute waiver on his part.

A shareholders meeting is duly constituted if there are present in person or by proxy shareholders entitled to exercise at least fifty percent of the voting rights of the shares entitled to vote at the meeting.

Anti-Takeover Provisions

Clause 9 of the Memorandum provides that subject to the BVI Act, our Memorandum or Articles may be amended by a resolution of directors or resolution of shareholders. Our board of directors may therefore amendment our Memorandum or Articles without shareholder approval, and this ability could have the effect of delaying, deferring or preventing a change in control of our company.

A copy of our Memorandum and Articles was filed as an exhibit to our annual report on Form 20-F (File No. 001-33799-10735637) filed with the Securities and Exchange Commission on April 7, 2010.

C. MATERIAL CONTRACTS

We have not entered into any material contracts other than in the ordinary course of business or other than those described below and in Item 4. “Information on the Company”, Item 5. “Operating and Financial Review and Prospects” and elsewhere in this annual report.

On October 20, 2011, we renewed the technology cooperation agreement with the China Institute of Sport Science for an additional term of five years, which governs our exclusive strategic collaboration with the China Institution of Sport Science. For more information of this agreement, see Item 5. “Operating and Financial Review and Prospects—Research and Development, Patents and Licenses, etc.— China Institute of Sport Science.”

On December 20, 2011, we entered into an agreement with the Municipal Government of Ruichang City, which requires us to acquire land parcels in Ruichang, Jiangxi Province with an aggregate site area of 400,000 square meters. The total consideration for the land parcels will amount to RMB198 million ($32.7 million), of which a deposit of RMB46.8 million ($7.7 million) was paid as a performance bond on December 28, 2011 and an additional premium of RMB73.1 million (US$12.1 million) was paid on December 27, 2012. The remaining amount of RMB78.1 million ($12.9 million) is disclosed as a capital commitment in Item 5.F. “Contractual Obligations and Commercial Commitments.” We financed the deposit from our working capital and a shareholder loan and intend to finance the remaining amount in cash through our working capital.

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D. EXCHANGE CONTROLS

All of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar. Fluctuations in exchange rates, particularly those involving the U.S. dollar may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Renminbi terms. Where our operations conducted in Renminbi are reported in dollars, such fluctuations could result in changes in reported results which do not reflect changes in the underlying operations. Since January 1, 1994, the PRC government has used a unitary managed floating rate system. Under that system, the People’s Bank of China, or PBOC, publishes a daily-base exchange rate with reference primarily to the supply and demand of the Renminbi against the U.S. dollar and other foreign currencies in the market during the previous day. Authorized banks and financial institutions are allowed to quote buy and sell rates for Renminbi within a specified bank around the central bank’s daily exchange rate. On July 21, 2005, PBOC announced an adjustment of the exchange rate of the U.S. dollar to Renminbi from 1:8.27 to 1:8.11 and modified the system by which the exchange rates are determined. PBOC regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate. The RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. It is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. On March 17, 2014, the People’s Bank of China announced that the RMB exchange rate flexibility increased to 2% in order to proceed further with reform of the RMB exchange rate regime. These could result in a further and more significant floatation in the RMB’s value against the U.S. Dollars.

While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further revaluation and a significant fluctuation of the exchange rate of the Renminbi against the U.S. dollar, including possible devaluations. As substantially all of our revenues are denominated in Renminbi, such a potential future devaluation of the Renminbi against the U.S. dollar could negatively impact our results of operations.

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

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

Renminbi is currently convertible to foreign currency with respect to “current account” transactions, but not with respect to “capital account” transactions. Current account transactions include ordinary course import/export transactions, payments for services rendered and payments of license fees, royalties, interest on loans and dividends. Capital account transactions include cross-border investments and repayments of principal of loans. Currently, our PRC subsidiaries may purchase foreign exchange currencies for settlement of “current account transactions,” including payment of dividends to us and payment of license fees to content licensors, without the approval of the State Administration for Foreign Exchange, or SAFE. Our PRC subsidiaries may also retain foreign exchange currencies in their current accounts, subject to a ceiling approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant PRC governmental authorities may limit or eliminate the ability of our PRC subsidiaries to purchase and retain foreign currencies in the future. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from or registration with SAFE. This could affect our PRC subsidiaries’ ability to obtain debt or equity financing from outside the PRC, including by means of loans or capital contributions from us.

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

E. TAXATION

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

British Virgin Islands Taxation

Under British Virgin Islands law as currently in effect, a holder of ordinary shares who is not a resident of the British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the ordinary shares and all holders of ordinary shares are not liable to the British Virgin Islands for income tax on gains realized during that year on sale or disposal of such shares. The British Virgin Islands does not impose a withholding tax on dividends paid by a company incorporated in the British Virgin Islands. There is no tax treaty currently in effect between the United States and the British Virgin Islands or between People’s Republic of China and the British Virgin Islands. However, the British Virgin Islands had entered into tax information exchange treaties with People’s Republic of China and the United States respectively.

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People’s Republic of China Taxation

Under the current Enterprise Income Tax Law and Implementing Rules of the People’s Republic of China, we may be deemed as a “resident enterprise,” which, if applied to us, would impose a 10% withholding tax on dividends payable to our non-PRC enterprise shareholders and with respect to gains derived by our non-PRC enterprise shareholders from disposition of our shares. The current law and its implementing rules are unclear as to how to determine a PRC “resident enterprise” status for non-Chinese enterprise or enterprise group controlled entities. See Item 3.D. “Key Information — Risk Factors — Any changes in PRC policies on enterprise income tax could adversely affect our ability to pay dividends and our financial condition.”

If we are not deemed as a resident enterprise, then dividends payable to our non-PRC shareholders and gains from disposition of our shares by our non-PRC shareholders will not be subject to PRC income tax withholding.

United States Federal Income Taxation

General

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

· an individual citizen or resident of the United States;

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

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

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

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

This summary is based on the Internal Revenue Code of 1986, as amended, or the “Code”, its legislative history, existing, proposed and temporary United States Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal Revenue Service will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position could not be sustained.

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

· financial institutions or financial services entities;

· broker-dealers;

· taxpayers who have elected mark-to-market accounting;

· tax-exempt entities or organizations, including an “individual retirement account” or “Roth IRA” as defined in Section 408 or 408A of the Code, respectively;

· governments or agencies or instrumentalities thereof;

· insurance companies;

· partnerships or other entities treated as partnerships or other pass-through entities for U.S. federal income tax purposes or persons holding ordinary shares through any such entities;

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· regulated investment companies;

· real estate investment trusts;

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

· persons that actually or constructively own 10% or more of our voting shares;

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

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

· persons liable for alternative minimum tax;

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

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

We have not sought, and will not seek, a ruling from the Internal Revenue Service, or IRS, or an opinion of counsel as to any U.S. federal income tax consequence described herein. The IRS may disagree with the consequences described herein, and its determination may be upheld by a court. Moreover, we cannot assure you that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.

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

Tax Consequences to U.S. Holders of Ordinary Shares

Taxation of Distributions Paid on Ordinary Shares

Subject to the passive foreign investment company, or PFIC, rules discussed below, the U.S. dollar amount of distributions on our ordinary shares (including the amount of PRC tax withheld, if any), other than certain pro rata distributions of our ordinary shares, generally will be includable in a U.S. Holder’s gross income as ordinary dividend income when actually or constructively received to the extent the distribution is paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). Such dividend will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Distributions in excess of such earnings and profits will be applied against and reduce the U.S. Holder’s basis in its ordinary shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such ordinary shares. We may not, however, calculate earnings and profits in accordance with U.S. tax principles. In this case, all distributions by us to U.S. Holders generally will be treated as dividends.

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

If PRC taxes apply to dividends paid to a U.S. Holder on our ordinary shares, such taxes may be treated as foreign taxes eligible for credit against such holder’s U.S. federal income tax liability (subject to certain limitations), and, if we are deemed to be a PRC “resident enterprise” under PRC tax law (see “Risk Factors – Risks Relating to the PRC – Any changes in PRC policies on enterprise income tax could adversely affect our ability to pay dividends and our financial condition.”), a U.S. Holder may be entitled to certain benefits under the income tax treaty between the United States and the PRC. U.S. Holders should consult their own tax advisors regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.

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Taxation on the Disposition of Ordinary Shares

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

The adjusted tax basis in an ordinary share generally will be equal to the cost of such ordinary share.

In the case of a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares is generally eligible for a preferential rate of taxation applicable to capital gains, if the U.S. Holder’s holding period for such ordinary shares exceeds one year (i.e., such gain is long-term capital gain). The deductibility of capital losses for United States federal income tax purposes is subject to limitations under the Code. Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.

If PRC taxes apply to any gain from the disposition of our ordinary shares by a U.S. Holder and if we are deemed to be a PRC, “resident enterprise” under PRC tax law (see “Risk Factors – Risks Relating to the PRC – Any changes in PRC policies on enterprise income tax may adversely affect our ability to pay dividends and our financial condition”), a U.S. Holder should consult its own tax advisor regarding the creditability of any such PRC tax and their eligibility for the benefits of the income tax treaty between the United States and the PRC.

Passive Foreign Investment Company Rules

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

We do not believe that we were a PFIC for the 2013 taxable year. Our actual PFIC status for the 2014 taxable year or any subsequent taxable year will not be determinable until after the end of each such taxable year. The PFIC determination is dependent on a number of factors, some of which are beyond our control, including the amount of our operating income and the market valuation of our assets, including goodwill, and certain aspects of the PFIC rules are not entirely certain. Accordingly, we cannot assure you with respect to our status as a PFIC for the 2012 taxable year or any future taxable year. See “—Risk Factors— We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.”

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

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

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

Under these rules,

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

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

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

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

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

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

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

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

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

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

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

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

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If a U.S. Holder owns (or is deemed to own) shares during any year in which we are a PFIC and the U.S. Holder recognizes gain on a disposition of our ordinary shares or receives distributions with respect to our ordinary shares, the U.S. Holder generally will be required to file an IRS Form 8621 with respect to the Company, generally with the U.S. Holder’s federal income tax return for that year. Additionally, recently enacted legislation creates an additional annual filing requirement for U.S. persons who are shareholders of a PFIC. However, pursuant to recently issued guidance, this additional filing obligation is suspended until the IRS releases the relevant final form. If our company were a PFIC for a given taxable year, then each U.S. Holder is urged to consult its tax advisor concerning the applicable annual filing requirements.

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

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

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

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

Dividends and gains that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject to tax (but not the Medicare contribution tax described below) in the same manner as for a U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.

Backup Withholding and Information Reporting

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

In addition, a payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements.

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

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

Foreign Asset Reporting

Certain U.S. Holders who are individuals are required to report information relating to an interest in our ordinary shares, subject to certain exceptions (including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are urged to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition of our ordinary shares.

Medicare Tax

Certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their dividend income and net gains from the disposition of ordinary shares. Each U.S. Holder that is an individual, estate or trust is urged to consult its tax advisors regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our ordinary shares.

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F. DIVIDENDS AND PAYING AGENTS

Not applicable.

G. STATEMENTS BY EXPERTS

Not applicable.

H. DOCUMENTS ON DISPLAY

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

I. SUBSIDIARY INFORMATION

Not applicable.

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency risk

We mainly operate in the PRC with most of the transactions settled in RMB. Our assets and liabilities, and transactions arising from its operations are mainly denominated in RMB, and therefore the overall foreign currency risk was considered minimal. We have not used any forward contracts, currency borrowings or other means to hedge our foreign exchange exposure. Nevertheless, the management will continue to monitor the foreign exchange exposure and adopt prudent measures as appropriate.

Credit risk

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

We offer revolving credit to domestic distributors. This revolving credit provides for a maximum credit limit that may be outstanding at any one time based on, among others, credit history, market conditions, prior year's purchases and estimated purchases for the coming year. In considering the amount of revolving credit, we also take into account the funding needs of the distributors in expanding their retail network. We generally evaluate the credit limits granted to distributors upon renewal of the relevant distribution agreements.

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

Our exposure to credit risk is influenced mainly by the customer characteristics. The default risk of the industry in which our customers operate also has an influence on credit risk but only to a lesser extent. We have a high concentration of credit: 41.6% and 41.8 % of our total trade receivables were due from our five largest customers for the years ended December 31, 2012 and 2013, respectively.

Our maximum credit exposure, without taking collateral into account, is represented by the carrying amount of each financial asset. We do not provide any guarantees. We closely monitor trade receivable balances that are overdue by 30 days or more by taking into account, among others, the ability and intent of the distributor to settle the balance. We, however, will not make any provision for the overdue balance if (1) we have ongoing trading with the distributor; (2) we receive payments on other invoices from the distributor; and (3) we have no dispute on the amount overdue with the distributor.

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Interest rate risk

Our interest rate risk arises primarily from cash and deposits at bank and bank loans. We do not have any significant exposure to risk of changes in market interest rates as our cash and deposit and debt obligations were all with fixed interest rates.

Commodity price risk

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

Liquidity risk

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

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

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PART II 

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

None.

Item 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting 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 our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we determined that, as of December 31, 2013, the Company’s internal control over financial reporting was effective based on those criteria.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Annual Report.

Changes in Internal Control over Financial Reporting

During the year ended December 31, 2013, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. Yea-Mow Chen qualifies as an Audit Committee Financial Expert as defined by the applicable rules of the Securities and Exchange Commission and is independent as defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.

Our board of directors has determined that Mr. Jin Jichun and Mr. Pang Xiaozhong, the other two members of the Audit Committee, are independent as such term is defined by Rule 5605(a)(2) of the NASDAQ Listing Rules.

Item 16B. CODE OF ETHICS

Our board of directors has adopted a code of ethics, which is applicable to our senior executive and financial officers. In addition, our board of directors has adopted a code of conduct, which is applicable to all of our directors, officers and employees. Our code of ethics sets forth and summarizes certain policies of the Company related to legal compliance and ethical business practices. Essentially, each officer, employee and member of the Board of Directors of the Company is expected, and required, to comply with the law and to conduct the business of the Company in an ethical manner. This code is intended to comply with the standards set forth in Section 406 of the Sarbanes-Oxley Act of 2002. The full text of our code of ethics has been filed posted on our internet website, www.ir.xdlong.cn.

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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 Crowe Horwath (HK) CPA Limited (“CHHK”) for the periods indicated. We did not pay any other fees to our principal external auditors during the periods indicated below.

	For the year ended December 31,
	2012		2013
	RMB		RMB		US$
	(in thousands)
Audit fees*		1,277		1,308		216
Audit-related fees**		467		381		63
Total		1,744		1,689		279

* CHHK audit fees for 2013 consisted of fees in relation to the audit of our financial statements for 2013. CHHK audit fees for 2012 consisted of fees in relation to the audit of our financial statements for 2012

** CHHK audit-related fees included the fees for the reviews of our interim financial statements included in our Form 6-K filings. Pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X, the engagement of audit or non-audit service is approved by our audit committee before we engaged the accountant to render such service.

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

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

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

During the year ended December 31 2013, there was no purchase made by or on behalf of us or any affiliated purchaser of shares of any class of our securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934.

Item 16F.  CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not Applicable

Item 16G.  CORPORATE GOVERNANCE

We are incorporated under the laws of British Virgin Islands. Our ordinary shares is currently listed on the NASDAQ Global Select Market and, for so long as our securities continue to be listed, we will remain subject to the rules and regulations established by NASDAQ as being applicable to listed companies. NASDAQ has adopted its Rule 5600 Series to impose various corporate governance requirements on listed securities. Rule 5615 provides that foreign private issuers such as our Company are required to comply with certain specific requirements of the Rule 5600 Series, but, as to the balance of the Rule 5600 Series, foreign private issuers are not required to comply if the laws of their home country do not otherwise require compliance.

We currently comply with the specifically mandated provisions of the Rule 5600 Series. In addition, we have elected to voluntarily comply with certain other requirements of the Rule 5600 Series, notwithstanding that our home country does not mandate compliance; although we may in the future determine to cease voluntary compliance with those provisions of the Rule 5600 Series. However, we have determined not to comply with the following provisions of the Rule 5600 Series since the laws of the British Virgin Islands do not require compliance:

· NASDAQ Rule 5605(c)(2)(A) requires that each company must have an audit committee of at least three members and such audit committee must be comprised only of Independent Directors as defined in the NASDAQ Rule 5605(a)(2). Under the laws of the British Virgin Islands, we are not required to have an audit committee of at least three members. Our audit committee is comprised of two members, both of whom are Independent Directors as defined in the NASDAQ Rule 5605 (a)(2).

· NASDAQ Rule 5605(d) requires Independent Director involvement in the determination of executive compensation. In particular, NASDAQ 5605(d)(B) requires that the chief executive officer may not be present during voting or deliberations of the compensation committee. Our chief executive officer, however, can be invited to attend our compensation committee meetings.

74

· NASDAQ Rule 5610 requires that each company shall adopt a code of conduct applicable to all directors, officers and employees, which shall be publicly available. A code of conduct satisfying this rule must comply with the definition of a "code of ethics" set out in Section 406(c) of the Sarbanes-Oxley Act of 2002 and any regulations promulgated thereunder by the Commission. In addition, the code must provide for an enforcement mechanism. Any waivers of the code for directors or executive officers must be approved by the board. Our ethics administrator, who is the chairman of our audit committee, has the authority to grant a specific limited waiver of any provision of our ethics code.

75

PART III

Item 17.      FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18 (see below).

Item 18.      FINANCIAL STATEMENTS

Our consolidated financial statements are included at the end of this Annual Report on Form 20-F.

Item 19.      EXHIBITS

Exhibit No.	Description
1.1†	Amended and Restated Memorandum and Articles of Association
2.1††	Specimen Stock Certificate
4.1††	Exceed Company Ltd. 2010 Equity Incentive Plan
4.2†††	Translation of the Technology Cooperation Agreement with China Institute of Sports Science of the General Administration of Sport of China dated October 20, 2011
4.3†††	Translation of the Contract for the Investment Project Regarding Setting up a Sportswear Manufacturing Base in Ruichang City with the municipal government of Ruichang City, Jiangxi Province dated December 20, 2011
4.11††††	Agreement and Plan of Merger, dated as of December 2, 2013, among Exceed Limited, Pan Long Company Limited and Pan Long Investment Holdings Limited
8.1	List of Subsidiaries
12.1	Certification of the Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
12.2	Certification of the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002
13.1	Certification of the Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification of the Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1	Consent of Crowe Horwath (HK) CPA Limited, dated April 30, 2014

^† Incorporated by reference to the Annual Report on Form 20-F (File No. 001-33799) filed with the Commission on April 7, 2010.

^†† Incorporated by reference to the Registration Statement on Form S-8 (File No. 333-171280) filed with the Commission on December 20, 2010.

†††	Incorporated by reference to the Annual Report on Form 20-F (File No. 001-33799) filed with the Commission on April 30, 2011.
††††	Incorporated by reference to the Current Report on Form 6-K (File No. 001-33799) filed with the Commission on December 2, 2013

76

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

EXCEED COMPANY LTD. (Registrant)
By:	/s/ Lin Shuipan
	Name: Lin Shuipan
	Title: Chairman and Chief Executive Officer

Date: April 30, 2014

77

Audited Financial Statements

EXCEED COMPANY LTD. AND ITS SUBSIDIARIES

(Incorporated in the British Virgin Islands with limited liability)

December 31, 2013

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONTENTS

	Pages
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
AUDITED FINANCIAL STATEMENTS
Consolidated:
Statements of profit or loss and other comprehensive income	F-2
Statements of financial position	F-3
Statements of changes in equity	F-4 – F-7
Statements of cash flows	F-8 – F-9
Notes to consolidated financial statements	F-10 – F-61

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Exceed Company Ltd.

We have audited the accompanying consolidated statements of financial position of Exceed Company Ltd. and its Subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of profit or loss and other comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Crowe Horwath (HK) CPA Limited

Hong Kong, China

April 30, 2014

F-1

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Year ended December 31, 2013

	Notes		2013			2013			2012			2011
			(in thousands except for share and per share data)
			USD'000			RMB'000			RMB'000			RMB'000
REVENUE		6		269,193			1,629,616			2,383,516			3,288,561
Cost of sales				(196,352	)		(1,188,657	)		(1,707,801	)		(2,296,298	)
Gross profit				72,841			440,959			675,715			992,263
Other income and gains		6		2,007			12,150			15,917			14,791
Selling and distribution expenses				(43,086	)		(260,828	)		(347,680	)		(377,903	)
Administrative expenses				(8,458	)		(51,203	)		(67,932	)		(77,073	)
Research and development expenses				(7,700	)		(46,613	)		(44,227	)		(53,863	)
OPERATING PROFIT				15,604			94,465			231,793			498,215
Finance costs		7		(185	)		(1,122	)		(638	)		(856	)
Gain from change in fair value of contingent share liability		6		-			-			-			38,645
PROFIT BEFORE TAX		8		15,419			93,343			231,155			536,004
Tax		10		(4,592	)		(27,801	)		(32,213	)		(65,922	)
PROFIT FOR THE YEAR				10,827			65,542			198,942			470,082
Other comprehensive income for the year, net of tax:
Items that may be reclassified separately to profit or loss:
Exchange differences on translation of financial statements of overseas subsidiaries
Exchange difference arising during the year				64			392			(49	)		4,042
Total comprehensive income for the year attributable to equity holders of the Company				10,891			65,934			198,893			474,124
EARNINGS PER SHARE		11
Net profit per share
Basic			USD	0.33		RMB	1.98		RMB	6.03		RMB	15.83
Diluted			USD	0.33		RMB	1.98		RMB	6.03		RMB	13.72
Weighted average number of  shares outstanding		11
Basic				33,081,656			33,081,656			32,997,441			29,700,010
Diluted				33,081,656			33,081,656			32,997,441			34,273,028

The shares which are held in escrow are regarded as issued and not outstanding.

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

F-2

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31, 2013

	Notes		2013			2013			2012
			USD'000			RMB'000			RMB'000
NON-CURRENT ASSETS
Property, plant and equipment		13		93,765			567,627			330,914
Prepaid land lease payments		14		4,354			26,355			27,103
Deposit paid for acquisition of land use rights		15		24,776			149,986			149,986
Total non-current assets				122,895			743,968			508,003
CURRENT ASSETS
Inventories		16		3,139			19,001			11,655
Trade receivables		17		188,954			1,143,872			1,084,535
Prepayments, deposits and other receivables		18		3,258			19,719			24,396
Cash and cash equivalents		19		80,388			486,647			637,184
Total current assets				275,739			1,669,239			1,757,770
CURRENT LIABILITIES
Trade payables		20		9,773			59,160			8,831
Deposits received, other payables and accruals		21		9,060			54,849			61,681
Interest-bearing bank borrowings		22		1,652			10,000			30,000
Tax payable				1,595			9,653			2,357
Total current liabilities				22,080			133,662			102,869
NET CURRENT ASSETS				253,659			1,535,577			1,654,901
TOTAL ASSETS LESS CURRENT LIABILITIES				376,554			2,279,545			2,162,904
NON-CURRENT LIABILITIES
Loan from a shareholder		23		8,052			48,747			-
Total non-current liabilities				8,052			48,747			-
Net assets				368,502			2,230,798			2,162,904
STOCKHOLDERS' EQUITY
Preferred stock – par value of USD0.0001 per share; 5,000,000 shares authorized; nil issued and outstanding				-			-			-
Common stock – par value of USD0.0001 per share; 55,000,000 shares authorized; 33,736,313 shares issued and 33,124,349 outstanding (2012: 55,000,000 shares authorized; 33,634,629 shares issued and 33,022,665 shares outstanding)		24		4			23			23
Treasury shares		24		(2,626	)		(15,898	)		(15,898	)
Retained profits				286,838			1,736,428			1,678,920
Reserves		24		84,286			510,245			499,859
Total equity				368,502			2,230,798			2,162,904

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

F-3

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Year ended December 31, 2013

																		Employee
	Outstanding													Statutory				share-based					Contingent
	common stock					Capital		Other			Treasury			surplus		Exchange		payment		Retained			shares			Total
	Shares			Amount		reserve (i)		reserve (ii)			shares			fund (iii)		reserve (iv)		reserve (v)		profits			issuable			Equity
				RMB '000		RMB '000		RMB '000			RMB '000			RMB '000		RMB '000		RMB '000		RMB '000			RMB '000			RMB '000
At January 1, 2011		25,357,563			17		153,764		(148,443	)		-			93,586		16,563		7,319		1,077,313			197,419			1,397,538
Profit for the year		-			-		-		-			-			-		-		-		470,082			-			470,082
Other comprehensive income: Exchange difference		-			-		-		-			-			-		4,042		-		-			-			4,042
Recognition of equity-settled share-based payments		205,665			-		-		-			-			-		-		7,861		-			-			7,861
Transfer to statutory surplus		-			-		-		-			-			44,997		-		-		(44,997	)		-			-
Repurchase of treasury shares (Note 24(b))		(415,751	)		-		-		-			(11,549	)		-		-		-		-			-			(11,549	)
Exercise of warrants (Note 24(c))		10,993			-		371		-			-			-		-		-		-			-			371
Contingent shares issuable		-			-		-		-			-			-		-		-		-			94,069			94,069
Escrow shares released in relation to 2010 profit (Note 24(a)(i))		4,277,590			3		197,416		-			-			-		-		-		-			(197,419	)		-
At December 31, 2011 and January 1, 2012		29,436,060			20		351,551		(148,443	)		(11,549	)		138,583		20,605		15,180		1,502,398			94,069			1,962,414

continued/…

F-4

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)

Year ended December 31, 2013

																			Employee
	Outstanding													Statutory					share-based					Contingent
	common stock					Capital		Other			Treasury			surplus		Exchange			payment		Retained			shares			Total
	Shares			Amount		reserve (i)		reserve (ii)			shares			fund (iii)		reserve (iv)			reserve (v)		profits			issuable			Equity
				RMB '000		RMB '000		RMB '000			RMB '000			RMB '000		RMB '000			RMB '000		RMB '000			RMB '000			RMB '000
At December 31, 2011 and January 1, 2012		29,436,060			20		351,551		(148,443	)		(11,549	)		138,583		20,605			15,180		1,502,398			94,069			1,962,414
Profit for the year		-			-		-		-			-			-		-			-		198,942			-			198,942
Other comprehensive income: Exchange difference		-			-		-		-			-			-		(49	)		-		-			-			(49	)
Recognition of equity-settled share-based payments		144,166			-		-		-			-			-		-			5,946		-			-			5,946
Transfer to statutory surplus		-			-		-		-			-			22,420		-			-		(22,420	)		-			-
Repurchase of treasury shares (Note 24(b))		(196,213	)		-		-		-			(4,349	)		-		-			-		-			-			(4,349	)
Escrow shares released in relation to 2011 profit (Note 24(a)(i))		3,638,652			3		94,066		-			-			-		-			-		-			(94,069	)		-
At December 31, 2012 and January 1, 2013		33,022,665			23		445,617		(148,443	)		(15,898	)		161,003		20,556			21,126		1,678,920			-			2,162,904

continued/…

F-5

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)

Year ended December 31, 2013

																	Employee
	Outstanding												Statutory				share-based
	common stock				Capital		Other			Treasury			surplus		Exchange		payment		Retained			Total
	Shares		Amount		reserve (i)		reserve (ii)			shares			fund (iii)		reserve (iv)		reserve (v)		profits			Equity
			RMB '000		RMB '000		RMB '000			RMB '000			RMB '000		RMB '000		RMB '000		RMB '000			RMB '000
At December 31, 2012 and January 1, 2013		33,022,665		23		445,617		(148,443	)		(15,898	)		161,003		20,556		21,126		1,678,920			2,162,904
Profit for the year		-		-		-		-			-			-		-		-		65,542			65,542
Other comprehensive income: Exchange difference		-		-		-		-			-			-		392		-		-			392
Recognition of equity-settled share-based payments		101,684		-		-		-			-			-		-		1,960		-			1,960
Transfer to statutory surplus		-		-		-		-			-			8,034		-		-		(8,034	)		-
At December 31, 2013		33,124,349		23		445,617		(148,443	)		(15,898	)		169,037		20,948		23,086		1,736,428			2,230,798
At December 31, 2013 (USD'000)				4		73,611		(24,521	)		(2,626	)		27,923		3,460		3,813		286,838			368,502

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

F-6

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)

Year ended December 31, 2013

Notes:

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

The capital reserve at January 1, 2011 primarily included:

(a) RMB83,597,000 being the excess of the consideration received from the equity holder of a subsidiary over the nominal value of the issued capital of a subsidiary pursuant to Group Reorganization;

(b) RMB28,400,000 being a contribution from an equity holder of the Company in 2008 pursuant to an agreement dated March 28, 2008 whereby the equity holder agreed to pay the contribution if the Group achieved certain profit target for 2007;

(c) RMB326,117,000 being the excess of the consideration received (net) from the equity holders of 2020 for the issuance of 10,500,000 shares of the Company’s common stock and the redemption of 1,343,082 of 2020 common stock (Note 1), and was retroactively adjusted for the Business Combination with Windrace International Company Limited on October 21, 2009;

(d) RMB204,997,000 being the excess of the consideration received from the equity holders of Windrace International Company Limited pursuant to the investment agreement on July 27, 2009 (as described in Note 24(a)(ii));

(e) RMB240,992,000 being escrow shares released in relation to 2009 profit (as described in Note 24(a)(i)); and

(f) Exercise of 879,372 warrants of RMB31,508,000 in 2010 (Note 24 (c))

offset by RMB761,854,000 being the deemed dividend for the fair value of the contingently issuable shares (as described in Note 24 (a)(i)).

(ii) The other reserve represented distribution to certain holders of the Company of RMB189,504,000 pursuant to a share purchase agreement on March 28, 2008, offset by RMB41,061,000 being write off of accrued interest on preferred shares.

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

(iv) Exchange fluctuation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. This reserve is presented in accordance with the accounting policy in Note 2.2.

(v) Share-based compensation reserve represents the value of employee services in respect of restricted shares granted to directors and employees of the Group.

F-7

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31, 2013

	Notes		2013			2013			2012			2011
			USD'000			RMB'000			RMB'000			RMB'000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax				15,419			93,343			231,155			536,004
Non-cash adjustments for:
Interest income		6, 8		(2,007	)		(12,150	)		(15,122	)		(11,858	)
Finance costs		7		185			1,122			638			856
(Gain)/loss on disposal of items of property, plant and equipment, net				42			255			619			(56	)
Depreciation		13		2,884			17,458			18,213			18,248
Amortization of prepaid land lease payments		8,14		124			748			748			748
Expense recognized in respect of equity-settled share-based payment		25		323			1,960			5,946			7,860
Gain from change in fair value of contingent shares liability		24(a)(i)		-			-			-			(38,645	)
Operating cash inflow before working capital changes				16,970			102,736			242,197			513,157
(Increase)/decrease in inventories				(1,213	)		(7,346	)		19,934			13,158
Increase in trade receivables				(9,802	)		(59,337	)		(384,644	)		(88,230	)
(Increase)/decrease in prepayments, deposits and other receivables				770			4,661			(19,645	)		14,967
Increase/(decrease) in trade payables				8,314			50,329			(51,110	)		(51,060	)
Increase/(decrease) in deposits received, other payables and accruals				(2,109	)		(12,766	)		5,542			(13,018	)
Cash generated from/(used in) operations				12,930			78,277			(187,726	)		388,974
Interest paid				(191	)		(1,157	)		(638	)		(856	)
PRC taxes paid				(3,387	)		(20,505	)		(40,955	)		(67,683	)
Net cash inflow/(outflow) from operating activities				9,352			56,615			(229,319	)		320,435

continued/…

F-8

EXCEED COMPANY LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Year ended December 31, 2013

	Notes		2013			2013			2012			2011
			USD'000			RMB'000			RMB'000			RMB'000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of items of property, plant and equipment		13		(40,761	)		(246,757	)		(65,551	)		(38,721	)
Deposit paid for acquisition of land use rights		15		-			-			(73,080	)		(60,430	)
Proceeds from disposal of items of property, plant and equipment				59			360			118			173
Interest received		6, 8		2,007			12,150			15,122			11,858
Net cash outflow from investing activities				(38,695	)		(234,247	)		(123,391	)		(87,120	)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of warrants				-			-			-			372
Repurchase of ordinary shares		24(b)		-			-			(4,349	)		(11,549	)
New bank loans				1,651			10,000			30,000			-
Repayment of bank loans				(4,955	)		(30,000	)		-			(18,000	)
New loan from a shareholder		23		7,733			46,814			-			-
Exchange realignment				-			-			56			98
Net cash inflow/(outflow) from financing activities				4,429			26,814			25,707			(29,079	)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS				(24,914	)		(150,818	)		(327,003	)		204,236
Cash and cash equivalents at beginning of year				105,255			637,184			964,317			762,798
Effect of foreign exchange rate changes				47			281			(130	)		(2,717	)
CASH AND CASH EQUIVALENTS AT END OF YEAR				80,388			486,647			637,184			964,317

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

F-9

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

1. CORPORATE INFORMATION

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

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

On October 5, 2009, the board of directors of 2020 unanimously approved the simultaneous reincorporation of 2020 from the State of Delaware to the BVI through a redomestication merger (the "Redomestication") with and into the Company. In the Redomestication, the Company issued its securities in exchange for the issued and outstanding securities of 2020 (being 10,500,000 shares of common stock) on a one-to-one basis, and redeemed 1,343,082 shares of 2020 common stock at USD7.92 per share.

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

The Business Combination was accounted for as a reverse recapitalization because (i) after the Business Combination the Sellers together with the Investors (as defined in Note 24 – Shareholders' Equity – Common Stock) held approximately 51% of the issued and outstanding ordinary shares of Exceed (not including the escrowed shares, the additional 2,212,789 shares issuable to the Sellers if certain earnings targets in 2011 are met, and the additional shares issuable to the Investors as described in this Note 24 – Shareholders' Equity – Common Stock) and 2020's directors resigned and were replaced by Mr. Lin Shuipan, the CEO of the Company immediately prior to the Acquisition, and Professor Jin Jichun, a designee of the Sellers who is considered an independent director under applicable regulatory rules and thus independent of both 2020 and the Investors, and (ii) 2020 had no prior operations and was formed for the purpose of effecting this business combination.

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December 31, 2013

1. CORPORATE INFORMATION (continued)

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

Windrace, the owner and operator of "Xidelong" brand — one of the leading domestic sportswear brands in China, is engaged in the design, development and wholesale of sporting goods, including footwear, apparel and accessories, under its own brand, Xidelong, in China.

On December 2, 2013, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Pan Long Company Limited (“Parent”), an exempted company with limited liability incorporated under the laws of the Cayman Islands and wholly owned by Mr. Shuipan Lin (“Mr. Lin”), the Company’s Chairman and Chief Executive Officer, and Pan Long Investment Holdings Limited (“Merger Sub”), a business company with limited liability incorporated under the laws of the British Virgin Islands (“BVI”) and a wholly owned subsidiary of Parent, pursuant to which Parent will acquire the Company for USD1.78 per ordinary share of the Company (a “Share”),which represents a 19.5% premium over the closing price of USD1.49 on August 16, 2013, the last trading day prior to the Company’s announcement on August 19, 2013 that it had received a “going private” proposal, and a 24.4% premium over the volume-weighted average closing price of the Company’s Shares during the 30 trading days prior to August 16, 2013.

Upon consummation of the transactions contemplated under the Merger Agreement, Parent will be beneficially owned by Mr. Lin, (and/or entities affiliated with or related to them) (collectively, the “Buyer Group”), together with seven existing shareholders of the Company (and/or entities affiliated with or related to them) who have elected to transfer, prior to the closing, their Shares to Parent in exchange for newly issued shares of Parent (the “Rollover Shareholders”).

Subject to the terms and conditions of the Merger Agreement, at the effective time of the merger (the “Effective Time”), Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). At the Effective Time, each of the Company’s Shares issued and outstanding immediately prior to the Effective Time will be cancelled in exchange for the right to receive USD1.78 in cash and without interest, except for the excluded Shares (the “Excluded Shares”), which include: (i) Shares legally owned by Parent; and (ii) dissenting Shares (the “Dissenting Shares”) owned by holders of Shares who have validly exercised and not effectively withdrawn or lost their dissenter’s rights pursuant to Section 179 of the BVI Business Companies Act, 2004, as amended (the “BVI Companies Act”) (the “Dissenting Shareholders”). Each Excluded Share issued and outstanding immediately prior to the Effective Time will be cancelled and will cease to exist, and no consideration will be delivered with respect thereto. Each Dissenting Share will be cancelled at the Effective Time for the right to receive the fair value of such Shares as determined in accordance with the provisions of the BVI Companies Act.

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December 31, 2013

1. CORPORATE INFORMATION (continued)

Parent has received from Mr. Lin an equity commitment letter, pursuant to which Mr. Lin has committed to subscribe for ordinary shares in Parent in the amount of USD19,545,858 subject to adjustment in certain cases. Mr. Lin has also entered into a limited guarantee in favor of the Company.

The Company’s board of directors, acting upon the unanimous recommendation of the independent committee formed by the board of directors (the “Independent Committee”), approved the Merger Agreement and the Merger and resolved to recommend that the Company’s shareholders vote to authorize and approve the Merger Agreement and the Merger. The Independent Committee, which is comprised solely of independent and disinterested directors of the Company who are unaffiliated with any of Parent, Merger Sub, or the Buyer Group, negotiated the terms of the Merger Agreement with the assistance of its financial and legal advisors.

The Merger, which is currently expected to close in the second quarter of 2014, is subject to customary closing conditions, including the approval by an affirmative vote of shareholders representing more than seventy percent (70%) of the outstanding Shares of the Company as of the record date, present and voting in person or by proxy as a single class at an extraordinary general meeting of the Company’s shareholders which will be convened to consider the approval of the Merger Agreement and the Merger. As of the date of the Merger Agreement, the Rollover Shareholders have agreed under a voting agreement to vote all in favor of the Merger Agreement and consummation of the transactions contemplated thereby, including the Merger. If completed, the Merger will result in the Company becoming a privately held company and its Shares will no longer be listed on Nasdaq.

During the year ended December 31, 2013, the Company had direct or indirect equity interests in the following subsidiaries, the particulars of which are set out below, as a result of which the Company had the ability to direct the financial and operating policies of each of the entities, and thus had effective control over such entities:

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December 31, 2013

1. CORPORATE INFORMATION (continued)

	Place and	Nominal value
	date of	of issued	Percentage
	incorporation or	ordinary share/	of equity
	establishment/	registered	attributable to		Principal
Name	operation	capital	the Company		activities
			Direct	Indirect
Windrace International Company Limited	Cayman Islands	HKD9,200	100	-	Investment
(Formerly known as Xdlong International	March 25, 2008				holding
Company Limited)
Windrace Investment Holding Limited	British Virgin Islands	USD100	-	100	Investment
("Windrace Investment")	August 17, 2007				holding
(Formerly known as Xdlong Investment
Holding Limited)
Hei Dai Lung Group Company Limited	Hong Kong	HKD10,000	-	100	Investment
("XDLong HK")	November 5, 2003				holding
Xidelong (China) Co., Ltd.	PRC	HKD390,000,000	-	100	Manufacture
("XDLong China")	April 13, 2004				and sale of
(Note (i) and (ii))					sportswear
Fujian Xidelong Sports Goods Co., Ltd.	PRC	HKD25,000,000	-	100	Manufacture
("XDLong Fujian")	September 26, 2001				and sale of
(Note (i) and (iii))					sportswear
Xidelong (Jiang Xi) Athletic Equipment Co., Ltd. ("XDLong Jiangxi") (Note (i) and (iv))	PRC September 10, 2012	HKD400,000,000	-	100	Manufacture and sale of sportswear

Notes:

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

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

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

(iv) The registered capital of XDLong Jiangxi is HKD400,000,000 of which HKD60,000,000 had been paid up as of December 31, 2013 (Note 28(a)).

(v) The functional and reporting currency of XDLong China, XDLong Fujian and XDLong Jiangxi, the operating subsidiaries of the Group, is RMB.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.1. BASIS OF PRESENTATION AND PREPARATION

Basis of presentation

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

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries.

Translations of amounts from RMB into USD are solely for the convenience of the reader and were calculated at the rate of USD1.00 = RMB6.0537. The exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve, on December 31, 2013. This convenience translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into U.S. dollars at that rate on December 31, 2013, or at any other rate.

The preparation of these financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments made by management in the application of IFRS that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in Note 4.

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December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Subsidiaries

Subsidiaries are entities controlled by the Company. Control is achieved when the Company:

• has power over the investee;

• is exposed, or has rights, to variable returns from its involvement with the investee; and

• has the ability to use its power to affect its returns.

The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

Profit or loss and each item of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.

All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

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December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Related parties

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

(a) the party is a person or a close member of that person's family and that person

(i) has control or joint control over the Group;

(ii) has significant influence over the Group; or

(iii) is a member of the key management personnel of the Group or of a parent of the Group;

or

(b) the party is an entity where any of the following conditions applies:

(i) the entity and the Group are members of the same group;

(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);

(iii) the entity and the Group are joint ventures of the same third party;

(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;

(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;

(vi) the entity is controlled or jointly controlled by a person identified in (a); and

(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of non-financial assets

The Group assessed at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets and financial assets), the asset's recoverable amount is estimated. An asset's recoverable amount is the greater of the asset's or cash-generating unit's value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

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

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

Property, plant and equipment and depreciation

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

The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Expenditures incurred after the items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment, and where the cost of the item can be measured reliably, the expenditure is capitalized as an additional cost of that asset or as a replacement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment and depreciation (continued)

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

Buildings	Over the shorter of lease terms or 20 years
Leasehold improvements	Over the shorter of lease terms or 5 years
Plant and machinery	5 to 10 years
Motor vehicles	5 years
Furniture, fixtures and office equipment	5 years

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

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

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

Construction in progress represents a building under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction during the period of construction and includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the Group’ accounting policy. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Research and development costs

All research costs are charged to profit or loss as incurred.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial assets

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

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

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

Loans and receivables

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of financial assets

The Group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 180 days or observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortized cost, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (i.e., the effective interest rate computed at initial recognition).

The carrying amount of the asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. The amount of the impairment loss is recognized in profit or loss. Loan and receivables together with any associated allowances are written off when there is no realistic prospect of future recovery.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derecognition of financial assets

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

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

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

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

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group's continuing involvement in the asset. In that case, the Company also recognizes the associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Financial liabilities

Initial recognition and measurement

Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognized initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs.

The Group's financial liabilities include trade and other payables and interest-bearing bank and other borrowings.

Loans and borrowings

After initial recognition, interest-bearing bank borrowings are subsequently measured at amortized cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in the statement of profit or loss when the liabilities are derecognized as well as through the effective interest rate method amortization process.

Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortization is included in finance costs in the statement of profit or loss.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derecognition of financial liabilities

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

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

Earn-out obligation

Pursuant to an earn-out provision of the Purchase Agreement and the Escrow Agreement (as defined in Note 24(a)(i)), the Company has been required annually to release shares from the escrow account to the former shareholders of Windrace for the fiscal years 2009, 2010 and 2011. In addition, upon the achievement of certain earnings targets in 2011, 2,212,789 additional new shares of Exceed are required to be issued to the former shareholders of Windrace as earn-out shares. The details with respect to the contingent share obligation are discussed in Note 24(a)(i).

The Company releases the shares, which are held in the escrow account, and issues the new ordinary shares, in respect of the earn-out provision when the audited result of the Company's financial results each year are released and the financial results fulfill the condition in the Purchase Agreement. The Earn-out obligation is a derivative financial instrument liability that is adjusted to its fair value each reporting date with changes in fair value being recognized currently in profit or loss. Once a measurement period for the issuance of shares ends, the Earn-out obligation related to that period is no longer conditional and the obligation is reclassified from a liability to equity based on the fair value of the obligation at the end of the measurement period.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if, and only if, there is currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.

Treasury shares

Equity instruments which are reacquired (treasury shares) are recognized at cost and deducted from equity until the shares are cancelled or reissued. No gain or loss is recognized in the consolidated statements of profit or loss and other comprehensive income on the purchase, sale, issue or cancellation of the Group's own equity instruments. Any difference between the carrying amount and the consideration is recognized in equity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Inventories

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

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

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

Leases

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

Prepaid land lease payments

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

Cash and cash equivalents

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

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

Provisions

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

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

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December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or loss in correlation to the underlying transaction, either in other comprehensive income or directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authority, based on tax rates (and tax laws) that have been enacted or substantially enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.

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

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

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

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

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

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

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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income tax (continued)

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

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognized when there are probable economic benefits to the Group and when the revenue can be measured reliably, on the following bases:

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

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

The Group utilizes preliminary purchase orders received from consultations with customers at sales fairs to prepare sales estimates and formulate production schedules for upcoming seasons. Once a purchase order is finalized, the Group re-confirms the delivery schedule of sales orders with each distributor before shipment. Distributors are invoiced and sales are recognized by the Group only at the time that products are ultimately delivered to distributors.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue recognition (continued)

The Group does not have any arrangements with distributors to accept returns of out-of-season stock. When in-season new products arrive, the current products on shelves become out-of-season stock. The Group does not provide volume-based discount programs or discounts for early payment.

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

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

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale. To the extent that funds are borrowed specifically for the purpose of obtaining the asset, the amount of borrowing costs eligible for capitalization should be determined as the actual borrowing costs incurred less any investment income on the temporary investment of those borrowings. To the extent that funds are borrowed generally and used for the purpose of obtaining the asset, the amount of borrowing costs eligible for capitalization is by applying a capitalization rate to the expenditures on that asset. The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The amount of borrowing costs capitalized during a period should not exceed the amount of borrowing costs incurred during that period.

Government grants

Government grants are recognized at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate.

Where the grant relates to an asset, the fair value is deducted from the carrying amount of the asset and released to the profit or loss by way of a reduced depreciation charge.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits

Share-based payment transactions

The Company operates an equity incentive plan for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group's operations. Employees of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ("equity-settled transactions").

The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value of the restricted shares is determined by an external valuation company using a prepaid forward contract and based on the income approach by discounting the expected value of the shares according to their expected vesting schedule to the date of valuation, taking into account the terms and conditions upon which the restricted shares were granted. The fair value is essentially equal to the share price of the Company as of the date of grant.

The cost of equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the consolidated statements of profit or loss for a period represents the movement in the cumulative expense recognized as of the beginning and end of that period.

The expense is recognized and charged to the consolidated statements of profit or loss on the straight-line basis over the performance period.

No expense is recognized for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

Where the terms of an equity-settled award are modified, as a minimum the expense recognized is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. This includes any award where non-vesting conditions within the control of either the Group or the employee are not met. However, if a new award is substituted for the cancelled award, and is designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. All cancellations of equity-settled transaction awards are treated equally.

The dilutive effect of outstanding restricted shares is reflected as additional share dilution in the computation of earnings per share.

F-27

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

2.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits (continued)

Pension schemes

The Group operates a defined contribution Mandatory Provident Fund retirement benefit scheme (the "MPF Scheme") under the Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees' basic salaries and are charged to profit or loss as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group's employer contributions vest fully with the employees when contributed into the MPF Scheme. The Group has no further payment obligations once the contributions have been paid.

The employees of the Group's subsidiaries which operate in Mainland China are required to participate in central pension schemes operated by the local municipal government. The subsidiaries are required to contribute certain percentages of their payroll costs to the central pension schemes. The contributions are charged to the consolidated statements of profit or loss as they become payable in accordance with the rules of the central pension schemes. The Group has no further payment obligations once the contributions have been paid.

Other benefits

The Group contributes on a monthly basis to defined contribution housing, medical and other benefit plans organized by the PRC government. The PRC government assumes the obligations to all existing and retired employees under these plans. Contributions to these plans by the Group are expensed as incurred. The Group has no further obligations beyond the required contributions under these plans.

Foreign currencies

These financial statements are presented in RMB. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the end of each reporting period. All differences are taken to the consolidated statements of profit or loss and other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currencies of certain overseas subsidiaries are currencies other than RMB. As of the end of each reporting period, the assets and liabilities of these entities are translated into the presentation currency of the Group at exchange rates ruling at the end of each reporting period and, their consolidated statements of profit or loss and other comprehensive income are translated into RMB at the weighted average exchange rates for the year. The resulting exchange differences are included in a separate component of equity, the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that particular foreign operation is recognized in the consolidated statements of profit or loss and other comprehensive income.

For the purpose of the consolidated statements of cash flows, the cash flows of foreign subsidiaries are translated into RMB at the exchange rates prevailing at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the period are translated into RMB at the weighted average exchange rates for the period.

F-28

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

3.1. IMPACT OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Group has adopted the following relevant new interpretations and amendments to IFRSs for the first time for the current year's financial statements.

IFRS 7 Amendments	Disclosures – Offsetting Financial Assets and Financial Liabilities
IFRS 10	Consolidated Financial Statements
IFRS 13	Fair Value Measurement
IAS 1 Amendments	Presentation of Financial Statements– Presentation of Items of Other Comprehensive Income
IAS 27	Separate Financial Statements

(a) The IFRS 7 amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for all recognized financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments have no impact on the Company’s financial position or performance because the Group has not offset financial instruments, nor has it entered into master netting arrangement or similar agreement which is the subject to the disclosures of IFRS 7 during the periods presented.

(b) IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also addresses the issues raised in SIC-12 Consolidation – Special Purpose Entities. IFRS 10 establishes a single control model for all entities, including special purpose entities, used for determining which entities are consolidated. To meet the definition of control in IFRS 10, an investor must have (a) power over an investee, (b) exposure, or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over the investee to affect the amount of the investor’s returns. The changes introduced by IFRS 10 require management of the Group to exercise significant judgement to determine which entities are controlled and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27.

As a result of the application of IFRS 10, the Group has changed the accounting policy with respect to determining which investees are controlled by the Group.

(c) IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. IFRS 13 also contains extensive disclosure requirements about fair value measurements of both financial instruments and non-financial instruments. The application of this new standard has no impact on the Company’s fair value measurement.

F-29

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

3.1. IMPACT OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS

(d) The IAS 1 Amendments change the grouping of items presented in other comprehensive income (“OCI”). Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, exchange differences on translation of foreign operations, net movements on cash flow hedges and net loss or gain on available-for-sale investments) are presented separately from items which will never be reclassified (for example, the revaluation of land and buildings). The amendments have affected the presentation only and have had no impact on the financial position or performance of the Group. The consolidated statement of comprehensive income has been modified to reflect the changes. In addition, the Company has chosen to use the new title “consolidated statement of profit or loss and other comprehensive income” as introduced by the amendments in these financial statements.

3.2. ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective, in these financial statements.

IFRS 9	Financial Instruments3
IFRS 9, IFRS 7 and IAS 39 Amendments	Hedge Accounting3
IFRS 10, IFRS 12 and IAS 27 Amendments	Investment Entities1
IAS 19 Amendments	Employee Benefits – Defined Benefit Plans: Employee Contributions2
IAS 32 Amendments	Offsetting Financial Assets and Financial Liabilities1

¹ Effective for annual periods beginning on or after 1 January 2014

² Effective for annual periods beginning on or after 1 July 2014

³ No mandatory effective date yet determined but is available for adoption

(a) IFRS 9 issued in November 2009 is the first part of phase 1 of a comprehensive project to entirely replace IAS 39 Financial Instruments: Recognition and Measurement. This phase focuses on the classification and measurement of financial assets. Instead of classifying financial assets into four categories, an entity shall classify financial assets as subsequently measured at either amortized cost or fair value, on the basis of both the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. This aims to improve and simplify the approach for the classification and measurement of financial assets compared with the requirements of IAS 39.

In November 2010, the IASB issued additions to IFRS 9 to address financial liabilities (the "Additions") and incorporated in IFRS 9 the current derecognition principles of financial instruments of IAS 39. Most of the Additions were carried forward unchanged from IAS 39, while changes were made to the measurement of financial liabilities designated at fair value through profit or loss using the fair value option ("FVO"). For these FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. However, loan commitments and financial guarantee contracts which have been designated under the FVO are scoped out of the Additions.

The Group will quantify the effect in conjunction with other phases, when the final standard including all phases is issued.

F-30

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

3.2. ISSUED BUT NOT YET EFFECTIVE INTERNATIONAL FINANCIAL REPORTING STANDARDS (continued)

(b) In December 2013, the IASB added to IFRS 9 the requirements related to hedge accounting and made some related changes to IAS 39 and IFRS 7 which include the corresponding disclosures about risk management activity for applying hedge accounting. The amendments to IFRS 9 relax the requirements for assessing hedge effectiveness which result in more risk management strategies being eligible for hedge accounting. The amendments also allow greater flexibility on the hedged items and relax the rules on using purchased options and non-derivative financial instruments as hedging instruments. In addition, the amendments to IFRS 9 allow an entity to apply only the improved accounting for own credit risk-related fair value gains and losses arising on FVO liabilities as introduced in 2010 without applying the other IFRS 9 requirements at the same time.

IAS 39 is aimed to be replaced by IFRS 9 in its entirety. Before this entire replacement, the guidance in IAS 39 on hedge accounting and impairment of financial assets continues to apply. The Group expects to adopt IFRS 9 from January 1, 2015. The Group will quantify the effect in conjunction with other phases, when the final standard including all phases is issued.

(c) Amendments to IFRS 10 include a definition of an investment entity and provide an exception to the consolidation requirement for entities that meet the definition of an investment entity. Investment entities are required to account for subsidiaries at fair value through profit or loss in accordance with IFRS 9 rather than consolidate them. Consequential amendments were made to IFRS 12 and IAS 27. The amendments to IFRS 12 also set out the disclosure requirements for investment entities. The Group expects that these amendments will not have any impact on the Group as the Company is not an investment entity as defined in IFRS 10.

(d) The IAS 32 Amendments clarify the meaning of “currently has a legally enforceable right to set off” for offsetting financial assets and financial liabilities. The amendments also clarify the application of the offsetting criteria in IAS 32 to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments are not expected to have any impact on the financial position or performance of the Group upon adoption on 1 January 2014.

F-31

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

4. SIGNIFICANT ACCOUNTING ESTIMATES

In the process of applying the Group's accounting policies, management has made estimates and assumptions in determining certain amounts recognized in the financial statements, some of the estimates and assumptions are based on expected outcomes of future events. These estimates may not necessarily be indicative of the actual outcome. The significant estimates and assumptions are discussed below.

Useful lives of property, plant and equipment

The Group determines the estimated useful lives and related depreciation charges for its property, plant and equipment based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. Management will revise the depreciation period where actual useful lives are different from those previously estimated, and it will write off or write down the value of obsolete or non-strategic assets that have been abandoned.

Prepaid land lease payments and deposit paid for acquisition of land use rights

At the end of reporting period, construction on the parcel of land owned by XDLong Fujian within the Group’s production complex in Jinjiang, Fujian Province, has not commenced. For reasons stated in Note 14 to the financial statements, management has estimated that the possibility of incurring an impairment in value of loss of this land use is remote. Also at the end of reporting period, the Group has not yet completed the land acquisitions for two parcels of land located in Jinjiang, Fujian Province, and Ruichang, Jiangxi Province. The classification and the carrying amounts of the deposits paid are based on the Group’s estimates on completion of the land acquisition process and finally obtaining land use rights of these parcels of land. Any changes in the abovementioned estimates could have a significant impact on the classification and carrying amounts of prepaid land lease payments and deposit paid for acquisition of land use rights. The carrying amount of the land belonging to XDLong Fujian as of December 31, 2013 is RMB5,093,000 (Note 14). As of December 2013, a total deposit of RMB149,986,000 (Note 15) was paid for land use rights over two parcels of land located in Fujian Province and Jiangxi Province.

Net realizable value of inventories

Net realizable value of inventories is the estimated selling price in the ordinary course of business less estimated selling expenses. The net realizable value is estimated based on the current market conditions and historical experience of selling merchandise of similar nature. The estimates can change significantly as a result of changes in customer taste or competitor actions. The Group reassesses these estimates at the end of each reporting period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

4. SIGNIFICANT ACCOUNTING ESTIMATES (continued)

Impairment on trade and other receivables

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

Historically, the Group has no experience of bad debts. All the customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and the Group has the sole discretion to cease business with customers who fail to pay within the credit period.

The Group will not make any provision of the overdue balance if (1) the Group has continuous trading with the distributor; (2) the Group receives continuous repayment from the distributor; and (3) the Group has no dispute on the overdue balance with the distributor.

The Group will make full provision on such balances if they are considered not recoverable by the Group.

Share-based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them.

Contingent share liability

As stated in Note 24 to the consolidated financial statements, the number of shares of the Company to be released and issued to the former shareholders of Windrace as part of the reverse capitalization transaction effective on October 21, 2009 is subject to the results of adjusted net earnings of the Company. Estimating fair value for contingent share liability requires determining the most appropriate valuation model. This estimate also requires determining the most appropriate inputs to the valuation model including volatility, market discount and dividend yield and making assumptions about them. Any changes to the assumptions can materially affect the determination of the fair value of contingent share liability.

F-33

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

5. SEGMENT INFORMATION

The Group determines its operating segments based on the reports reviewed by the chief operating decision-makers that are used to make strategic decisions.

The Group operates one business segment, which is the manufacture and sale of sportswear, including footwear, apparel and accessories. The Group's most senior executive management consider the major product lines (being footwear, apparel and accessories) as one business segment for assessment of segment performance as they exhibit similar long term financial performance and they are similar in terms of product nature, production process, customer type and class, and distribution method. As such, no further business segment analysis is presented.

In addition, the Group's revenue, expenses, assets and liabilities and capital expenditures are predominantly attributable to a single geographical region, which is the PRC. Therefore, no analysis of business or geographical segment is presented.

F-34

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

6. REVENUE, OTHER INCOME AND GAINS

Revenue, which is also the Group's turnover, represents the net invoiced value of goods sold during the year.

An analysis of revenue, other income and gains is as follows:

	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Revenue
Manufacture and sale of sportswear:
Footwear		123,965		750,448		1,144,843		1,514,096
Apparel		141,135		854,391		1,198,186		1,731,482
Accessories		4,093		24,777		40,487		42,983
		269,193		1,629,616		2,383,516		3,288,561

	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Other income and gains
Bank interest income		2,007		12,150		15,122		11,858
Gain on disposal of property, plant and equipment		-		-		-		63
Award from the PRC government*		-		-		780		2,390
Other income		-		-		15		480
		2,007		12,150		15,917		14,791
Gain from change in fair value of contingent share liability		-		-		-		38,645

* There are no unfulfilled conditions or contingencies relating to these subsidies.

7. FINANCE COSTS

	2013			2013			2012		2011
	USD'000			RMB'000			RMB'000		RMB'000
Interest on:
- bank loans wholly repayable within one year		185			1,122			638		856
- other loans wholly repayable more than one year but within two years		319			1,933			-		-
Total borrowing costs		504			3,055			638		856
Less: interest capitalized included in construction in progress		(319	)		(1,933	)		-		-
		185			1,122			638		856

F-35

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

8. PROFIT BEFORE TAX

The Group's profit before tax is arrived at after charging/(crediting):

	Note		2013		2013		2012		2011
			USD'000		RMB'000		RMB'000		RMB'000
Included in cost of sales
Cost of inventories sold*				196,352		1,188,657		1,707,801		2,296,298
Included in selling and distribution expenses
Advertising and promotional expenses				40,742		246,639		328,375		352,436
Depreciation of property, plant and equipment				55		336		348		338
Employee benefits expenses:
Wages and salaries				1,259		7,624		11,714		13,752
Pension scheme contributions**				228		1,382		1,941		1,995
				1,487		9,006		13,655		15,747
Included in administrative expenses
Depreciation of property, plant and equipment				995		6,021		6,325		6,831
Employee benefits expenses:
Wages and salaries				1,849		11,192		11,940		13,057
Share-based compensation expense				323		1,960		5,946		7,860
Pension scheme contributions**				278		1,683		1,348		1,329
				2,450		14,835		19,234		22,246
Minimum lease payments under operating leases in respect of office premises and warehouse				98		594		1,290		3,714
Auditors' remuneration				272		1,646		2,604		3,753
Amortization of prepaid land lease payments		14		124		748		748		748
Loss on disposal of items of property, plant and equipment				42		255		619		7
Merger related expenses***				450		2,724		-		-

F-36

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

8. PROFIT BEFORE TAX (continued)

	2013			2013			2012			2011
	USD'000			RMB'000			RMB'000			RMB'000
Included in research and development expenses
Depreciation of property, plant and equipment		152			917			918			683
Employee benefits expenses:
Wages and salaries		1,580			9,567			7,249			9,750
Pension scheme contributions**		321			1,943			1,447			1,698
		1,901			11,510			8,696			11,448
Included in other income and gains
Interest income		(2,007	)		(12,150	)		(15,122	)		(11,858	)

* The cost of inventories sold includes approximately RMB49,145,000 (2012: RMB53,162,000; 2011: RMB54,803,000) relating to direct staff cost and RMB10,184,000 (2012: RMB10,623,000; 2011: RMB10,396,000) depreciation of the manufacturing facilities.

** As of December 31, 2013 and 2012, the Group had no forfeited contributions available to reduce its contributions to the pension schemes in future years.

*** In 2013, the Company retained legal counsel and financial advisory firm (“professional service providers”) to advise the Company in connection with the potential going private transaction. On December 2, 2013, at the recommendation of the Independent Committee, the Company entered into a merger agreement with the Parent for the going private transaction. The closing of the Merger is subject to customary closing conditions, including shareholders’ approval. The details of the going private transaction are described in Note 1 – Corporate Information. For the year ended December 31, 2013, the Company has incurred non-fundable fees to the professional service providers of RMB2,724,000 (USD450,000). At the closing of the Merger, the Company will incur additional fees of approximately RMB1,423,000 (USD235,000) to the professional service providers.

F-37

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

9. DIRECTORS' REMUNERATION

Details of directors' remuneration are as follows:

	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Other emoluments:
Salaries, bonuses, allowances and benefits in kind		247		1,491		1,228		941
Pension scheme contributions		3		15		9		8
		250		1,506		1,237		949

There was no arrangement under which a director waived or agreed to waive any remuneration during the years ended December 31, 2013, 2012 and 2011.

No remuneration was paid by the Group to any of the directors of the Group as an inducement to join or upon joining the Group or as compensation for loss of office for the years ended December 31, 2013, 2012 and 2011.

10. TAX

Pursuant to the rules and regulations of the BVI and the Cayman Islands, the Group is not subject to any income tax in the BVI and the Cayman Islands. No provision for Hong Kong profits tax has been made as the Group did not generate any assessable profits arising in Hong Kong during the reporting periods. Taxes on profits assessable in the PRC have been calculated at the prevailing rates, based on existing legislation, interpretations and practices in respect thereof.

	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Current tax - Mainland China
Charge for the year		4,592		27,801		32,213		65,922

Under the new PRC Corporate Income Tax Law (the ''New Corporate Income Tax Law'') and its Implementation Rules (effective on January 1, 2008), the PRC corporate income tax rate for domestic-invested and foreign-invested enterprises is unified to 25%. Accordingly, the applicable tax rate for XDLong Fujian is 25% in 2013, 2012 and 2011. The applicable tax rate for XDLong Jiangxi is 25% in 2013 and 2012.

XDLong China, a foreign-invested enterprise established before the New Corporate Income Tax Law, can continue to enjoy the existing tax holiday whereby it is exempted from the PRC corporate income tax for its first two profitable years, commencing from January 1, 2008, and thereafter is entitled to a 50% reduction in the PRC corporate income tax for the subsequent three years from January 1, 2010 to December 31, 2012. The tax rate applied to XDLong China pre-tax profits is 25% in 2013, and 12.5% in 2012 and 2011.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

10. TAX (continued)

Pursuant to the agreement between XDLong Jiangxi and the municipal government of Ruichang City, XDLong Jiangxi, a foreign-invested enterprise established after the New Corporate Income Tax Law, is exempted from the PRC corporate local income tax for its first two years and is entitled to a 50% reduction in the PRC corporate local income tax for the subsequent three years, since the first year of production. As of December 31, 2013, XDLong Jiangxi did not commence any production.

A reconciliation of the tax expense applicable to profit before tax using the applicable statutory rates for the jurisdictions in which the Company and the majority of its subsidiaries operated to the tax expense at the effective tax rates are as follows:

	2013		2013		2012			2011
	USD'000		RMB'000		RMB'000			RMB'000
Profit before tax		15,419		93,343		231,155			536,004
Tax at the applicable rates (Note)		4,081		24,708		59,905			132,618
Tax exemption due to tax holidays		-		-		(31,890	)		(64,041	)
Tax effect of expenses not deductible for taxation purposes		511		3,093		4,198			3,721
Income not subject to tax		-		-		-			(6,376	)
Tax charge at the Group's effective rate		4,592		27,801		32,213			65,922

Note: The applicable tax rates from January 1, 2011 were a mix of 25% and 16.5% for entities operating in China and Hong Kong, respectively.

According to the New Corporate Income Tax Law and its implementation rules, dividends receivable by non-PRC corporate residents from PRC enterprises are subject to withholding tax at a rate of 10%, unless reduced by tax treaties or arrangements, for profits earned since January 1, 2008. In addition, under the Sino Hong Kong Double Tax Arrangement and its relevant regulations, a qualified Hong Kong tax resident will be liable for withholding tax at the rate of 5% for dividend income derived from the PRC if the Hong Kong tax resident is the "beneficial owner" and holds 25% or more of the equity interests of the PRC company.

As of December 31, 2013 and 2012, the Company had not recorded any withholding tax on the retained earnings of its foreign invested enterprises in the PRC, since the Company intends to reinvest its earnings to further expand its businesses in mainland China, and its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies.

F-39

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

11. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders of the Company is based on the following data:

	December 31
	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Earnings
Earnings for the purposes of basic earnings per share and diluted earnings per share		10,827		65,542		198,942		470,082
Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share		33,081,656		33,081,656		32,997,441		29,700,010
Effect of dilutive potential ordinary shares
Escrow shares		-		-		-		1,425,863
Earn-out shares		-		-		-		2,212,789
Warrants		-		-		-		927,246
Restricted shares		-		-		-		7,120
Weighted average number of ordinary shares for the purposes of diluted earnings per share		33,081,656		33,081,656		32,997,441		34,273,028
Earnings per share
Basic	USD	0.33	RMB	1.98	RMB	6.03	RMB	15.83
Diluted	USD	0.33	RMB	1.98	RMB	6.03	RMB	13.72

12. RELATED PARTY TRANSACTIONS

Apart from discussed elsewhere in these financial statements, the Group had the following material transactions with related parties:

(a) Mr. Lin Shuipan, a director of the Company, Ms. Chen Xiayu, the spouse of Mr. Lin Shuipan, and Mr. Ding Dongdong, a director of the Company and the brother in-law of Mr. Lin Shuipan, have guaranteed certain bank loans made available to the Group up to RMB550,000,000 as of December 31, 2013.

(b) Remuneration of key management personnel of the Group, including amounts paid to the Company’s directors as disclosed in Note 9 to the financial statements, is as follows:

	2013		2013		2012		2011
	USD'000		RMB'000		RMB'000		RMB'000
Salaries, bonuses, allowances and benefits in kind		493		2,983		2,814		2,192
Share-based compensation expense		150		911		1,325		891
Pension scheme contributions		6		32		24		21
		649		3,926		4,163		3,104

(c) The Company also has a loan from a shareholder that is further described in Note 23.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

13. PROPERTY, PLANT AND EQUIPMENT

												Furniture,
												fixtures
			Leasehold			Plant and			Motor			and office			Construction
	Buildings		improvements			machinery			vehicles			equipment			in progress			Total
	RMB'000		RMB'000			RMB'000			RMB'000			RMB'000			RMB'000			RMB'000
Cost:
As of January 1, 2012		285,987		3,227			34,729			5,813			4,320			30,359			364,435
Additions		-		-			366			134			207			64,844			65,551
Disposals		-		(1,436	)		-			(398	)		(14	)		(10	)		(1,858	)
Exchange realignment		-		-			-			-			(1	)		-			(1	)
As of December 31, 2012 and January 1, 2013		285,987		1,791			35,095			5,549			4,512			95,193			428,127
Additions		-		-			-			-			4			254,783			254,787
Disposals		-		(13	)		(933	)		(534	)		(46	)		-			(1,526	)
Exchange realignment		-		(1	)		-			-			(2	)		-			(3	)
As of December 31, 2013		285,987		1,777			34,162			5,015			4,468			349,976			681,385
Accumulated depreciation:
As of and January 1, 2012		60,520		1,081			13,517			3,192			1,811			-			80,121
Provided during the year		12,870		722			3,197			702			722			-			18,213
Written off		-		(779	)		-			(336	)		(6	)		-			(1,121	)
As of December 31, 2012 and January 1, 2013		73,390		1,024			16,714			3,558			2,527			-			97,213
Provided during the year		12,869		537			2,915			456			681			-			17,458
Written off		-		(6	)		(701	)		(184	)		(22	)		-			(913	)
As of December 31, 2013		86,259		1,555			18,928			3,830			3,186			-			113,758
Carrying amount:
As of December 31, 2012		212,597		767			18,381			1,991			1,985			95,193			330,914
As of December 31, 2013		199,728		222			15,234			1,185			1,282			349,976			567,627
		USD'000		USD'000			USD'000			USD'000			USD'000			USD'000			USD'000
As of December 31, 2013		32,993		36			2,516			196			212			57,812			93,765

The Group's buildings are situated in Mainland China and are held on land under medium term leases (lease with a term less than 50 years). The leases of the said land expire in 2056.

As of December 31, 2013, no buildings were pledged to secure general banking facilities granted to the Group. As of December 31, 2012, certain Group's buildings with a carrying amount of approximately RMB212,597,000 were pledged to secure general banking facilities granted to the Group (Note 22).

F-41

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

14. PREPAID LAND LEASE PAYMENTS

	2013			2013			2012
	USD'000			RMB'000			RMB'000
Carrying amount at January 1		4,584			27,751			28,499
Recognized during the year		(124	)		(748	)		(748	)
Carrying amount at December 31		4,460			27,003			27,751
Current portion included in prepayments, deposits and other receivables (Note 18)		(106	)		(648	)		(648	)
Non-current portion		4,354			26,355			27,103

The Group's prepayment of land use rights is for medium term land located in Mainland China. The leases expire between 2055 and 2056.

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

XDLong Fujian owns a parcel of land located within the Group's production complex in Jinjiang, which has an aggregate site area of approximately 15,277 square meters. Pursuant to the State-owned Land Use Right Transfer Contract, construction on this land was required to commence by February 28, 2006. However, XDLong Fujian did not commence construction by such date because the Group decided to construct its production facilities on another larger parcel of land owned by XDLong China. On May 14, 2008, XDLong Fujian applied to the relevant local government agency for the approval to postpone construction on the land. On July 1, 2012, the Ministry of Land and Resources issued the Measures on Disposing Idle Land. The new regulation emphasizes that the land authority shall repossess the idle land without any compensation if the scheduled construction has not commenced for two years. The new regulation also stipulates the procedures, results and other details regarding repossessing idle land. The Group does not believe that the parcel of land held for use by XDLong Fujian met the definition of Idle Land in accordance with the new regulation.

The local government agency has verbally confirmed that it does not intend to repossess the parcel of land held for use by XDLong Fujian, or otherwise cancel the underlying contract. Consistent with the objectives of the local government, the construction of the Group in the Jinjiang area has injected capital into the local economy and resulted in an expansion of the Group's local workforce.

F-42

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

14. PREPAID LAND LEASE PAYMENTS (continued)

Management based its conclusion on the fact that local government officials have provided verbal assurances that they do not intend to take punitive action for the Group's failure to commence construction, management has concluded that the possibility of incurring an impairment in value or loss of land use is remote.

As of December 31, 2013, the carrying amount of this piece of land was RMB5,093,000 (2012: RMB5,216,000).

15. Deposit paid for acquisition of land use rights

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Carrying amount at January 1		24,776		149,986		73,030
Additions		-		-		76,956
Carrying amount at December 31		24,776		149,986		149,986

As of December 31, 2013 and 2012, a total deposit of RMB149,986,000 was paid for land use rights over two parcels of land located in Fujian Province and Jiangxi Province.

As of December 31, 2013 and 2012, the deposit of RMB26,230,000 was fully paid for land use rights over a parcel of land in Jinjiang, Fujian Province, the PRC. On May 17, 2010, May 20, 2010, November 18, 2010 and January 3, 2011, four sales and purchase agreements were entered into between the Group and the independent third parties for the transfer of the right arising from the aforesaid deposit paid at a consideration of RMB5,400,000, RMB7,640,000, RMB600,000 and RMB7,590,000, respectively. RMB5,000,000 was paid to the Jinjiang Municipal Bureau of Land and Resources for the application of the land use right. The Group plans to use this parcel of land for the construction of new staff quarters. The construction work has been completed and the internal renovation is expected to be completed in 2014. The Group is in the process of obtaining the relevant State-owned Land Use Rights Certificate as of December 31, 2013.

As of December 31, 2013 and 2012, the deposit of RMB123,756,000 was paid and payable for the land use rights over a parcel of land in Ruichang, Jiangxi Province, the PRC.

F-43

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

15. Deposit paid for acquisition of land use rights (continued)

On December 1, 2012, a sales and purchase agreement was entered into for the transfer of the right of the aforesaid parcel of land of 193,333 square meters. The land purchase proposal for remaining parcel of land of 206,667 square meters has not been finalized and is subject to municipal and administrative approvals. Upon completion of the construction of our new production facility in Ruichang City, the Group expects its annual production capacity for our footwear products to increase to approximately 30.0 million pairs as well as gaining certain internal apparel production capabilities. The Group believes increased in-house production capacities will give more control over production process and allow it to reduce costs. Ultimately, the expansion of in-house production capacity will help to increase gross profit margins, as the Group can reduce the reliance on outsourced manufacturing. It is an important part of the long-term strategy of the Group to gain better control on production, increase economies of scale, enhance profitability and capture a greater market share.

The Group plans to use this parcel of land for the construction of a new production facility. Since the construction plan was revised, the first phase of the new production facility is expected to be extended for the completion by the end of 2014. The outstanding amount of RMB78,120,000 as of December 31, 2013 and 2012 is disclosed as a capital commitment in Note 28(a).

The Group is in the process of obtaining the relevant State-owned Land Use Rights Certificate of the aforesaid parcel of land of 193,333 square meters as of December 31, 2013.

The deposits will be reclassified to the respective account under the non-current assets upon the transfers of legal title.

16. INVENTORIES

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Raw materials		1,009		6,107		3,963
Work in progress		250		1,514		2,159
Finished goods		1,880		11,380		5,533
		3,139		19,001		11,655

F-44

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

17. TRADE RECEIVABLES

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Trade receivables		188,954		1,143,872		1,084,535
Impairment		-		-		-
		188,954		1,143,872		1,084,535

The Group's trading terms with its customers (independent distributors) are mainly on credit. The credit period is generally for a period of six months. The Group monitors and controls the outstanding amounts due from the distributors on an on-going basis and requires the distributors to make continuous payment before getting new products.

All of the trade receivables are expected to be recovered within one year. An aging analysis of the Group's trade receivables as of December 31, 2013 and 2012, based on the invoice date, is as follows:

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Within 60 days		56,135		339,823		271,743
61 to 90 days		39,702		240,343		165,530
91 to 180 days		93,117		563,706		647,262
181 to 360 days		-		-		-
		188,954		1,143,872		1,084,535

F-45

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

17. TRADE RECEIVABLES (continued)

An aging of trade receivables that were neither past due nor impaired or past due but not impaired, is as follows:

			Past due but not impaired
	Neither past
	due nor		Less than		31 to		Over
	impaired		30 days		120 days		120 days		Sub-total		Total
	RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		RMB'000
December 31, 2012		1,084,535		-		-		-		-		1,084,535
December 31, 2013		1,143,872		-		-		-		-		1,143,872
		USD'000		USD'000		USD'000		USD'000		USD'000		USD'000
December 31, 2013		188,954		-		-		-		-		188,954

Receivables that were neither past due nor impaired relate to customers with no recent history of default.

The carrying amounts of trade receivables approximate to their fair values.

18. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Deposits to suppliers		2,360		14,289		19,997
Prepaid advertising		549		3,321		1,478
Prepaid expenses		94		570		1,004
Prepaid land-lease payments		106		648		648
Rental deposits		5		30		610
Other receivables		144		861		659
		3,258		19,719		24,396

All of the other receivables are expected to be recovered or recognized as expense within one year. Staff advances included in other receivables are considered as financial assets in the scope of IAS 39.

The carrying amount of prepayments, deposits and other receivables approximate to their fair value.

F-46

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

19. CASH AND CASH EQUIVALENTS

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Time deposits		49,556		300,000		400,000
Cash and bank balances		30,832		186,647		237,184
Cash and cash equivalents		80,388		486,647		637,184

At the end of the reporting period, the cash and cash equivalents of the Group denominated in RMB amounted to RMB484,790,000 (2012: RMB622,631,000). RMB is not freely convertible into other currencies, however, under Mainland China's Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorized to conduct foreign exchange business.

Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for three months depending on the immediate cash requirements of the Group, and earn interest at the respective short term deposit rates. The bank balances and time deposits are deposited with creditworthy banks with no recent history of default. The carrying amount of cash and bank balances approximate to their fair values.

20. TRADE PAYABLES

An aging analysis of the Group's trade payables, based on the invoice date, is as follows:

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Trade payables-Within 90 days		9,773		59,160		8,831

The trade payables are non-interest-bearing and are normally settled on 30- to 90-day terms. All of the trade payables are expected to be settled within one year.

The carrying amount of trade payables approximate to their fair values.

F-47

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

21. DEPOSITS RECEIVED, OTHER PAYABLES AND ACCRUALS

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Accrued liabilities		6,670		40,383		35,870
Value added tax payables		171		1,032		11,790
Deposits received		1,734		10,500		11,000
Accrued IPO expenses		485		2,934		3,021
		9,060		54,849		61,681

Deposits received primarily relate to deposits made by distributors in accordance with the distributorship agreements. Each distributor must pay the Group a fixed sum of RMB500,000 as security for the performance of their obligations under the distributorship agreement. The Group has the right not to refund the deposit to the distributors if they do not comply with the terms stipulated in the distributorship agreements. The Group will refund the deposit to a distributor upon the expiration of the distributorship agreement should either party decide not to renew the agreement. During the term of the distribution agreement, the Group has the right to terminate the distribution agreement, at its sole discretion and at any time, if the distributions cannot meet certain sales target and payment requirements. Accordingly, management considers it appropriate to classify the deposits from the Group’s distributors as a current liability.

The carrying amount of deposits received, other payables and accruals approximate to their fair value.

22. INTEREST-BEARING BANK BORROWINGS

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Current
Bank loans - repayable within one year
-   Secured		-		-		10,000
-   Unsecured		1,652		10,000		20,000
		1,652		10,000		30,000

As at December 31, 2013, a bank loan of RMB10,000,000 is interest bearing at an annual rate of 6.0%, secured by personal guarantees from Mr. Lin Shuipan, Ms. Chen Xiayu, the spouse of Mr. Lin Shuipan, and Mr. Ding Dongdong, a director of the Company and the brother in-law of Mr. Lin Shuipan, to the extent of RMB550,000,000 (Note 12(a)), and due for payment on December 8, 2014.

As at December 31, 2012, (i) a bank loan of RMB10,000,000 was interest bearing at an annual rate of 6.56%, secured by mortgages over certain buildings of the Group situated in the Mainland China (Note 13) to the extent of RMB79,530,000, and was repaid in February 2013; and (ii) a bank loan of RMB20,000,000 was interest bearing at an annual rate of 5.4%, secured by personal guarantees from Mr. Lin Shuipan, Ms. Chen Xiayu, the spouse of Mr. Lin Shuipan, and Mr. Ding Dongdong, a director of the Company and the brother in-law of Mr. Lin Shuipan, to the extent of RMB635,000,000, and was repaid in Dec 2013.

The above bank loans were denominated in RMB. Because of the short maturity, the carrying amounts of the bank loans approximate to their fair values.

F-48

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

23. LOAN FROM A SHAREHOLDER

In June 2013, the Company obtained a loan of HKD60.0 million (RMB48.7 million) from a shareholder which is interest bearing at an annual rate of 7.0% and repayable on May 31, 2015. During the year, interest expenses of RMB1.9 million were incurred and remained outstanding as of December 31, 2013. The shareholder loan was obtained to finance the construction project in Jiangxi Province.

The carrying amount of the loan from a shareholder approximates its fair value.

24. SHAREHOLDERS' EQUITY

(a). Common Stock

On October 21, 2009, the Company acquired 100% equity interest of Windrace by issuing an aggregate of 17,008,633 new ordinary shares (the "Additional Shares") to the Sellers.

(a)(i). Common Stock – Escrow Agreement

Subject to an escrow agreement (the "Escrow Agreement") to be entered into among 2020, Windrace, the Company, the Sellers and the escrow agent and the Purchase Agreement, a portion of the Additional Shares were to be held in escrow and released by installment subject to Adjusted Net Earnings of Exceed. The Company defines adjusted profit after tax (the "Adjusted Net Earnings") according to the interpretation of 2010 Adjusted Earnings in the Purchase Agreement. The Adjusted Net Earnings is defined as the profit for the year in the financial statements excluding: (i) the impact, positive or negative, of any fair value assessment or accounting impact attributable to the escrow agreement for the release of escrowed shares; (ii) the expenses relating to the completion of the transactions contemplated by the Purchase Agreement; (iii) the expenses, including interest expenses and other related expenses, related to the repurchase of the preferred shares held by the GS Investor; and (iv) the expenses relating to the grant of options under share option plans that may be implemented in the future.

If the 2009 Adjusted Net Earnings are not less than USD38,067,350, an aggregate of 5,563,714 Additional Shares would be released to the Sellers . If the 2010 Adjusted Net Earnings are not less than USD49,487,555, an aggregate of 4,277,590 Additional Shares would be released to the Sellers. If the 2011 Adjusted Net Earnings are not less than USD64,333,821, an aggregate of 1,425,863 Additional Shares would be released to the Sellers. If the Company achieves Adjusted Net Earnings of USD64,333,821 in 2011, 2,212,789 additional new ordinary shares of Exceed shall be issued to the Sellers as earn-out shares.

The Company exceeded the Adjusted Net Earnings for the years ended December 31, 2011, 2010 and 2009. The shares described above became issuable in each of the years based on the Adjusted Net Earnings, and were released or issued in the subsequent year.

The contingent shares issuable under the escrow and the additional earn-out shares are accounted for as a financial instrument liability that is adjusted to fair value at each reporting date, with changes in fair value being recognized currently in the consolidated statements of profit or loss. Once a measurement period for the issuance of such contingent shares ends, the contingent share liability related to that period is no longer conditional, and the obligation is reclassified from liability to equity, if the shares have been earned, based on the fair value of the obligation at the end of the measurement period. The activities in the contingent share liability during 2011, 2012 and 2013 were as follows:

F-49

EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

24. SHAREHOLDERS' EQUITY (continued)

(a). Common Stock (continued)

(a)(i). Common Stock – Escrow Agreement (continued)

	RMB'000
Contingent share liability as of January 1, 2011		139,168
Change in fair value during 2011 with a charge to profit or loss		(38,645	)
Reclassification of 2011 contingent share liability at December 31, 2011 from a liability to equity		(94,069	)
Exchange rate effect		(6,454	)
Contingent share liability as of December 31, 2011, 2012 and 2013		-

	Number of Shares
Contingent shares issuable as of January 1, 2011		3,638,652
Contingent shares earned in 2011, to be released from escrow and issued in 2012		(3,638,652	)
Contingent share issuable as of December 31, 2011, 2012 and 2013		-

METHODOLOGY — VALUATION OF CONTINGENT CONSIDERATION

When estimating the fair value of the financial liabilities that arise from release or issuance of Escrow Shares and Earn-out Shares which constitute the contingent consideration, management relied on the probabilistic scenario model which is commonly adopted to value a contingency driven by future non-market-related events. The Company consulted with an international independent valuation firm to assist it in developing the model and determining the fair value of the Escrow Shares and Earn-out Shares at each reporting period end. The following major factors were considered when estimating the valuation-date fair value of contingent consideration under this model:

1. Expected or scenario-based projection of earning estimates

The earnings estimates adopted under different scenarios were referenced to the following sources:

(i) Historical performance of the Company as of different valuation dates

(ii) Internal profit forecasts prepared by the management as of different valuation dates

(iii) Research reports on the Company issued by third-party analysts

(iv) Industry earning growth rates implied by the consensus earnings estimates from Bloomberg

2. Likelihood of various possible outcomes

The probabilities of achieving specified earnings estimates were management representation and based on their best estimate of the likelihood of different earning scenarios as of different valuation dates.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

24. SHAREHOLDERS' EQUITY (continued)

(a). Common Stock (continued)

(a)(i). Common Stock – Escrow Agreement (continued)

METHODOLOGY — VALUATION OF CONTINGENT CONSIDERATION (continued)

3. Expected quantities of issuable Escrow Shares and Earn-out Shares

The number of shares issuable for a particular year under each scenario was calculated according to the release schedules stated in the Agreement for Sale and Purchase dated May 8, 2009 and the expected numbers of issuable Escrow Shares and Earn-out Shares as of different valuation dates are probability-weighted figures calculated using the probabilities estimated by the management and number of issuable shares.

4. Fair value per share

The fair value per share is based on the prevailing market price as of each valuation date.

5. Marketability discount on issuable shares

As the sale or transfer of Escrow Shares and Earn-out Shares is prohibited during a certain lock-up period after they are released or issued, marketability discounts were applied on the fair value of the contingent consideration to reflect this restriction from the release date or issue date to the expiry date of the lock-up restriction. An option-pricing method was used to estimate the discount for lack of marketability ("DLOM"). Under an option-pricing method, the cost of a put option, which can hedge the price change before the privately held share can be sold, was considered as a basis to determine the lack of marketability discount. This option-pricing method is one of the methods commonly used in estimating DLOM, as it can take into consideration factors like timing of liquidity event (expiry of lock-up period in this case) and estimated volatility of the Company or shares of peer companies.

METHODOLOGY — VALUATION OF FINALIZED CONSIDERATION

The fair value of the finalized considerations as of December 31, 2011 was calculated through multiplication of the actual quantities of the issuable Escrow Shares and Earn-out Shares by both the prevailing market price as of valuation date and the appropriate marketability discount.

After determining all the key parameters, the fair value of the contingent liabilities and finalized considerations as of each valuation date was then calculated through multiplication of the expected quantities of the issuable Escrow Shares and Earn-out Shares by both the prevailing market price as of the valuation date and the appropriate marketability discount. Below are some of the key assumptions:

	December 31, 2011
Volatility		56%-65%
Marketability discount		18%-20%
Current stock price		USD4.9
Dividend yield		0.0%

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

24. SHAREHOLDERS' EQUITY (continued)

(a). Common Stock (continued)

(a)(ii). Common Stock – Investment Agreement

On July 27, 2009, Windrace entered into an Investment Agreement (the "Investment Agreement") and the Escrow Agreement with Wisetech Holdings Limited ("Wisetech"), Windtech Holdings Limited ("Windtech" and, collectively with Wisetech, the "Investors") and Mr. Lin Shuipan, and as amended by a supplemental agreement dated on November 30, 2009, the Investors invested an aggregate of USD30,000,000 in Windrace in two installments. Upon the completion of the Business Combination, the Company issued 3,627,968 new ordinary shares to the Investors (equal to USD27,500,000 divided by USD7.58 per share). On November 30, 2009, the Company issued 329,816 new ordinary shares to the Investors (equal to USD2,500,000 divided by USD7.58 per share).

(b). Treasury shares

In accordance with its share repurchase program announced on August 15, 2011, the Company has purchased 415,751 of its ordinary shares from the period of August 15, 2011 to December 31, 2011, at an average price of USD4.34 per share, for a total purchase price of approximately USD1.8 million (approximately RMB11.5 million). The Company is authorized to repurchase up to USD10 million of its ordinary shares within 6 months of August 15, 2011 using existing cash reserves.

The Company extended the date of expiration of Exceed's existing USD10 million share repurchase program from February 14, 2012 to August 14, 2012. The Company purchased 196,213 of its ordinary shares from January 1, 2012 to August 14, 2012, at an average price of USD3.48 per share, for an aggregate cost of approximately USD0.7 million (approximately RMB4.3 million), with a balance of approximately USD7.5 million available for further repurchases under the share repurchase program. The share repurchase program expired on August 14, 2012.

(c). Common stock warrants

2020 issued common stock warrants in November 2007 as part of its initial public offering. Each warrant entitled the holder to purchase from 2020 one share of common stock at an exercise price of USD5.25 commencing on the later of (i) November 8, 2008 or (ii) the completion of the Business Combination with a target business, and expires on November 8, 2011. The warrants would be redeemable, at a price of USD0.01 per warrant upon 30 days prior notice after the warrants become exercisable, only in the event that the last sale price of the common stock was at least USD11.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.

In 2010, the Company implemented a program for early cashless exercise of warrants through ordinary share exchange, which offered the holders of all 10,890,000 outstanding warrants (the "Warrants"), including Warrants held as part of the Company's units, the opportunity, for a limited time, to acquire ordinary shares of the Company (the "Ordinary Shares") by exchanging the Warrants for Ordinary Shares. A total of 32,550 Warrants (approximately 0.3% of the outstanding Warrants) were exchanged for a total of 8,223 Ordinary Shares in this tender offer. Besides the tender offer, a total of 10,993 warrants and 879,372 warrants were exercised into shares in 2011 and 2010, respectively.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

24. SHAREHOLDERS' EQUITY (continued)

(c). Common stock warrants (continued)

The Company's publicly traded warrants expired in accordance with their terms on November 8, 2011. 922,915 warrants were exercised during the period from October 21, 2009 to November 8, 2011, generating USD4,674,000 in cash for the Company. As of December 31, 2013 and 2012, the Company had no warrants outstanding. The common stock warrants were treated as equity instruments according to IAS 32 paragraph 22.

(d). Reserves

The amounts of the Group's reserves and the movements therein for the current and prior years are presented in the consolidated statements of changes in equity.

25. EQUITY INCENTIVE PLAN

The Company operates a 2010 Equity Incentive Plan (the "Plan") for the purpose of providing incentives and rewards to eligible participants who contribute to the success of the Group's operations. Eligible participants of the Scheme include the Company's directors, including independent non-executive directors, other employees of the Group, consultants of the Company, and its Subsidiaries. The Plan was approved by the shareholders and became effective on June 30, 2010 and, unless otherwise cancelled or amended, will remain in force for 10 years from that date.

The number of ordinary shares of USD0.0001 each in the share capital of the Company, that may be issued or transferred (A) upon the exercise of option rights or appreciation rights, (B) in payment of restricted stock and released from substantial risks of forfeiture thereof, (C) in payment of restricted stock units, (D) in payment of performance shares or performance units that have been earned, (E) as awards to non-employee directors, (F) as other awards, or (G) in payment of dividend equivalents paid with respect to awards made under the Plan, shall be 1,000,000 shares of common stock plus, during each calendar year of the Company during which this Plan is in effect, an additional number of shares equal to the lesser of (1) 1,000,000 shares of common stock, (2) ten percent (10%) of the number of shares of all classes of common stock of the Company outstanding on the first business day of the Company's fiscal year, and (3) such lesser number as may be determined by the Compensation Committee, in the aggregate not to exceed 10,000,000 shares of common stock plus, in each case, any shares of common stock relating to awards that expire or are forfeited or cancelled under this Plan. Such common stock may be shares of original issuance or treasury shares or a combination of the foregoing.

In 2011, the Company granted 338,000 restricted shares to its non-executive directors, senior management and certain employees. Restricted shares of 50,086 were granted outright to the non-executive directors and certain employees in 2010. 163,000 restricted shares granted in 2011 will be vested 25%, 30% and 45% after the first year, second year and third year, respectively. The remaining granted restricted shares will be generally vested in equal installments over three years. No restricted shares were granted in 2012 and 2013.

Share-based compensation expense related to the restricted shares under the Plan of RMB2.0 million (USD323,000), RMB5.9 million and RMB7.9 million was recognized in profit or loss in 2013, 2012 and 2011, respectively.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

25. EQUITY INCENTIVE PLAN (continued)

The following restricted shares were outstanding under the Plan during the years:

				Weighted
				Average
				Grant-date
	Number			Fair Value
Unvested Restricted Shares	of Shares			USD
At January 1, 2011		354,000			7.26
Granted during the year		338,000			5.56
Vested during the year		(205,665	)		7.53
Forfeited during the year		(145,918	)		6.45
At December 31, 2011 and January 1, 2012		340,417			5.75
Vested during the year		(144,166	)		6.34
Forfeited during the year		(54,850	)		5.33
At December 31, 2012 and January 1, 2013		141,401			5.31
Vested during the year		(101,684	)		6.33
Forfeited during the year		(6,383	)		7.86
At December 31, 2013		33,334			4.09

26. CONTINGENT LIABILITIES

At December 31, 2013, the Group is not aware of any significant contingent liabilities (2012: Nil).

27. OPERATING LEASE ARRANGEMENTS

The Group leases certain of its office premises under operating lease arrangements. Leases for these properties are negotiated for terms ranging from 1 to 3 years.

As of the end of each reporting period, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Within one year		5		30		447
In the second to fifth years, inclusive		-		-		-
		5		30		447

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

28. COMMITMENTS

(a) Capital commitments

Total commitments under these arrangements at the end of each reporting period were as follows:

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Contracted for capital commitment in respect of capital contribution to its wholly foreign owned subsidiary in the PRC:
-   XDLong Jiangxi		43,849		265,448		321,520
Contracted for commitment in respect of
-   acquisition of land		12,905		78,120		78,120
-   construction of new staff quarters in Jinjiang		2,105		12,741		7,239
-   construction of new production facility in Ruichang		19,440		117,687		163,629
		78,299		473,996		570,508

(b) Other commitments

Other commitments at the end of each reporting period were as follows:

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Advertising and promotional expenses
2013		-		-		2,032
2014		643		3,892		-
2015		965		5,839		-
2016		965		5,839		-
2017		965		5,839		-
2018		625		3,791		-
		4,163		25,200		2,032
Research and development (Note (i))
2013		-		-		500
2014		127		767		500
2015		82		500		500
2016		62		375		375
		271		1,642		1,875
		4,434		26,842		3,907

Note (i): The agreement with the China Institute of Sport Science was renewed in October 2011. The Group has committed to pay predetermined annual fees of RMB500,000 to the China Institute of Sport Science for each of the years in the period from October 2011 to October 2016 for their assistance with the research and development of technology for its sports footwear and apparel, and the promotion of the technology content of its products.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

29. FINANCIAL INSTRUMENTS BY CATEGORY

The carrying amounts of each of the categories of financial instruments as of the end of each reporting period are as follows:

Financial assets – Loans and receivables (including cash and cash equivalents)

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Trade receivables		188,954		1,143,872		1,084,535
Other receivables		26		157		158
Cash and cash equivalents		80,388		486,647		637,184
		269,368		1,630,676		1,721,877

Financial liabilities

	2013		2013		2012
	USD'000		RMB'000		RMB'000
Other financial liabilities at amortized costs
Trade payables		9,773		59,160		8,831
Other payables		6,823		41,306		36,454
Interest-bearing bank borrowings		1,652		10,000		30,000
Loan from a shareholder		8,052		48,747		-
		26,300		159,213		75,285

30. FINANCIAL RISK MANAGEMENT AND FAIR VALUES

The Group's principal financial instruments comprise bank borrowings, trade receivables and cash and cash equivalents. The main purpose of these financial instruments is to fund the Group's operations. The Group has various financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

It is, and has been, throughout the reporting periods, the Group's policy that no trading in financial instruments shall be undertaken.

The main risks arising from the Group's financial instruments are foreign currency risk, credit risk, interest rate risk, commodity price risk, business risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarized below:

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

30. FINANCIAL RISK MANAGEMENT AND FAIR VALUES (continued)

Foreign currency risk

The Group mainly operates in Mainland China with most of the transactions settled in RMB. The Group's assets and liabilities, and transactions arising from its operations are mainly denominated in RMB, and therefore the overall foreign currency risk was considered minimal. The Group has not used any forward contracts, currency borrowings or other means to hedge our foreign exchange exposure. Nevertheless, the management will continue to monitor the foreign exchange exposure and adopt prudent measures as appropriate.

Credit risk

The credit risk of the Group is primarily attributable to trade receivables and deposits with banks.

Cash and cash equivalents

The Group maintains its cash and cash equivalents primarily with various PRC State-owned banks and Hong Kong-based financial institutions, which management believes are of high credit quality. The Group performs periodic evaluations of the relative credit standing of those financial institutions.

Trade receivables

The Group trades only with recognized and creditworthy customers. It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis and the Group's exposure to bad debts is not significant. The Group offers revolving credit to domestic distributors. This revolving credit provides for a maximum credit limit that may be outstanding at any one time based on, among others, credit history, market conditions, prior year's purchases and estimated purchases for the coming year. In considering the amount of revolving credit, the Group also takes into account the funding needs of the distributors in expanding their retail network. The Group generally evaluates the credit limits granted to distributors upon renewal of the relevant distribution agreements. Normally, the Group does not obtain collateral from their distributors.

At the end of reporting period, the Group is exposed to certain credit risks as 11.8% and 41.8% (2012: 11.8% and 41.6%) of the total trade receivables were due from the Group's largest and the five largest customers, respectively.

During the year ended December 31, 2013, one customer accounted for 12.2% of consolidated net sales of the Company. During the year ended December 31, 2012, one customer accounted for 12.1% of consolidated net sales of the Company. During the year ended December 31, 2011, two customers accounted for 12.6% and 11.0% of consolidated net sales of the Company, respectively.

Further quantitative disclosures in respect of the Group's exposure to credit risk arising from trade receivables are set out in Note 17.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group does not provide any guarantees which would expose the Group or the Company to credit risk.

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EXCEED COMPANY LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

30. FINANCIAL RISK MANAGEMENT AND FAIR VALUES (continued)

Interest rate risk

The Group is exposed to fair value interest rate risk in relation to fixed-rate bank and other borrowings.  The Group did not have any variable-rate bank borrowings as of December 31, 2013 and 2012.

Commodity price risk

The major raw materials used in the production of the Group's products included cotton, rubber and plastics. The Group is exposed to fluctuation in the prices of these raw materials which are influenced by global as well as regional supply and demand conditions. Fluctuations in the prices of raw materials could adversely affect the Group's financial performance. The Group historically has not entered into any commodity derivative instruments to hedge the potential commodity price changes.

Business risk

The Group's primary business is the design, manufacture and distribution of branded sports products including footwear, apparel and accessories. The Group's financial results are influenced by the rapidity of its designs to be copied by competitors and reproduced at much lower prices, as well as by the Group's ability to continue to create new designs that appeal to consumers, maintain an extensive distribution network, manufacture sufficient quantities to meet customer demand, and dispose of excess inventories without excessive losses. Based on these factors, the Group may experience significant fluctuations in its future financial results.

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30. FINANCIAL RISK MANAGEMENT AND FAIR VALUES (continued)

Liquidity risk

The Group monitors risk of a shortage of funds by considering the maturity of both its financial assets and projected cash flows from operations. The Group's objective is to maintain a balance between continuity of funding and flexibility through use of bank borrowings and other borrowings to meet its working capital requirements.

The table below summarizes the maturity profile of the Group's financial liabilities as of the end of reporting period based on contractual undiscounted cash flow:

December 31, 2013	On demand		Less than 3 months		3 to 12 months		More than 12 months		Total				Carrying amount
	RMB'000		RMB'000		RMB'000		RMB'000		RMB'000		USD'000		RMB'000		USD'000
Interest-bearing bank borrowings		-		-		10,562		-		10,562		1,745		10,000		1,652
Loan from a shareholder		-		-		-		53,402		53,402		8,821		48,747		8,052
Other financial liabilities		10,500		30,806		-		-		41,306		6,823		41,306		6,823
Trade payables		-		59,160		-		-		59,160		9,773		59,160		9,773
		10,500		89,966		10,562		53,402		164,430		27,162		159,213		26,300

	On		Less than		3 to 12				Carrying
December 31, 2012	demand		3 months		months		Total		amount
	RMB'000		RMB'000		RMB'000		RMB'000		RMB'000
Interest-bearing bank borrowings		-		10,082		20,990		31,072		30,000
Other financial liabilities		11,000		25,454		-		36,454		36,454
Trade payables		-		8,831		-		8,831		8,831
		11,000		44,367		20,990		76,357		75,285

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EXCEED COMPANY LTD.AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

30. FINANCIAL RISK MANAGEMENT AND FAIR VALUES (continued)

Capital Management

The primary objective of the Group's capital management is to ensure that it maintains a capital ratio in order to support its business. The Group manages its capital structure and makes adjustment to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, or issue new shares. No changes were made in the objectives or policies during the reporting periods.

The Group is not subject to any externally imposed capital requirements as imposed by any financial institutions.

The Group monitors capital on the basis of debt-to-adjusted capital ratio, which is calculated as the net debt divided by adjusted capital. The debt-to-adjusted capital ratios as of the end of reporting period were as follows:

	2013			2013			2012
	USD'000			RMB'000			RMB'000
Interest-bearing bank borrowings		1,652			10,000			30,000
Loan from a shareholder		8,052			48,747			-
Trade payables		9,773			59,160			8,831
Less: Cash and cash equivalents		(80,388	)		(486,647	)		(637,184	)
Net debt		(60,911	)		(368,740	)		(598,353	)
Total equity		368,502			2,230,798			2,162,904
Debt-to-adjusted capital ratio		N/A			N/A			N/A

Fair values

No disclosure of fair value is required as all of the Group’s financial assets and liabilities are carried at amounts not materially different from their fair values at December 31, 2013 and 2012.

31. IMMEDIATE AND ULTIMATE CONTROLLING PARTY

At December 31, 2013, the directors consider the immediate and ultimate controlling party of the Group to be Mr. Lin.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013

32. EVENTS AFTER THE REPORTING PERIOD

(i) The extraordinary general meeting of shareholders for the approval of the going private transaction was originally scheduled for April 16, 2014, but the meeting was adjourned due to a delay in financing on the part of Mr. Lin. Our board of directors has been advised that financing will become available no later than May 31, 2014. Notice of the adjourned meeting will be sent to shareholders when Mr. Lin confirms that the merger consideration has been deposited into a bank account outside of the PRC.

(ii) On April 1, 2014, the Company obtained a loan of HKD1.0 million (RMB0.8 million) from a shareholder which is interest bearing at an annual rate of 7.0% and repayable on March 31, 2016. The shareholder loan was obtained as the working capital of the Company.

(iii) On April 7, 2014, the Company obtained a loan of HKD1.0 million (RMB0.8 million) from a shareholder which is interest bearing at an annual rate of 7.0% and repayable on April 6, 2016. The shareholder loan was obtained as the working capital of the Company.

(iv) On April 25, 2014, the Company obtained a loan of USD0.2 million (RMB1.2 million) from a shareholder which is interest bearing at an annual rate of 7.0% and repayable on April 24, 2016. The shareholder loan was obtained as the working capital of the Company.

33. APPROVAL OF FINANCIAL STATEMENTS

The financial statements were approved and authorized for issue by the board of directors on April 30, 2014.

F-61