VIMC (MM)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

Commission file number: 001-34225

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

* Not for trading, but only in connection with the listing of the American depositary shares

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2013, 104,014,754 ordinary shares were outstanding.

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

o Yes    x No

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

o Yes    x No

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

x Yes    o No

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

x Yes    o No

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

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

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

o Item 17    o Item 18

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

o Yes    x No

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

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

o Yes    o No

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INTRODUCTION

Unless otherwise indicated, “we,” “us,” “our company,” “our,” and “Vimicro” refer to Vimicro International Corporation, its predecessor entities and subsidiaries. Unless otherwise indicated, references in this annual report on Form 20-F to,

·                                           “Viewtel” are to Viewtel Corporation, a wholly-owned subsidiary of Vimicro China;

·                                           “Vimicro Beijing” are to Vimicro Electronic Technology Corporation, a wholly-owned subsidiary of Vimicro China;

·                                           “Vimicro China” are to Vimicro Corporation, our wholly-owned subsidiary;

·                                           “Vimicro Guangdong ” are to Vimicro Guangdong Corporation, a wholly-owned subsidiary of Vimicro China;

·                                           “Vimicro Fuzhou” are to Vimicro Fuzhou Corporation, a wholly-owned subsidiary of Vimicro China;

·                                           “Vimicro Guiyang ” are to Vimicro Guiyang Corporation , a wholly-owned subsidiary of Vimicro Tianjin;

·                                           “Vimicro Hong Kong” are to Vimicro Electronics International Limited, a wholly-owned subsidiary of Vimicro China;

·                                           “Vimicro Jiangsu” are to Jiangsu Vimicro Electronics Corporation, a wholly-owned subsidiary of Vimicro Beijing;

·                                           “Vimicro Qingdao ” are to Qingdao Vimicro Corporation, a company in which Vimicro China effectively holds a 18.03 % equity interest;

·                                           “Vimicro Shanghai” are to Vimicro High-Tech Corporation, a wholly-owned subsidiary of Vimicro which we disposed of in 2012 ;

·                                           “Vimicro Shenzhen” are to Vimicro Technology Corporation, a wholly-owned subsidiary of Vimicro which we disposed of in 2013 ;

·                                           “Vimicro Sky-Vision” are to Vimicro Sky-Vision Technology Corporation, our variable interest entity, or VIE ;

·                                           “Vimicro Tianjin” are to Vimicro Electronics Corporation, a company in which Vimicro China holds a 49.99% equity interest;

·                                           “Visiondigi” are to Shanghai Visiondigi Technology Co. Ltd, in which we beneficially own 12.03 % of equity interest. See “Item 4. Information on the Company - A. History and Development of the Company - Our Recent Corporate Developments;” and

·                                           “Zhongtianxin” are to Zhongtianxin Science and Technology Co., Ltd., a company, in which Vimicro China beneficially owns a 51% equity interest. We do not control Zhongtianxin and our investment in Zhongtianxin is accounted for using the equity method. See “Item 4. Information on the Company - A. History and Development of the Company - Our Recent Corporate Developments.”

The following chart sets forth our corporate structure as of April 23, 2014.

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In addition, references in this annual report on Form 20-F to,

·                                           “ADRs” are to the American depositary receipts that evidence our ADSs;

·                                           “ADSs” are to our American depositary shares, each of which represents four ordinary shares;

·                                           “China” or the “PRC” are to the People’s Republic of China, excluding, for the purpose of this annual report on Form 20-F only, Hong Kong, Macau and Taiwan;

·                                           “ordinary shares” are to our ordinary shares, par value $0.0001 per share;

·                                           “RMB” and Renminbi are to the legal currency of China; and

·                                           “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2011, 2012 and 2013, and as of December 31, 2012 and 2013.

This annual report contains translations of certain Renminbi amounts into U.S. dollars at the rate of RMB6.0537 to $1.00, the noon buying rate in effect on December 31, 2013 in New York City for cable transfers of Renminbi as certified for customs purposes by the H.10 weekly statistical release of the Federal Reserve Board. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Future movements in exchange rates between the U.S. dollar and the RMB may have a material adverse effect on your investment.” On April 18, 2014, the noon buying rate was RMB6.2240 to $1.00.

We and certain shareholders of the company completed our initial public offering of 8,697,063 ADSs, each representing four of our ordinary shares on November 18, 2005. On November 15, 2005, we listed our ADSs on the NASDAQ Global Market under the symbol “VIMC.”

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(1)               Figures in 2009 through 2011 were adjusted to reflect the restructuring in investments in, and the deconsolidation of, Visiondigi in 2012. Results of such disposed businesses are presented under “discontinued operations.” See “Item 4. Information on the Company - A. History and Development of the Company - Our Recent Corporate Developments.” In addition, (a) figures in 2009 were adjusted to reflect the disposal of our non-core IC businesses in December 2010 (results of such disposed businesses are presented under “discontinued operations,” except with respect to the entities to be disposed which holds certain related property interests), and (b) Figures in 2009 through 2010 were adjusted to reflect the disposal of our mobile phone multimedia processor business in December 2011 (results of such disposed businesses are presented under “discontinued operations”). See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”

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B.                                 Capitalization and Indebtedness

Not Applicable.

C.                                     Reasons for the Offer and Use of Proceeds

Not Applicable.

D.                                     Risk Factors

Risks Related to Our Business

We are exposed to risks related to general economic conditions in domestic and international markets.

The uncertainty arising out of domestic and global economic conditions, including the global financial crisis and the related credit crisis, poses a risk to the economies in which we operate. Such uncertainty has impacted demand for our products and services, and may impact our ability to manage normal relationships with our customers, suppliers and creditors. The markets for semiconductor products and video surveillance products significantly depend on consumer spending and available capital and other financial resources for spending. Economic uncertainty exacerbates negative trends in consumer spending and may cause certain customers to delay, cancel, or refrain from placing orders, which may affect our business and operating results. In addition, any tightening of liquidity in China and elsewhere in the world might also negatively influence market recovery.

The recent financial turmoil and related credit crisis affecting the financial markets and banking system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially reasonable terms, or at all. In addition, difficulty in obtaining capital and market uncertainty may also prevent some customers from obtaining affordable financing, resulting in lower sales. Customers with liquidity issues may cause us to experience longer turnover days or incur additional bad debt expenses. These conditions may also similarly affect key suppliers, which could affect their ability to deliver parts thereby causing delays in our production. Further, these conditions and uncertainty about future economic conditions make it challenging for us to forecast our operating results, make business decisions, and identify the risks that may affect our business, financial condition and results of operations. If we are not able to timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected.

We may continue to incur net losses in the future.

Our financial condition and results of operation have been negatively affected by weakening global economic conditions and intense industry competition in recent years. Our net revenue increased from $59.0 million in 2011 to $71.2 million in 2012, and decreased to $64. 5 million in 2013. Our gross profit increased from $20.5 million in 2011 to $26.0 million in 2012, and decreased to $22. 4 million in 2013. We incurred a net loss attributable to Vimicro International Corporation of $28.2 million, $0.6 million and $ 8 . 4 million in 2011, 2012 and 2013, respectively. We had net cash used by operating activities of $26.8 million in 2011, net cash provided in operating activities of $7.1 million in 2012 and net cash used by operating activities of $14. 8 million in 2013. There is no assurance that our revenues and gross profits will continue to increase, or that we will be able to generate net profit in the near future, or at all. Our financial condition and results of operations could also fluctuate significantly due to changes in our product mix and the industry environment. In addition, we may continue to grant options to employees and consultants in the future to retain and recruit key personnel and may therefore continue to incur share-based compensation expenses.

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The development and ramping-up plan of our video surveillance operations involves risks.

We plan to allocate additional resources to the development and ramping-up of our video surveillance operations. In particular, in May, 2013, Vimicro Tianjin completed the construction of a project for the research, development and production of digital high-definition video surveillance products and solutions. We may plan for additional development projects on this parcel of land based on our operational needs. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures.” We are in the process of applying for the necessary governmental approvals to utilize this facility. There are risks associated with our planned expansion of business into the video surveillance market and the development project, including without limitation, our ability to:

·                                           successfully design and develop video surveillance products and solutions that can be applied for commercial production and meet market demands;

·                                           effectively sell and distribute our new products and solutions;

·                                           respond rapidly and timely to technological and other changes in the industry;

·                                           effectively manage the increase in costs and expenses in connection with our expansion into the relevant fields; and

·                                           compete effectively against other players in the market.

In addition, the loans provided by banks include covenants and restrictions that could limit our flexibility in planning for or reacting to market conditions or in meeting our capital needs or that may otherwise restrict our operations or corporate activities. We cannot assure you that we will be able to effectively manage our planned expansion. We may not have, or be able to raise, sufficient capital to service or refinance our indebtedness or to complete the project and our ability to raise additional capital depends on market and regulatory conditions which we cannot control. In addition, the gross margin from our video surveillance business has historically been less than that of our video processor business which could lead to overall lower gross margins as we increasingly rely on our video surveillance business. We may fail to generate revenue, profit or operating cash flow as expected. Furthermore, our efforts to allocate additional resources, managerial or financial, to the video surveillance business may adversely affect our ability to manage and grow our other business operations. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Any changes in government policies on surveillance and safety system installation and operation may cause our revenues and profits to decrease.

We depend on state and local government policies mandating and funding surveillance and safety system installation and operation in China. For instance, our video surveillance business benefits from the government’s support of surveillance projects in China which promotes the installation of urban and suburban surveillance and monitoring networks to improve the safety-monitoring and alarm systems in cities. We expect that our video surveillance business will continue to rely on government policies in the foreseeable future. If such policies change, whether due to tightening budgets, shifting policy, or otherwise, initiatives promoting surveillance projects may be abandoned or cut back, and our financial condition and results of operations may suffer material adverse effects.

Our video surveillance products are subject to delivery acceptance, testing and approval.

We normally supply video surveillance products and services pursuant to agreements with general contractors or government agencies. The successful completion of our obligations under these contracts is often subject to delivery acceptance, satisfactory testing and approval of such products and services. Although we endeavor to satisfy the requirements of each of these contracts to which we are a party, no assurance can be given that the necessary approval of our products and services will be granted on a timely basis or at all, and that we will receive any payments due to us. In some cases, we may depend on others to complete these projects which may also delay payments to us. Any failure to obtain these approvals and payments may have a material adverse effect on our business and future financial performance.

We sometimes extend credit to our customers in the video surveillance projects . Failure or delay in collecting trade receivables from these customers could affect our liquidity.

We extend credit to some of our customers in the video surveillance projects without requiring collateral in most cases. As a result, our claims for payment would rank as unsecured claims, which would expose us to the credit risks of our customers in the event of their insolvency or bankruptcy. Generally, our customers in the video surveillance projects pay in installments, with a portion of the payment upfront upon signing the sales contracts, a portion of the payment upon receipt of our products but before installation and a portion of the payment after installation and upon satisfaction of our customers. Sometimes, a portion of the payment may not be paid until after a certain period following the installation.

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As of December 31, 2012 and 2013, accounts receivable due from ASB, a distributor of our video surveillance products, accounted for 48% and 33 %, respectively, of our total accounts receivable. Net revenue generated from the same customer accounted for 11% and 7%, respectively, of our total net revenue in the same periods. We perform ongoing credit evaluations of our customers’ financial condition. Our provisions for doubtful accounts amounted to $2.2 million and $2.2 million as of December 31, 2012 and 2013, respectively. Our net working capital requirements could increase significantly if we offer longer payment terms to attract and retain large customers, including customers of our video surveillance products . We may encounter further issues with or material delay in collecting accounts receivable due from our customers, which could materially and adversely affect our financial condition and results of operations.

If our subcontractors fail to perform their contractual obligations, our ability to provide services and products to our customers, as well as our ability to obtain future video surveillance business, may be harmed.

We sometimes may enter into contracts with subcontractors who perform a portion of the video surveillance services that we provide to our customers. We may have disputes with our subcontractors, including disputes regarding quality and timeliness of the work performed by those subcontractors. Failure by one or more of our subcontractors to satisfactorily perform the agreed-upon services may materially and adversely impact our ability to fulfill our obligations to our customers, expose us to liability and cause a material adverse effect on our ability to compete for future business.

If the SVAC standard is not widely adopted, or if the deployment of the SVAC standard in China is slower than we expect, the growth of our video surveillance business will be adversely affected.

Reflecting our commitment to the video surveillance business, we are a co-founder and co-developer of the Surveillance Digital Video Audio Coding Standard Working Group, or SVAC Working Group. The goals of the SVAC Working Group are to develop standards for advanced audio video coding and safety systems and improve synchronization among various safety and alarm systems. In December 2010, the Standardization Administration of China released a national standard for SVAC, which was prepared by the SVAC Working Group. The SVAC standard has been approved by the national standardization committee in China and has been applied in industry use starting in May 2011.

We have invested substantial time and resources in developing and promoting the SVAC standard. The market for video surveillance products that adopt the SVAC standard is relatively new and its potential is uncertain. Our growth in video surveillance business depends in part upon the timely and broadly deployment of video surveillance products that adopt SVAC standards, which is affected by the extent that SVAC standard is adopted. The deployment of the SVAC standard depends upon many factors, for example: the promotion efforts and the incentives associated with government construction projects to adopt the SVAC standard; end-use customers’ awareness and acceptance of the SVAC standard; any favorable business benefit derived from the SVAC-based products and system applications to the end-use customers; the maturity and the degree of the serialization of the SVAC-based products and system applications; and the number of the suppliers and the suppliers’ capability to provide SVAC products to meet end-users’ demand. In addition, even if the video surveillance market for SVAC projects is fully developed, our success will still depend upon the selection by existing and potential customers of our products for use in their projects. If the SVAC standard is not broadly adopted in a timely manner or our products are not selected by customers, the growth and success of our video surveillance business will be adversely affected. As a result, our business, financial condition and results of operations may be materially and adversely affected.

Due to the nature of our business, we do not have significant amounts of recurring revenues from our existing customers, and we are highly dependent on new business development.

Most of our revenues are derived from the installation of video surveillance systems which are generally non-recurring. Our customers are primarily governmental entities and their affiliates such as cities, municipalities and provinces, non-profit organizations and commercial entities, such as airports, customs agencies, banks and theaters. We install video surveillance systems for these customers and generate revenues from the sale of these systems to our customers and, to a lesser extent, from maintenance of these systems for our customers. After we have installed a solution at any particular customer site, we have generated the majority of revenues from that particular customer. We do not expect to generate significant revenues from any existing customer in future years unless that customer has additional installation sites for which our services might be required. Therefore, in order to maintain a level of revenues each year that is at or in excess of the level of revenues we generated in prior years, we must identify and be retained by new customers or work on new projects for existing customers. If our business development, marketing and sales techniques do not result in an equal or greater number of projects of at least comparable size and value for us in a given year compared to the prior year, then we may be unable to increase our revenues and earnings or even sustain current levels in the future.

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Future government regulations or other standards could have an adverse effect on our operations.

Our operations are subject to a variety of laws, regulations and licensing requirements of state and local authorities in the PRC. In certain jurisdictions, we are required to obtain licenses or permits and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.

Our operating results are affected by peaks and troughs in our product delivery and project installation schedule and we may experience delays in our recognition of revenue.

We expect our results of operations to fluctuate significantly from period to period in the future. As we expand our video surveillance business, we expect the fluctuation to increase because the video surveillance business relies on a smaller number of large contracts. We generally recognize revenue from delivered hardware with bundled software when customer acceptance is obtained, which occurs when the customer acknowledges receipt of goods and the delivered hardware with bundled software meet vendor-specific criteria.  For installation services, we recognize revenue after obtaining acceptance of the related services. Our revenue and profit during any given period reflects the number of products shipped and projects installed during that period and are significantly affected by any peaks or troughs in our product delivery and project installation schedule. The fluctuation in revenue from our video surveillance business reflected the characteristics of our product delivery and project installation schedule. Our operating results may not be indicative of the actual demand for our products and installation services during the relevant period. In addition, because we do not recognize revenue from installation services until after obtaining acceptance from customers, we may experience delays in recognizing revenue for certain projects. As a result, it may be difficult for us to predict our performance quarterly or annually and our operating results for any period are not necessarily indicative of results that may be expected for any future period.

Our business is subject to a concentration of customers, and a significant portion of our video surveillance revenue comes from a small number of projects.

Our business is subject to a concentration of customers. Our top ten customers collectively accounted for approximately 89 %, 91 % and 82 % of our revenue in 2011, 2012 and 2013, respectively. Richpower Co., Ltd. , one of our major China-based distributors for our PC camera processor business, accounted for approximately 63% of our net revenue in 2012 and 26 % of our net revenue in 2013. We expect to continue to rely on a concentration of China-based customers for our sales. We are especially dependent on a limited number of customers for our video surveillance business due to the project nature of such business, for which sales to our top five customers accounted for 72 % of our total video surveillance revenue in 2013. In addition, our largest customers may change from time to time as we continue to expand our video surveillance market share. If a major customer ceases to order our products, or otherwise delays or reduces its order for our products, or if we fail to develop additional major customers, our business, operating results and financial condition could be materially and adversely affected. See “Item 4. Information on the Company—Business Overview—Customers.”

As we undertake a growing number of large-scale surveillance projects in our video surveillance business, we are also subject to certain concentration risks. Many of these large-scale surveillance projects are with government agencies and can take many months to complete. In order to successfully complete these projects, we need to ensure that we have sufficient cash to fund our working capital requirements and that we have sufficient technical and managerial resources to complete the projects in a timely manner and with acceptable quality. Any inability to complete the projects to the satisfaction of our customers, or any inability to receive payment upon completion, could materially and adversely affect our business, operating results and financial condition.

Future acquisition s, investments and divestitures may have an adverse effect on our ability to manage our business and may harm our operating results .

If we are presented with appropriate opportunities, we may acquire complementary technologies, businesses or assets. We may also consider divesting certain of our business operations to the extent our management deems it to be in the best interest of our shareholders and company. Future acquisitions , investments and divestitures would expose us to potential risks, including risks associated with the assimilation of new technologies, businesses and personnel, unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business and the inability to generate sufficient revenue or cost savings associated with such acquisitions, investments or divestitures. Any difficulties encountered in the integration and divestiture process may have an adverse effect on our ability to manage our business. We have made and may continue to consider making strategic divestitures. To concentrate more on our video surveillance business and video surveillance processor business , we disposed of certain loss-making businesses, including our non-core IC businesses and our mobile phone multimedia processor businesses in 2010 and 2011. There i s no assurance that the business divestiture may be completed as expected, or the projected cost savings and other benefits of such divestiture may be realized to our benefit, on a timely basis, or at all. We may also experience business interruptions in case the business divestiture was not executed successfully. We plan to allocate additional resources to the development of our video surveillance business. For example, we made investments and established Zhongtianxin in 2012. Any negative development in this regard may have a material and adverse impact upon our business, financial condition and results of operations.

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We may not be able to execute cost-control measures successfully which may adversely affect our financial condition and results of operations.

We have adopted significant measures to reduce our operating costs and expenses. These measures include adjusting staff and employee compensation and benefits and implementing general cost-control measures across our c ompany. We expect to continue these measures. We may not achieve the expected savings on our operating costs and expenses, and we may otherwise experience significant increases in operating costs and expenses without any associated increase in revenue. A portion of our operating costs and expenses are fixed and do not change in line with the fluctuation in our revenues. As a result, our business, financial condition and results of operations may be materially and adversely affected. In addition, if our cost-reduction measures are not executed properly, the quality of our products may be affected and our ability to generate future revenue may deteriorate. Our adjustments in staff and employee compensation and benefits may also adversely affect our ability to attract and retain key employees .

Failure to obtain design wins could have a material adverse effect on our video processor business.

Our business significantly depends on our ability to obtain design wins whereby the product designers agree to incorporate our video processors into their new product designs. Once a video processor designed by a supplier has been incorporated into a product design, especially PC camera designs, the product designer tends to keep the same supplier for the life of the product as significant costs are generally required in association with qualifying a new supplier. This reluctance to change existing suppliers may be an entry barrier for new suppliers and there is no guarantee that we may qualify as suppliers to new customers we intend to sell our products to. On the other hand, the designers of PC camera and surveillance products constantly develop and introduce new products to the market, which requires suppliers, such as us, to continue to create innovative, highly integrated, low-power and cost-effective products and solutions in order to continue to achieve design wins from our current customers. Our failure to achieve design wins could have a material adverse effect on our business.

We face significant volatility in supply and demand conditions for our video processor products, and this volatility, as well as any failure by us to accurately forecast future supply and demand conditions, could materially and negatively impact our business.

The semiconductor industry has historically been characterized by significant fluctuations in the demand for, and supply of, semiconductor products. Demand for our products depends in large part on the continued growth of various electronics industries that use our products, including, but not limited to:

·                                           PC and computer-related peripherals;

·                                           s ecurity processor and surveillance products ; and

·                                           wireless telecommunications equipment.

Any downturn or reduction in the growth of these industries could seriously harm our business, financial condition and results of operations. We order materials and build our products based primarily on our internal forecasts , customer forecasts and existing orders. Existing orders may be cancelled and our forecasted orders may not be realized. There is no guarantee that we may adjust our orders for raw materials and manufacturing activities on a timely basis to reflect such changes. Because the video processor market is volatile and subject to rapid technological and price changes, our forecasts may be inaccurate, causing us to incur significant costs and expenses, which could negatively affect our business, financial condition and results of operations.

Our video processor business is dependent on sales of our PC camera processors.

We derive a significant portion of our net revenue from sales of our PC camera processors. In 2011, 2012 and 2013, we generated approximately 80%, 75% and 32 %, respectively, of our net revenue from sales of PC camera processors. Even though our sales of PC camera processors have significantly decreased in 2013, we expect that sales of our PC camera processors will continue to be a major source of revenue for our video processor business in the near future. However, we also anticipate that revenue from surveillance processors will continue to increase as a proportion of the revenue from our video processor business. The success of competing products, negative development or slow-down in the growth of the PC camera market or any other adverse developments could result in decreased demand or lower average prices for these products, which could in turn result in a decrease in the revenue from the sale of these products. Any such negative development, or any inability to generate an increasing portion of revenue from surveillance processors, could materially and adversely affect our business, financial condition and results of operations.

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Our video processor business depends on our ability to respond in a timely manner to the evolving video processor market and changing consumer preferences and industry standards.

Our business and future growth depends significantly on the development of the video processor market, which is evolving rapidly. The development of the video processor market depends on several factors, including changes in end user preferences and demand for multimedia functions and applications on end products. In addition, the video processor market is characterized by evolving industry standards, which are difficult for us to predict. If we do not respond to the evolving market, changing consumer preferences and industry standards in a timely manner, our business, financial condition and results of operations could be materially and adversely affected.

Our lengthy time-to-market makes it difficult for us to forecast revenue and increases the variability of our short-term results.

Our video processor products business is characterized by lengthy intervals between the product development stage and the volume sales stage. This interval, commonly referred to as time-to-market, typically ranges from three to six months for our video processors, and may be significantly longer for new customers. A number of factors contribute to the length of our time-to-market. After initially developing a product, we need to convince a customer to incorporate it into the design of the customer’s end product, which is referred to as a “design win.” Following the design win, we need to complete our product development and deliver our product to the customer, and the customer will then test and evaluate our product before completing the design of its own end product. Our customers may need one to two months or longer to test and evaluate our products and an additional three months or more to commence volume production of end products. Our lengthy time-to-market makes it difficult for us to forecast revenue and results in fluctuations in our short-term results. It also results in a lengthy interval from the time we incur research and development and other operating expenses in connection with a new product to the time that we can start to generate revenue from the product. In addition, there is no guarantee that a design win will result in volume production or sales of our product. We may not be able to generate sufficient revenue and profit from a new product to offset the operating expenses incurred in connection with the development and sale of that product.

We may be unable to accurately predict demand for our video processors, which may result in product shortages or excess inventory or obsolete inventory.

The lead time required by the foundries that we use to fabricate wafers and manufacture our video processors is generally longer than the lead time our customers may require for delivery of our products to them. Consequently, we must forecast our anticipated manufacturing needs and place binding manufacturing orders with these foundries before we receive purchase orders from our customers. This may result in shortages or excess inventory because we cannot easily adjust our orders or commitments. Obtaining additional supply in the event of inventory shortages may be costly or impossible, particularly in a short time frame, which could prevent us from fulfilling orders from our customers. In line with industry-wide increases in foundry lead times, the lead times the foundries require to manufacture our new video processors have grown longer, which has led to an increase in our inventory levels. These lead times may increase further, which may in turn cause us to increase our inventory levels. In addition, like most semiconductor products, our video processors are often susceptible to rapidly declining average selling prices or product obsolescence. Excess inventory levels, whether due to inaccurate forecasts, lengthening foundry lead times or other reasons, could result in unprofitable sales or write-offs of excess or obsolete inventory. Consequently, any such negative development could adversely affect our business, operating results and financial condition.

We depend on third-party foundries to manufacture our video processors. Failure to obtain sufficient foundry capacity could significantly delay our ability to ship our products, cause us to lose revenue and damage our customer relationships.

We rely on Taiwan Semiconductor Manufacturing Company, or TSMC, and Semiconductor Manufacturing International Corporation, or SMIC, to manufacture our video processors. We face several risks associated with our dependence on these third-party foundries, including:

·                                           failure to secure sufficient manufacturing capacity at a reasonable cost, or at all;

·                                           limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and

·                                           the unavailability of, or potential delays in obtaining access to, key process technologies.

The ability of a foundry to manufacture our video processors is limited by its available production capacity. Neither of these third-party foundries has allocated a fixed level of production capacity to us. It is difficult for us to accurately forecast our capacity needs. We do not have any long-term agreement with any foundry and we typically place orders with them on a purchase order basis, depending on our own customers’ purchase orders and sales forecasts . These foundries can allocate their production capacities to their other customers and reduce deliveries to us on short notice. It is possible that other customers of these foundries are larger with more financial and other resources than we are, or have long-term agreements with these foundries. Foundries may allocate their production capacities to these customers on a preferential basis in the event that they experience shortage in production capacity. Any shortfall in available foundry capacity could significantly delay our ability to ship our products, cause us to lose revenue and damage our customer relationships.

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In addition, if either of these foundries experience financial difficulties, suffer damage to its facilities, or experience other disruption to their operations, we may not be able to qualify an alternative foundry in a timely manner, as the qualification process could take several months before we could place an order. Such a delay could damage our customer relationships and have a material adverse effect on our business, financial condition and results of operations.

If the foundries that we use do not achieve expected manufacturing yields, our product costs could increase and product availability could decrease.

The manufacture of semiconductors is a highly complex process. Minute impurities in a silicon wafer can cause a substantial number of wafers to be rejected or cause numerous die on a wafer to be nonfunctional. Foundries encounter difficulties from time to time in achieving acceptable manufacturing yields, which are measured by the percentage of dies produced on a fab line that pass all visual and process control monitoring tests. This often occurs during the production of new products or the installation and start-up of new process technologies. The foundries that we use may not be able to achieve acceptable manufacturing yields as we migrate our designs to smaller geometries. If these foundries do not achieve expected manufacturing yields, our product costs could increase and product availability could decrease.

Significant disruption in operations of the two independent assembly and testing houses we rely on could significantly disrupt our shipments, harm our customer relationships and reduce our sales.

We rely on independent assembly and testing houses to assemble and test substantially all of our current video processors either for the foundry or directly for us. As a result, we do not have direct control on our product delivery schedules, assembly and testing costs or quality assurance and control. W e currently engage Advanced Semiconductor Engineering, Inc., or ASE, and Siliconware Precision Industries Co., Ltd., or SPIL, for our assembly and testing requirements. If either of these assembly and testing houses experiences capacity constraints or financial difficulties or suffers any damage to their facilities, or if there is any other disruption of operations, we may not be able to obtain alternative assembly and testing services in a timely manner. We do not have long-term agreements with either of our independent assembly and testing houses. We typically procure services from them on a per-order basis. Because of the lengthy period required to qualify third-party assembly and testing houses, we could experience significant delays in product shipments if we are required to qualify an alternative assembly and testing house for our products on short notice. Any issue we may experience in this regard could negatively affect our product delivery, product quality or result in increased operating costs and expenses, which could in turn damage our reputation and result in a loss of customers. Our business and results of operations could be materially and adversely affected as a result.

Our video processor business significantly depends on our customers’ ability to successfully sell their products incorporating our video processors.

Demand for our products significantly depends on the market demand for our customers’ products incorporating our products. In particular, even if a product designer decides to incorporate our products into its product or design, the designer may not be able to market and sell its product or design successfully. Even though the designer does not have the right to return the product purchased from us, the designer’s inability to market and sell its products, whether from lack of market acceptance or otherwise, could adversely affect our business as the designer may cease to order or otherwise reduce orders of our products. Our reputation may also be negatively affected. Accordingly, our business depends on our customers’ ability to successfully sell their products incorporating our products, and may be materially and adversely affected if they fail to do so.

One of the principal foundries and one of the assembly and testing houses that we use are both located in a region that is subject to earthquakes, typhoons and other natural disasters, as well as geopolitical risks and social upheaval.

Our business relies on certain foundries and assembly and testing houses in Taiwan. In particular, we currently rely on TSMC, one of our principal foundries, to manufacture a majority of our video processors. In addition, we also use ASE as one of our assembly and testing houses. These two entities are both located in Taiwan, which is susceptible to earthquakes, typhoons, floods and other natural disasters. Taiwan has historically experienced severe earthquakes that have caused significant casualties and property damage. In addition, TSMC and ASE are subject to risks associated with uncertain political, economic and other conditions in Taiwan and elsewhere in Asia, such as political turmoil in the region and the outbreak of communicable diseases. The occurrence of any of the foregoing could disrupt the operations of TSMC and ASE, resulting in significant delays in deliveries or substantial shortages in supply. As a result, our business, financial condition and results of operations could be materially and adversely affected.

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We are exposed to risks relating to our development of facilities on land held by Vimicro Jiangsu

Vimicro Jiangsu holds land use rights to a parcel of undeveloped land that we originally planned to use for our non-core IC businesses. We currently plan on using the property to develop offices , sales and research facilities. We will use a portion of these facilities for our own purposes and the remaining portion we will sell to third parties through the assistance of the local government. Such third party buyers and the terms of the relevant sales agreements will need to be approved by the local government. The sale of a portion of the units to qualified third parties is in line with the government policy of attracting investment to the local area . For a detailed discussion of our current plan with respect to the land held by Vimicro Jiangsu, see “Item 4. Information on the Company—D. Property, Plant and Equipment.” The construction of this project involves a number of risks including:

·                             our ability to sell completed units to purchasers at acceptable prices, or at all;

·                             our ability to reach agreements with, and obtain regulatory consents and approvals from, local regulators, for the conversion of the land use rights and issuance of ownership certificates to allow us to dispose of property units to be built on the land;

·                             our ability to use the completed units for our business needs;

·                             our ability to work effectively with partners in developing the property and selling units of the property;

·                             potential fines and penalties for delays in development of the property;

·                             our ability to obtain necessary cash and financial resources to complete the construction of this project; and

·                             our ability to apply for and acquire necessary governmental approvals in developing the property and selling units of the property.

Any such negative development could have a material and adverse effect on our business, financial condition and results of operations. In November 2013, we entered into an agreement with the Nanjing Bureau of Land and Resources, or the Bureau. Pursuant to this agreement, we agreed to pay a security deposit of RMB1.8 million ($0.3 million) to the Bureau. The Bureau has agreed to repay us half of this amount if we commence construction by May 15, 2014 and the other half if we complete construction by May 15, 2016. However, failure to meet these deadlines could cause us to lose the deposit that we have paid.

We are currently managing construction projects with significant capital expenditure requirements and may continue to manage such projects in the future, including the development of the property held by Vimicro Jiangsu . See “Item 4. Information on the Company—D. Property, Plant and Equipment.” We are required to obtain various governmental approvals at the different stages of our construction projects, and there i s no assurance that we will be able to obtain such approvals on a timely basis. In addition, the relevant governmental authorities may require us to make material changes to our initial designs as conditions to issue certain approvals, which may significantly increase the costs and capital requirements of our construction projects. Government authorities could also impose penalties or fines for any non-compliance issues or significant construction delays. In addition, we rely on independent contractors for the construction of these projects. The contractors may experience financial or other difficulties which may affect their ability to carry out construction work and thus delay the completion of the projects or cause us to incur additional costs. In addition, construction delays and specific site conditions at any site could affect the final cost and completion date of the projects, which may in turn disrupt our growth strategy and materially and adversely affect our operating results. An increase in the estimated or actual construction costs may require a higher capital expenditure than we had anticipated. Any such negative development could materially affect the progress of our construction projects, which in turn could have a material and adverse effect on our business, financial condition and results of operations.

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We rely on third-party distributors for a significant portion of our revenue.

A significant portion of our revenue is derived from sales to distributors who resell our products to manufacturers of modules or end products, such as PC cameras into which our products are incorporated. Sales to distributors accounted for 67 %, 72 % and 37% of our net revenue in 2011, 2012 and 2013, respectively. In 2013, there were two distributors among our top ten customers. As a result, our ability to maintain good relationships with these distributors is important to the growth of our business and our results of operations. If our major distributors defer orders or fail to place additional orders with us, our business, financial condition and results of operations could be materially and adversely affected.

We do not have long-term purchase commitments from our customers, which may result in significant uncertainty and volatility with respect to our revenue from period to period.

We do not have long-term purchase commitments from our customers and our sales are made on the basis of individual purchase orders. Our customers may cancel or defer purchase orders. Our customers’ purchase orders may vary significantly from period to period, and it is difficult to forecast future order quantities. We cannot assure you that any of our customers will continue to place purchase orders with us in the future at the same level as in prior periods. We also cannot assure you that the volume of our customers’ purchase orders will be consistent with our expectations when we plan our expenditures. As a result, our results of operations may vary from period to period and may fluctuate significantly in the future.

If we are unable to obtain additional capital in future years, we may be unable to grow at the expected pace or proceed with our long-term business plan, and we may be forced to curtail or cease some of our projects.

We will require additional working capital to support our long-term business plan, which includes identifying suitable targets for horizontal or vertical mergers or acquisitions, fulfilling the agreements with general contractors or government agencies to provide the products and services for video surveillance projects, constructing additional projects for research, development, productions or office uses. Our working capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from period to period, depending on the volume of business during the period and payment terms with our customers. We may not be able to obtain adequate levels of additional financing, whether through equity financing, debt financing or through other sources. Additional equity financings could result in significant dilution to our shareholders and debt financing could adversely affect our earnings. If we are unable to raise additional capital, we may be unable to implement our long-term business plan, develop or enhance our products and services, take advantage of future opportunities or respond to competition on a timely basis, if at all. In addition, lack of financing could force us to substantially curtail or cease some of our projects.

Defects in our products could result in a loss of customers and a decrease in revenue, unexpected expenses and a reduction in market share.

Our products are complex and must meet stringent quality requirements. Complex products, such as our highly integrated single-chip video processor products, may contain defects, errors or viruses when they are first introduced or as new versions are released. If any of our products have reliability, quality or compatibility problems, we may not be able to correct these problems on a timely basis. Consequently, our reputation may be damaged and we may fail to obtain design wins, which could harm our ability to retain existing customers and attract new customers. In addition, these defects, errors or viruses could interrupt or delay sales to our customers. Because we cannot test for all possible scenarios, our products may contain errors which are not discovered until after they are shipped. If any of these problems are not found until after we have delivered our products to our customers, we may be required to incur additional development costs and costs associated with product recalls, repairs or replacements. Product defects may also result in product liability claims against us.

Our operating results have fluctuated in the past and we expect our operating results to continue to fluctuate.

Our revenue and operating results are difficult to predict, and have in the past and may in the future fluctuate from period to period. We expect that our revenue will continue to vary from period to period, making it difficult to predict our future operating results. In particular, we experience seasonality and variability in the demand for our products as our customers manage their inventories. Our customers tend to increase their inventories of our products in anticipation of the peak fourth quarter buying season for PCs and other devices into which our products are incorporated, which often leads to sequentially lower sales of our products in the first and fourth quarters. In addition, business activities in China generally slow s down during the Chinese New Year period in the first quarter of each year, which may adversely affect our sales and results of operations during that period. We base our planned operating expenses in part on our expectations of future revenue. If our revenue for a particular period is lower than what we expect, we may be unable to proportionately reduce our operating expenses for that period, which could harm our operating results for that quarter.

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Additional factors that could cause our results of operations to fluctuate include:

·                                           the timing and volume of purchase orders and cancellations from our customers;

·                                           changes in manufacturing costs, including wafer, testing and assembly costs, and changes in manufacturing yields, product quality and reliability;

·                                           the timing and availability of adequate manufacturing capacity of the foundries we use;

·                                           our ability to successfully design and introduce new products, including video surveillance products, in a timely manner that meet our customers’ needs;

·                                           the timing, performance and pricing of new products introduced by us and our competitors;

·                                           the timing and amount of operating expenses incurred by us, including cash bonuses to senior management;

·                                           the liquidity and cash flow of our company and our customers; and

·                                           changes in exchange rates, interest rates, tax rates and tax withholding.

Any fluctuations in our quarterly results of operations may affect the price of our ADSs. In future periods, the market price of our ADSs could decline if our revenue and results of operations are below the expectations of analysts and investors.

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

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights. As of December 31, 2013, we had 561 registered patents and 326 pending patent applications in China, 59 registered patents and 47 pending patent applications in the United States, one registered patent and six pending patent applications in Taiwan and four pending patent applications in South Korea. We cannot assure you that any patent will be issued as a result of our applications or, if issued, that it will sufficiently protect our intellectual property rights. Implementation of PRC intellectual property-related laws has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and management attention. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

We may face intellectual property infringement claims that could be time-consuming and costly to defend and, if successful, result in our loss of significant rights and inability to continue providing our existing products.

Our business also depends in large part on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technology or enter into royalty or license agreements that may not be available on acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation. Also, we may be unaware of filed patent applications that relate to our products. Parties making infringement claims may be able to obtain an injunction, which could prevent us from selling our products or using technology that contains the allegedly infringing intellectual property. Any intellectual property litigation could have a material adverse effect on our business, operating results or financial condition.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lose their services.

Our business and future growth depends heavily upon the continued services of our senior executives and other key employees. We rely on their expertise in research and development, business operations, sales and marketing and on their relationships with our shareholders and customers and relevant government authorities. We also rely on a number of experienced mixed-signal semiconductor designers who are difficult to find since it often requires years of experience to fully master mixed-signal design. We do not maintain key-man life insurance for any of our senior executives or other key employees. If one or more of our senior executives or key employees were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. Our business may be severely disrupted, our financial conditions and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain personnel. Since our industry is characterized by high demand and intense competition for talent, we also may not be able to attract or retain additional highly skilled employees or other key personnel that we will need to achieve our strategic objectives. Our business has grown rapidly. Our ability to train and integrate new employees into our operations may not meet the growing demands of our business.

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If any of our senior executives or key employees joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key professionals and staff members. Each of our executive officers has entered into an employment agreement with us, which contains non-competition provisions. However, if any dispute arises between our executive officers and us, we cannot assure you the extent to which any of these agreements could be enforced in China, where these executive officers reside, in light of the uncertainties with China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Our business success depends on our ability to retain our key employees or replace departing key employees in a timely manner.

All share options that we initially granted to certain key employees have become vested. While we periodically grant additional share options to certain employees upon their recruitments, the numbers of options that we may grant from time to time with respect to such new hires are generally smaller compared to our initial option grants to our key employees. Such key employees as well as our newly hired employees may leave us after the share options are fully vested, especially if the options are substantially exercised. If any member of our management team or any of our key employees leaves our company, our ability to operate our business and execute our strategy could be materially impaired. We may also incur significant costs in identifying, hiring, training and retaining replacements for departing employees. There is no assurance that we could do so at a timely manner, or at all.

There are unknown risks associated with our acquisitions.

Selective acquisitions form part of our strategic expansion plan. Failure to successfully integrate the acquired business may affect the expected synergies from this acquisition and impede our overall growth strategy. Although we have conducted due diligence in connection with this acquisition, we may not be aware of all of the risks associated with the acquired business. Discovery of adverse information concerning the acquired business could have a material adverse effect on our business, financial condition and results of operations. Although we are entitled to claiming indemnification in certain circumstances, asserting indemnification or enforcing such indemnification could be costly and time-consuming and may not be successful at all.

We are subject to risks relating to our relationships with minority shareholders of our non wholly-owned subsidiaries and joint venture partners of our associated companies.

We have one significant non wholly-owned subsidiary, Vimicro Tianjin. The constitutional documents of Vimicro Tianjin require an affirmative vote of a qualified majority of the shareholders to take certain actions, which could have the consequence of slowing down the decision-making process for the subsidiary. In addition, the other major shareholder of Zhongtianxin, a joint venture established in 2012 in which we beneficially own 51% of equity interest, may exercise substantive participating rights in accordance with the constitutional documents of Zhongtianxin. We cannot assure you that we will maintain sound relationships with the other shareholders of these entities, and we may be required to dispose of our interests in any of such entities in the future or to purchase such interests held by the other shareholders. Failure to maintain relationships with the other shareholders of our non wholly-owned subsidiaries and associated companies may result in material disputes or disruptions of the operations of these subsidiaries, any of which could have a material adverse effect on our financial condition and results of operations.

If we fail to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor confidence in the reliability of our financial statements.

We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which must also contain management’s assessment of the effectiveness of its internal control over financial reporting. Our management has conducted an evaluation of our internal control over financial reporting, and concludes that our internal control over financial reporting as of December 31, 2013 is effective.

We are continuously improving our internal control over financial reporting in line with the development of our business, including the recent expansion of our operations in the security and surveillance market. However, we cannot assure you that our efforts to improve and develop our internal control over financial reporting will be effective or any material weaknesses in our internal control over financial reporting will not be identified in the future. If we fail to maintain effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act, we could suffer a loss of investor confidence in the reliability of our financial statements, which in turn could negatively impact the trading price of our ADSs, result in lawsuits being filed against us by our shareholders or otherwise harm our reputation. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs and use significant management time and other resources in an effort to continue to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

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Contractual arrangements between Vimicro China and Vimicro Hong Kong may be subject to scrutiny by the Hong Kong tax authorities and a finding that Vimicro Hong Kong owes additional taxes could substantially reduce our financial performance and the value of your investment.

We use Vimicro Hong Kong, a wholly-owned subsidiary of Vimicro China incorporated in Hong Kong, to facilitate a substantial portion of our overseas sales activities, primarily due to Vimicro Hong Kong’s close proximity to our clients as well as foundries and assembly and testing houses located in Taiwan and Hong Kong. Vimicro Hong Kong and Vimicro China have entered into a contractual arrangement pursuant to which Vimicro Hong Kong makes royalty payments to Vimicro China for certain technologies licensed by Vimicro China. We could be subject to material and adverse tax liabilities if the Hong Kong tax authorities determine that such contractual arrangement for royalty payments were not entered into on an arm’s-length basis and adjust Vimicro Hong Kong’s taxable income in the form of a transfer pricing adjustment. In addition, the Hong Kong tax authorities may impose late payment fees and other penalties on Vimicro Hong Kong for underpaid or unpaid taxes. Our financial performance may be materially and adversely affected if Vimicro Hong Kong’s tax liabilities increase or if it is found to be subject to related fees or penalties. Any such negative development could have a material and adverse effect on our business, financial condition and results of operations.

Vimicro Hong Kong’s application for claims in the future may not be successful and as a result, the penalties to those underpaid taxes might be invoked and the royalty payments to Vimicro China could be subject to withholding tax.

In September 2006, Vimicro Hong Kong lodged offshore claims for all years since its commencement of operations in 2002. Based on the territorial source principle of taxation in Hong Kong, we believe that Vimicro Hong Kong has a reasonable basis to obtain the approval for such offshore claims. If the offshore claims are approved by the tax authorities in Hong Kong, Vimicro Hong Kong will not be subject to profits taxes on its operations or withholding taxes on its royalty payments to Vimicro China. In November 2012, Vimicro Hong Kong obtained a notice of no tax adjustment for the years from 2005/06 to 2008/09 and a Notice of Revised Assessment and Refund of Tax for 2004/05 and Notice of Provision Tax for 2005/06 from the Hong Kong Inland Revenue Department. As such, Vimicro Hong Kong’s offshore claims for such periods have been accepted by the tax authorities in Hong Kong. We believe that Vimicro Hong Kong is highly likely to obtain approval for its offshore claims and enjoy exemptions of profits taxes for 2010/11, 2011/12 and 2012/13 in Hong Kong, as there has been no change in its business model since 2009. However, we cannot assure you that Vimicro Hong Kong will be able to enjoy such favorable tax treatments . If the tax authorities in Hong Kong decline Vimicro Hong Kong’s offshore claim s in the future , Vimicro Hong Kong could be required to pay unpaid or underpaid taxes and be subject to penalties, which could materially and adversely affect our business, financial condition and results of operations .

We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violate any of these laws could have a material adverse effect on our business.

We are subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by U.S. persons and issuers as defined by the statute for the purpose of obtaining or retaining business. We are similarly subject to Chinese anti-corruption laws. Our activities in China create the risk of unauthorized payments or offers of payments by one of the employees, consultants, sales agents or distributors of our Company, even though these parties are not always subject to our control. We implement safeguard measures to prohibit these practices by our employees. Although we believe that we have adopted sufficient measures to control the related risks, our existing safeguard measures and any future improvements may not be effective in prohibiting related illegal conducts. The employees, consultants, sales agents or distributors of our Company may engage in conducts, without our knowledge, for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.

We have limited insurance coverage in China, and any business disruption or litigation we experience may result in our incurring substantial costs and the diversion of resources.

Insurance companies in China offer limited business insurance products and do not, to our knowledge, offer business liability insurance. While business disruption insurance is available to a limited extent in China, we have determined that the risks of disruption, cost of such insurance and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. As a result, except for fire insurance and our liability insurance for directors and officers, we do not have any business liability, disruption or litigation insurance coverage for our operations in China. Any business disruption or litigation may result in our incurring substantial costs and the diversion of resources. Any such negative development could have a material and adverse effect on our business, financial condition and results of operations.

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Risks Related to Our Industry

The markets in which we operate are highly competitive, and we cannot assure you that we will be able to compete successfully against our competitors.

The video processor market and video surveillance market are intensely competitive and are characterized by frequent technological changes and evolving industry standards. Our video processor business is comprised of two sub-product lines: PC camera processors and surveillance processors. In the PC camera processor market, we face competition primarily from ALi Corporation, EMPIA Technology Inc., Sonix Technology Co. Ltd. and Sunplus Technology Industrial Corp . In the surveillance processor market, we face competition primarily from Texas Instruments Incorporated, HiSilicon Technologies Co., Ltd. and Ambarella Incorporated .

A large number of companies in China also engage in the business of designing, manufacturing and installing video surveillance products. We also face competition from international companies since China’s entry into the World Trade Organization in 2001. In our video surveillance business, we face competitions from companies such as Sony, Samsung, Texas Instruments Incorporated, NXP Semiconductors N.V., Zhejiang Uniview Technologies Co., Ltd. and STMicroelectronics Dahua Technology, Axis, HiSilicon Technologies Co., Ltd. and Ambarella Incorporated .

We expect competition to increase in the markets in which we conduct our business. Increased competition may result in price reductions, reduced margins and market share and increased marketing and research and development expenditures. Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do and may be able to respond to changing market conditions and customer requirements more quickly and effectively. We cannot assure you that we will be able to compete effectively and increase or maintain our revenue and market share in the video processor market and video surveillance market or compete successfully against our current or future competitors. If we are unable to successfully compete with existing and future competitors, our business, financial condition and results of operations could be materially adversely affected.

Our video surveillance product offerings involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our profitability.

Some of our video surveillance products and services are designed for medium to large commercial, industrial and government facilities to protect valuable assets or prevent intrusion into high security facilities in China. Given the nature of our products and the customers that purchase them, sales cycles can be lengthy as customers conduct intensive investigations and deliberate between competing technologies and providers. For these and other reasons, the sales cycle associated with some of our products and services is typically lengthy and subject to a number of significant risks over which we have little or no control. If sales in any period fall significantly below anticipated levels, our financial condition and results of operations could suffer.

We are subject to rapidly declining average selling prices, which may harm our revenue and gross profit.

Semiconductor products and electronics products into which they are incorporated are typically sold in high volumes and are subject to rapid declines in average selling prices. We have reduced the prices of many of our video processor products in the past to meet market demand, and expect that we will continue to face market-driven pricing pressures on our products in the short term as a result of the industry downturn and uncertain market conditions. We expect to face more pricing pressures on our video processor products, which would require us to reduce the production costs of our existing products and develop new products with better prices in order to stay competitive. We will focus on promoting our production scale and reducing production costs in our video processor products. Our financial results will suffer if we are unable to offset any reductions in our average selling prices by developing new or enhanced products on a timely basis with higher selling prices or gross profit margins, increasing our sales volumes or reducing our costs.

We may be adversely affected by the cyclicality of the semiconductor industry.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The semiconductor industry and our operations are characterized by high costs, such as those related to facility construction and equipment, research and development, and employment and training of a highly skilled workforce, that are either fixed or difficult to reduce in the short term. The industry has, from time to time, experienced significant downturns, often connected with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. In addition, during these downturns some competitors may become more aggressive in their pricing practices, which would adversely impact our gross margin. Any downturns in the semiconductor industry may be severe and prolonged, and any failure of the industry to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations in the short and long term. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products.

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The recent global economic crisis has significantly impacted our industry and the downturn may occur again in the near to medium term. The recent downturn in our industry has led to sharply diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns may result in consolidations in our industry and changes in our competitive landscape. They may also reduce our revenue, cause excessive inventory, and result in material and adverse changes in our operating results.

Our business could be materially and adversely affected if we fail to anticipate changes in evolving industry standards and to develop and introduce new and enhanced products.

Our products are generally based on industry standards, which are continually evolving. Significant changes in customer requirements and preferences, introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our products, services and systems obsolete, and may require us to incur substantial unanticipated costs to comply with any such new standards. We have in the past significantly relied on our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products. Our continued ability to adapt to such changes and anticipate future standards will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure you that we will be able to anticipate the evolving industry standards or that we will be able to successfully develop and introduce new products to meet the new standards. If we fail to anticipate technological change and introduce new products that achieve market acceptance, our business and results of operations could be materially and adversely affected.

Risks Related To Doing Business in China

Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and have a material adverse effect on our competitive position.

Most of our business operations are conducted in China and we believe that a significant portion of devices that our products are incorporated into are ultimately sold to end users in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, the level of development, the growth rate, the control of foreign exchange and the allocation of resources.

While the Chinese economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. We cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Any adverse change in the economic conditions in China, in the policies of the PRC government or in the laws and regulations in China, could have a material adverse effect on the overall economic growth of China or on the investment in the semiconductor industry. Such developments could lead to reduction in demand for our products and consequently materially and adversely affect our competitive position.

Because our business depends in part on the continuing expansion of the electronics supply chain in China, any slowdown in this expansion or a disruption of the supply chain could have a material adverse effect on our business and operating results.

Our continuing growth is based upon, among other factors, the continuing expansion of design, manufacturing and other elements of the electronics supply chain in China. This expansion depends on many factors, such as the sustained global demand for electronics products, China’s ability to continue to attract foreign investment, maintain low costs of operations and supply a well-educated labor force, as well as compete successfully against other countries which desire to establish themselves as preferred supply centers. Since 2008, the global downturn has put severe pressure on global demand for electronics product, and significant realignment may take place in the electronics supply chain in China as a result. Any slowdown in the expansion of the electronics supply chain in China or a disruption of the supply chain due to industry realignment could have a material adverse effect on our business and operating results.

Uncertainties with respect to the PRC legal system could adversely affect us.

We conduct our business primarily through Vimicro China, which is subject to PRC laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign owned companies. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit the legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and the diversion of resources and management attention.

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Our business benefits from certain tax incentives and government grants relating to research and development activities. Expiration or elimination of, or other adverse changes to, these tax incentives or reductions of these grants could have a material adverse effect on our results of operations.

The PRC government has provided various tax incentives to domestic companies in the semiconductor industry, including Vimicro China, in order to encourage development of the industry. Vimicro China has benefited from tax incentives provided by the PRC tax authorities in the form of preferential tax treatment, reduced tax rates and tax credits, and has also received government research grants and other incentives. However, the PRC tax authorities could reduce or eliminate any or all of these tax incentives at any time in the future.

In March 2007, the National People’s Congress adopted the New Enterprise Income Tax Law, or New EIT Law, which became effective as of January 1, 2008. Under the New EIT Law, the enterprise income tax rate for domestic and foreign enterprises is unified at 25%, and enterprises established prior to March 16, 2007 that were eligible for preferential tax treatment according to the then effective PRC EIT Law for Foreign Investment Enterprise and Foreign Enterprise, administrative regulations and circulars with equivalent effect are subject to transitional rules to gradually change their rates to 25%. Certain qualified “high and new technology companies” may be entitled to a 15% preferential tax rate if they meet the definition of “high and new technology enterprises” set out in the Implementation Rules of the New EIT Law. The Implementation Rules of the New EIT Law as well as a series of clarification rules were promulgated by the State Council and relevant local authorities. In accordance with the Implementation Rules of the New EIT Law, the preferential tax rates granted to PRC entities that previously qualified as “high and new technology enterprises” will not be automatically applicable under the new tax regime unless they qualify as “high and new technology enterprises” pursuant to the New EIT Law, its Implementation Rules, and relevant working guidance promulgated by the authorities. Vimicro China is currently recognized as a “high and new technology enterprise” under the New EIT Law which entitles Vimicro China to a preferential tax rate of 15% for three years starting from January 1, 2011. We cannot assure you that Vimicro China will continue to qualify for such status under governmental evaluations in the future. For example, in the past, we received certain preferential tax treatment as an integrated circuit design enterprises, or ICDE; however, we are no longer eligible for such preferential tax treatment. In the event the preferential tax treatment for Vimicro China is discontinued, it will become subject to the standard PRC enterprise income tax rate, which could materially increase our tax obligations.

In addition, under the New EIT Law, the worldwide income of a resident enterprise, which includes an enterprise established outside of China with effective management located in China, will be subject to PRC income tax. If the PRC tax authorities determine that our company or any of our subsidiaries registered outside the PRC is a resident enterprise, its worldwide income will be subject to PRC income tax at a tax rate of 25%. Furthermore, under the New EIT Law, dividends payable by a foreign investment enterprise to its foreign non-resident enterprise investors that were derived from income after January 1, 2008 are subject to a 10% withholding tax, unless such foreign investor’s jurisdiction of incorporation has signed a tax treaty or arrangement for the avoidance of double taxation and the prevention of tax evasion with China that provides for a reduced rate of withholding tax. The Cayman Islands, where we are incorporated, does not have such a tax treaty with the PRC. If we are considered a non-resident enterprise, the 10% withholding tax imposed on our dividend income received from Vimicro China, our PRC subsidiary, would reduce our net income and have an adverse effect on our operating results. The New EIT Law also provides that, if a resident enterprise directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested enterprise are exempted from income tax, subject to certain conditions. Therefore, if we are classified as a resident enterprise, the dividends that we receive from Vimicro China may be exempted from income tax. However, it remains unclear how the PRC tax authorities will interpret the PRC tax resident treatment of an offshore company, like us.

The discontinuation of preferential tax treatment, the increase of the enterprise income tax rate applicable to Vimicro China, or the imposition of PRC income tax on our worldwide income could have a material adverse effect on our financial condition and results of operations.

Foreign holders of our ADSs or ordinary shares may be subject to PRC withholding tax on dividends payable by us and on gains realized on the sale of our ADSs or ordinary shares, if we are classified as a PRC “resident enterprise.”

Under the New EIT Law, withholding tax at a rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such interest or dividends have their sources within the PRC unless such non-resident enterprise can claim treaty protection. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to a 10% withholding tax if such gain is regarded as income derived from sources within the PRC. Since the New EIT Law is relatively new and ambiguous in certain aspects, there is uncertainty as to whether the dividends we pay with respect to our ADSs or ordinary shares, or the gain you may realize from the transfer of our ADSs or ordinary shares, would be treated as income derived from sources within the PRC and be subject to PRC withholding tax. If we are required under the New EIT Law to withhold PRC income tax on such dividends or your gains realized on the sales of our ADSs or ordinary shares, your investment in our ADSs or ordinary shares may be materially and adversely affected.

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Vimicro China is subject to restrictions on paying dividends or making other distributions to us.

We are a holding company and we rely on dividends paid by our subsidiaries, including Vimicro China, for our cash needs, such as the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Subsidiaries are required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds, until the accumulated reserve fund exceeds 50% of its registered capital. These reserve funds are not distributable as cash dividends. If our subsidiary in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

Future movements in exchange rates between the U.S. dollar and the RMB may have a material adverse effect on your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a managed band based on market supply and demand and by reference to a basket of certain foreign currencies. This change in policy has resulted in an approximately more than 30% appreciation of the RMB against the U.S. dollar since the introduction of new policy.

The majority of our revenue, cost of revenue and operating expenses are denominated in RMB, while a portion of non-operating expenses are denominated in U.S. dollars and Hong Kong dollars, which is pegged to the U.S. dollar. We use the U.S. dollar as the reporting currency for our financial statements. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our costs and operating margins as well as our net income and comprehensive income reported in U.S. dollars. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

Restrictions on currency exchange may limit our ability to receive and use our revenue effectively.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a portion of our revenue in RMB, which is currently not a freely convertible currency. Under our current structure, our income will be primarily derived from dividend payments from Vimicro China. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted outside of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs. In addition, we cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on RMB foreign exchange transactions.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiary, limit our subsidiary’s ability to distribute profits to us, or otherwise adversely affect us.

On October 21, 2005, SAFE issued the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicle, or Circular 75. On November 19, 2012, SAFE issued Notice on Further Improving and Adjusting Foreign Administration Policies in Respect of Foreign Direct Investment, or SAFE Circular 59, which became effective on December 17, 2012. SAFE Circular 59 provides, among other things, detailed implementing rules on initial registration procedures relating to incorporation of offshore special purpose vehicles owned by onshore residents and amendment registration procedures relating to changes to such offshore special purpose vehicles. Pursuant to Circular 75 and SAFE Circular 59, a PRC resident is required to complete the initial registration with the local SAFE counterpart before incorporating or acquiring control of an offshore special purpose vehicle, with assets or equity interests in an onshore company located in the PRC, for the purpose of offshore equity financing. The PRC resident is also required to amend the registration or handle a filing procedure upon (i) injection of the assets or equity interests in an onshore company or undertaking of offshore financing, and (ii) a material change that may affect the capital structure of the special purpose vehicle. Under Circular 75, the fulfillment of the initial and amended SAFE registrations is a prerequisite for other regulatory approvals and registrations required for relevant cross-border investment activities and capital flows, such as the offshore entity’s inbound capital contribution or provision of shareholder’s loans to the onshore entity and the onshore entity’s payment of dividends or repatriation of liquidation proceeds, equity interests disposal proceeds or capital reduction to the offshore entity.

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We have notified beneficial owners of our company who are PRC residents to register with the local SAFE branch as required under Circular 75. We understand that members of our senior management who are PRC residents have registered with the local SAFE branch. However, we may not at all times be fully aware or informed of the identities of all our beneficial owners who are PRC residents, and we may not always be able to compel our beneficial owners to comply with the Circular 75 requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents will at all times comply with, or in the future make or obtain any applicable registrations or approvals required by, Circular 75 or other related regulations. The failure or inability of beneficial owners of our company resident in the PRC to comply with the registration procedures set forth under Circular 75 could subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to our company or otherwise adversely affect our business.

If the PRC government determines that the contractual arrangements that establish the structure for operating our wireless value-added telecommunications business do not comply with applicable PRC laws and regulations, we could be subject to penalties.

We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under PRC laws, and our PRC subsidiaries, including Vimicro China, are foreign-invested enterprises. Various regulations in China restrict or prevent foreign-invested entities from holding certain licenses required to operate value-added telecommunications business, including wireless value-added telecommunications business. In light of these restrictions, we plan to rely on Vimicro Sky-Vision to hold and maintain the permits and licenses necessary to operate our wireless value-added telecommunications business in China. Vimicro Sky-Vision has had no substantive operations since its incorporation. We do not possess any equity interest in Vimicro Sky-Vision, but we receive certain economic benefits from it through various contractual arrangements and certain corporate governance and shareholder rights arrangements. In addition, we have entered into agreements with each of Vimicro Sky-Vision’s shareholders, which provide us with substantial control over Vimicro Sky-Vision. For a description of these contractual arrangements with Vimicro Sky-Vision and its shareholders, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Vimicro Sky-Vision and its Shareholders.”

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the Circular, issued in July 2006 by the Ministry of Industry and Information Technology, or the MIIT, reiterated the regulations on foreign investment in telecommunications businesses, which requires foreign investors to set up foreign-invested enterprises and obtain a business operating license, or VT license, for conducting any value-added telecommunications business in China. Under the Circular, a domestic company that holds a VT license is prohibited from leasing, transferring or selling the license to foreign investors in any form. They are also prohibited from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by a VT license holder or its shareholder(s). The Circular further requires each VT license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the Circular will have on us or other domestic providers of value-added telecommunications services that have adopted the same or similar corporate and contractual structures as ours.

If we are found to be in violation of any existing or future PRC laws or regulations, including the Circular, or if we fail to obtain or maintain any of the required permits or approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including but not limited to imposing fines, issuing rectification orders, confiscating our income, revoking Vimicro China’s or Vimicro Sky-Vision’s business and operating licenses, requiring us to restructure the relevant ownership structure or operations or requiring us to discontinue all or any portion of our wireless value-added telecommunication business. We did not derive any revenues from our wireless value-added telecommunications business in 2013 and we currently do not have any plan to operate wireless value-added telecommunications business in the foreseeable future.

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Our contractual arrangements with Vimicro Sky-Vision and its shareholders, respectively, may not be as effective in providing control over Vimicro Sky-Vision as direct ownership.

We plan to conduct our wireless value-added telecommunication business in China through Vimicro Sky-Vision, which was set up in March 2010. There ha ve been no substantive operations since its incorporation. Our contractual arrangements with Vimicro Sky-Vision and its shareholders provide us with effective control over Vimicro Sky-Vision. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Vimicro Sky-Vision and its Shareholders.” As a result of these contractual arrangements, we are considered to be the primary beneficiary of Vimicro Sky-Vision and Vimicro Sky-Vision becomes our VIE. Accordingly, we consolidate the results of operations, assets and liabilities of Vimicro Sky-Vision in our financial statements.

These contractual arrangements may not be as effective in providing us with control over Vimicro Sky-Vision as direct ownership. In addition, Vimicro Sky-Vision or its shareholders may breach the contractual arrangements. We cannot assure you that when conflicts of interest arise, Vimicro Sky-Vision and its shareholders will act completely in our interests or that conflicts of interest will be resolved in our favor. In any such event, we would have to rely on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

Contractual arrangements we have entered into may be subject to scrutiny by the PRC tax authorities, and a finding that we or Vimicro Sky-Vision owe additional taxes could reduce our net income and the value of your investment.

As required by applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. On January 8, 2009, the State Administration of Taxation, or SAT, issued the Implementation Measures of Special Tax Adjustments (Provisional), which reinforces its supervision on transfer pricing. We could face adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between Vimicro China and Vimicro Sky-Vision, if any, do not represent an arm’s-length price, and adjust Vimicro Sky-Vision’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Vimicro Sky-Vision, which could in turn increase its tax liabilities. In addition, the PRC tax authorities may impose late payment fees, fines, or revocation of business licenses and other penalties on Vimicro Sky-Vision for underpaid taxes. Our net income may be adversely affected if tax liabilities of Vimicro Sky-Vision increase or if Vimicro Sky-Vision is found to be subject to late payment fees or other penalties.

We face uncertainty with respect to the indirect transfer of equity interests in PRC on-shore entities.

Pursuant to the Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises’ Share Transfer, or Circular 698, issued by the SAT, effective as of January 1, 2008, any foreign investor indirectly transferring equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company (which is located in a jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of its residents is not taxable) must provide the PRC tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfer. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through any “abusive use of organizational form” and there are no reasonable commercial purposes for such form with the result that the corporate income tax liability is avoided, the PRC tax authorities shall have the power to reassess the nature of the equity transfer in accordance with the “substance-over-form” principle and deny the existence of an offshore holding company that is used for abusive tax planning purposes. In that case, the indirect equity transfer will be viewed as a direct transfer. Therefore, the capital gain derived from the indirect transfer will be subject to PRC withholding tax at 10%. “Income derived from equity transfers” as mentioned in this circular refers to income derived by nonresident enterprises from direct or indirect transfers of equity interest in China resident enterprises, excluding shares in Chinese resident enterprises that are bought and sold openly on the stock exchange.

While the term “indirectly transfer” is not defined, we understand that the relevant PRC tax authorities have broad discretion in requesting for information over a wide range of foreign entities having no direct contact with China. Meanwhile, there have been no formal declarations with regard to the interpretation and implementation of rules relating to the “abusive use of organizational form” and “reasonable commercial purpose.” As a result, in the event that any transaction we engage is deemed as an “indirect transfer” that is subject to Circular 698, we may be subject to additional compliance requirements and tax burdens, which could have a material and adverse effect on our business, financial condition and results of operations.

We face risks related to health epidemics and other outbreaks.

Our business could be adversely affected by swine flu, avian flu, SARS or another epidemic or outbreak on the economic and business climate. In 2009, an outbreak of swine flu occurred in various countries, including China. Any outbreak of swine flu, avian flu, or another epidemic in China may have a material adverse effect on our business operations, financial condition and results of operations. For instance, health or other government regulations may require temporary closure of our offices, which will severely disrupt our business operations.

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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight Board and investors may be deprived of the benefits of such inspection.

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

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. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures and quality control procedures. As a result, investors may be deprived of benefits of PCAOB inspections.

Proceedings instituted recently by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Securities Exchange Act of 1934.

In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii) grants the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully violated any such laws or rules and regulations.  On January 22, 2014, an initial administrative law decision was issued, sanctioning four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take effect until there is an order of effectiveness issued by the SEC. The accounting firms involved have the ability to appeal and if appealed, the sanction will not become effective until after a full appeal process is concluded and a final decision is issued by the SEC.  While we cannot predict the outcome of the SEC’s proceedings, if our independent registered public accounting firm is denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements could be determined to not be in compliance with the requirements for financial statements of public companies with a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the NASDAQ Global Market, which event would effectively terminate the trading market for our ADSs in the United States, and/or to the SEC’s revoking the registration of our ADSs under the Exchange Act pursuant to Section 12(j) thereof, in which event broker-dealers thereafter would be prohibited from effecting transactions in, or inducing the purchase or sale of, our ADSs in the United States.

Risks Related to the Shares and ADSs

We believe we were a passive foreign investment company for the taxable year ended December 31, 2013, which could result in adverse United States federal income tax consequences to United States Holders of our ADSs or ordinary shares.

Based on the market price of our ADSs and the value and composition of our assets, we believe we were a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for the taxable year ended December 31, 2013. In addition, it is likely one or more of our subsidiaries were also PFICs for such year. A non-United States corporation will be a PFIC for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) 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 must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or ordinary shares, our PFIC status will depend in large part on the market price of the ADSs or ordinary shares, which may fluctuate significantly. Because we believe we were a PFIC for the taxable year ended December 31, 2013, certain adverse United States federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation”) of our ADSs or ordinary shares with respect to any “excess distribution” received from us and any gain from a sale or other disposition of the ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

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The market price for our ADSs may be volatile.

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

·                                           actual or anticipated fluctuations in our quarterly operating results and changes or revisions of our expected results;

·                                           changes in financial estimates by securities research analysts;

·                                           conditions in the PC camera and video surveillance markets;

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

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

·                                           addition or departure of our key personnel;

·                                           fluctuations of exchange rates between the RMB, the U.S. dollar and the Hong Kong dollar;

·                                           litigation related to our intellectual property;

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

·                                           sales or perceived potential sales of additional ordinary shares or ADSs.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs.

In October 2012, we received a notification from the NASDAQ Stock Market, indicating that the minimum bid price of our ADS had been below $1.00 per ADS for 30 consecutive business days and as a result, we were not in compliance with the minimum bid price requirement for continued listing set forth in NASDAQ Listing Rule 5450(a)(1). Under NASDAQ Listing Rule 5810(c)(3)(A), we had a grace period of 180 calendar days, within which to regain compliance with the minimum bid price rule. We regained compliance on November 1, 2012 by meeting or exceeding $1.00 per ADS for a minimum of ten consecutive business days. We actively monitor the price of its ADSs and will consider available options, including, but not limited to, changing the ADS ratio, to regain compliance with the continued listing standards of the NASDAQ. If we are unable to comply with the continued listing standards of the NASDAQ Stock Market, we would not be able to remain listed on that stock exchange which would have a material adverse effect on the price of our ADSs.

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

We may require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue, the performance of video surveillance projects and construction of office buildings. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure our existing shareholders that financing will be available in amounts or on terms acceptable to us, if at all.

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

Additional sales of our ADSs or ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options, in the public market, the market price of our ADSs could fall. 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 ordinary shares, the prevailing market price for our ADSs could be adversely affected.

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Holders of our ADSs may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise their right to vote.

Except as described in this annual report on Form 20-F and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary bank will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

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

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

Your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct a substantial portion of our operations in China and the majority of our directors and officers reside outside of the United States.

We are incorporated in the Cayman Islands, and conduct a substantial portion of our operations in China through Vimicro China. A majority of our directors and officers reside outside of the United States and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States and the substantial majority of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state and it is uncertain whether such Cayman Islands or PRC courts would impose liabilities in original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state.

You may face difficulties in protecting your interests as a shareholder, as Cayman Islands law provides significantly less protection to shareholders when compared to the laws of the U.S.

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (201 3 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, shareholders of Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, our public shareholders may have more difficulty in protecting their interests in actions against the management, directors or our controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States, and our ability to protect our interests if we are harmed in a manner that would otherwise enable us to sue in a United States federal court may be limited.

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Although publicly traded, the trading market in our common stock has been substantially less liquid than the average trading market for a stock quoted on the NASDAQ Global Market and this low trading volume may adversely affect the price of our common stock.

We completed our initial public offering on November 18, 2005. On November 15, 2005, we listed our ADSs on the NASDAQ Global Market under the symbol “VIMC.” The trading market in our common stock has been substantially less liquid than the average trading market for companies quoted on the NASDAQ Global Market. Limited trading volume will subject our shares of common stock to greater price volatility and may make it difficult for you to sell your shares of common stock at a price that is attractive to you.

Provisions of our stockholder rights plan could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our shareholders, and could make it more difficult for shareholders to change management.

In December 2008, we adopted a shareholder rights plan. Although the rights plan will not prevent a takeover, it is intended to encourage anyone seeking to acquire our company to negotiate with our board of directors prior to attempting a takeover by potentially diluting an acquirer’s ownership interest significantly in our outstanding capital stock. The existence of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our ADSs.

We have incurred and will continue to incur increased costs as a result of being a public company.

As a public company, we have incurred and will continue to incur a significantly higher level of legal, accounting and other expenses than we did as a private company. We have incurred and will continue to incur costs associated with our public company reporting requirements. In addition, the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and the NASDAQ Stock Market, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

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The following descriptions set forth detailed information of our current significant subsidiaries and affiliated entities:

·                           Vimicro China, incorporated in China in October 1999 as a limited liability company with an approved operating period through May 2034. Vimicro China is our onshore holding subsidiary and we conduct substantially all of our headquarters functions through Vimicro China, including research and development, administration, sales and marketing at a headquarters level;

·                           Viewtel, incorporated in California, the United States, in June 1999 to keep abreast with the latest technology developments in the United States and to maintain a small team of engineers to conduct advanced research and development activities;

·                           Vimicro Hong Kong, established in Hong Kong in May 2002 to facilitate our sales activities and utilization of third-party foundries and assembly and testing houses located in China, Taiwan and Hong Kong;

·                           Vimicro Beijing, established in Beijing in April 2007 as a limited liability company with an approved operating period of 20 years. Vimicro Beijing primarily engages in research and development and sales and marketing activities;

·                           Vimicro Jiangsu, established in Jiangsu in December 2007 as limited liability company with an approved operating period of 20 years . Vimicro Jiangsu owns land use rights to a parcel of property on which it plans to develop office and research/manufacturing facilities, a portion of which we will use for our own purposes and a portion of which we will lease to third parties. See “Item 4. Information on the Company—D. Property, Plant and Equipment”;

·                           Vimicro Tianjin, established in Tianjin in December 2008 to focus on the design, manufacture and sale s of video surveillance products. It is a limited stock corporation incorporated by (i) Vimicro China, (ii) the State-owned Asset Management Corporation of Tianjin Economic-Technological Development Area, or Tianjin SAMC, and (iii) the Vimicro Management Foundation, or VMF, a limited partnership with Zhonghan (John) Deng and Zhaowei (Kevin) Jin as limited partners who are members of our management team and managed by Dr. Xiaodong (Dave) Yang, the general partner of VMF, who acted as our director until May  2012, to provide investment and consulting services. Tianjin SAMC and Vimicro China each contributed RMB250 million in cash to Vimicro Tianjin as initial registered capital and each holds approximately 49.99% ownership interest in the company. VMF holds a nominal ownership interest. Pursuant to agreements between Vimicro China and VMF, we obtained the voting rights and economic interests associated with VMF’s current share ownership in Vimicro Tianjin, which provides us control of Vimicro Tianjin. VMF also granted us an exclusive right to acquire from VMF the beneficial ownership of Tianjin SAMC’s interest in Vimicro Tianjin for the same amount of consideration paid by VMF. It is necessary for VMF to receive our consent before it can exercise the option to acquire Tianjin SAMC’s interest in Vimicro Tianjin. If we exercise this exclusive right, approximately 15% of Vimicro Tianjin’s ownership interest will be reserved for an equity award scheme whereby we may make grants of equity awards at our discretion. In 2009, Vimicro Tianjin acquired the complete ViSS business from ASB, including all equipment, inventories, business contracts, intellectual property and employees in China for a total consideration of approximately RMB56.0 million. In addition, Vimicro and ASB agreed to continue to cooperate on the related fields in the future. Through Vimicro Tianjin, we are also constructing a new facility for the research, development and production of digital high-definition video surveillance products and solutions. For more information about this project, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures;”

·                           Vimicro Guiyang , wholly owned and established by Vimicro Tianjin in Guiyang in January 2012 as a limited liability company with an approved unlimited operating period. Vimicro Guiyang focuses on the design, manufacture and sales of video surveillance products, as well as the execution and maintenance of local video surveillance projects ;

·                           Vimicro Fuzhou , established in Fuzhou in July 2012 as a limited liability company with an approved long-term operating period. Vimicro Fuzhou focuses on producing and marketing SVAC-based security surveillance products in Fuzhou, the capital city of Fujian province in China ;

·                           Vimicro Guangdong , established in Zhuhai, Guangdong in March 2014 as a limited liability company with an approved unlimited operating period. Vimicro Guangdong focuses on producing and marketing SVAC-based security surveillance products in Guangdong ; and

·                           Vimicro Sky-Vision, established in March 2010 as a limited liability company. Zhonghan (John) Deng, our chairman and chief executive officer, and Zhaowei (Kevin) Jin, our president and chief operating officer, hold 67% and 33% of the equity interest in Vimicro Sky-Vision, respectively. We entered into a series of contractual arrangements with Vimicro Sky-Vision and its shareholders. As a result of these contractual arrangements, Vimicro Sky-Vision became a VIE of our company, and we are considered to be the primary beneficiary of Vimicro Sky-Vision. Accordingly, we consolidated the results of operations, assets and liabilities of Vimicro Sky-Vision in our financial statements. To comply with the PRC regulations that restrict foreign ownership in value-added telecommunications business in China, we conduct our wireless value-added telecommunication operations, particularly the mobile surveillance business, through Vimicro Sky-Vision. There ha ve been no substantive operations since its incorporation.

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Contractual Arrangements with Vimicro Sky-Vision and its Shareholders

In order to comply with PRC laws restricting foreign ownership in the wireless value-added telecommunication business in China, we plan to conduct all of our wireless value-added telecommunication business through Vimicro Sky-Vision. We expect that Vimicro Sky-Vision will apply and hold the licenses and permits required to operate our wireless value-added telecommunication services. There ha ve been no substantive operations since its incorporation. The equity interest in Vimicro Sky-Vision was owned 67% by Zhonghan (John) Deng, our chairman and chief executive officer, and 33% by Zhaowei (Kevin) Jin, our president and chief operating officers, upon its establishment in March 2010. Vimicro China, Vimicro Sky-Vision and the shareholders of Vimicro Sky-Vision entered into a series of agreements that became effective on March 5, 2010 through which we exercise effective control of Vimicro Sky-Vision and can receive economic benefits generated from its shareholders’ equity interests. The following is a summary of the agreements currently in effect:

·                           Loan Agreement , between Vimicro China and Vimicro Sky-Vision’s shareholders. These loan agreements provide for loans in the amount of RMB6.7 million ($1.0 million) to Mr. Deng and of RMB3.3 million ($0.5 million) to Mr. Jin for them to make contributions to the registered capital of Vimicro Sky-Vision in exchange for their 67% and 33% equity interests in Vimicro Sky-Vision. The loans are interest free and are repayable on demand, but the only means by which the shareholders can repay the loans is to transfer to Vimicro China or a third party designated by Vimicro China their respective equity interests in Vimicro Sky-Vision.

·                           Equity Interests Purchase Right Agreement , among Vimicro China, Vimicro Sky-Vision and Vimicro Sky-Vision’s shareholders. Pursuant to these agreements, Vimicro China and any third party designated by Vimicro China have the right, exercisable at any time during the term of the agreements, to the extent permitted under PRC law, to purchase from Mr. Deng or Mr. Jin, as the case may be, all or any part of their equity interests in Vimicro Sky-Vision at a purchase price equal to their respective initial contributions to the registered capital of Vimicro Sky-Vision or at a price determined by Vimicro China. Vimicro China also has the right to determine the type of purchase price payment and the means of rendering the purchase price when exercising all or part of the option to purchase the equity interest held by the shareholders of Vimicro Sky-Vision.

·                           Share Pledge Agreements , among Vimicro China, Vimicro Sky-Vision and the shareholders of Vimicro Sky-Vision. Pursuant to these agreements, Mr. Deng and Mr. Jin pledged to Vimicro China their equity interest in Vimicro Sky-Vision to secure the performance of their respective obligations and Vimicro Sky-Vision’s obligations under the various VIE-related agreements. If any of the shareholders of Vimicro Sky-Vision breaches his or her respective obligations under any VIE-related agreements (Vimicro Sky-Vision’s breach of any of its obligations under the various VIE-related agreements will be treated as its shareholders’ breach of their respective obligations), including the Share Pledge Agreement, Vimicro China is entitled to exercise its rights as the beneficiary under the Share Pledge Agreement, including all the rights such shareholder has as a shareholder of Vimicro Sky-Vision.

·                           Business Operations Agreement , among Vimicro China, Vimicro Sky-Vision and the shareholders of Vimicro Sky-Vision. This agreement sets forth the rights of Vimicro China to control the actions of the shareholders of Vimicro Sky-Vision.

·                           Powers of Attorney , executed by the shareholders of Vimicro Sky-Vision in favor of Vimicro China. These powers of attorney give Vimicro China the exclusive right to appoint nominees to act on behalf of each of the Vimicro Sky-Vision shareholders in connection with all actions to be taken by Vimicro Sky-Vision.

·                           Exclusive Technical and Consulting Services Agreement , between Vimicro China and Vimicro Sky-Vision. Pursuant to this agreement, Vimicro China has the exclusive right to provide product development and application services, technology support, intellectual property rights, marketing, staffing, business operation and maintenance services to Vimicro Sky-Vision for a fee, based on a predetermined operating margin of Vimicro Sky-Vision.

In the opinion of our PRC counsel, King & Wood Mallesons, (i) the ownership structure and the business and operation model of Vimicro China and Vimicro Sky-Vision comply with current PRC laws and regulations; and (ii) each contract under Vimicro China’s contractual arrangements with Vimicro Sky-Vision and each of Vimicro Sky-Vision’s shareholders is valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Accordingly, PRC governmental authorities may ultimately take a view that is inconsistent with the opinion of King & Wood Mallesons. See “Item 3. Key Information—D. Risk Factors—Risks Related To Doing Business in China—If the PRC government determines that the contractual arrangements that establish the structure for operating our wireless value-added telecommunications business do not comply with applicable PRC laws and regulations, we could be subject to penalties.”

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Our Recent Corporate Developments

Disposal of non-core IC businesses

In December 2010, we adopted the plan to dispose our loss-making non-core IC businesses and three entities holding related land use rights to VMF Consulting Company, a related party, for cash consideration. In December 2010, we completed the disposal of Wuxi Vimicro Corporation, or Vimicro Wuxi, the entity engaging in such business, to VMF Consulting Company by transferring 95% of the equity interest in Vimicro Wuxi. In 2012 and September 2013, we completed the transfer of 4.9% and the remaining 0.1% of the equity interest in Vimicro Wuxi to VMF Consulting Company, respectively.

In 2012, we disposed of our interest of Vimicro VMF Shanghai Corporation, the parent company of Vimicro Shanghai, to Vimicro Xingguang Corporation, an affiliate of VMF Consulting Company, for a total consideration of $10.4 million. In April 2013, we transferred our interest in Vimicro VMF Shenzhen Corporation, or VMF Shenzhen, the parent company of Vimicro Shenzhen, to Vimicro Management Zhongxing Tianshi Investment Corporation, or Vimicro Tianshi, an affiliate of VMF Consulting Company for a total consideration of US$10.0 million. The consideration was based on a valuation performed by a third party appraiser. We received $5.0 million of this amount in 2013, and $3.8 million and $1.2 million in January and April 2014, respectively.

We had also planned to dispose of Vimicro Jiangsu to divest the land use right associated with our non-core IC businesses . However, after discussions with the Administrative Committee of Nanjing Xuzhuang Software Industrial Base, we were informed that it would be difficult to obtain the necessary approvals to dispose Vimicro Jiangsu. We currently plan on using the property to develop offices , sales and research facilities. We will use a portion of these facilities for our own purposes and the remaining portion we will sell to third parties who are qualified and accepted by the local government. The sale of a portion of the units to qualified third parties is in line with the government policy of attracting investment to the local area . For a detailed discussion of our current plan with respect to the land held by Vimicro Jiangsu, see “Item 4. Information on the Company—D. Property, Plant and Equipment.”

Establishment of Zhongtianxin

I n September  2012, we made investments to incorporate Zhongtianxin with Shanxi Guoxin Investment (Group) Corporation, or Guoxin Group, a financial holding group associated with the local government of Shanxi, and VMF Consulting Company to focus on security-surveillance investment, services and products, as well as developing relationships with security-surveillance customers initially in the local Shanxi market. In particular, Zhongtianxin will focus on the video surveillance business, particularly integrating, developing, producing and marketing SVAC-based security surveillance products and related video sensing and intelligence surveillance applications . Zhongtianxin will also focus on large-scale and capital-intensive projects, such as our projects in Taiyuan and Baoding Vimicro China and Vimicro Tianjin will continue to focus on surveillance processor products as well as video surveillance solutions . According to the terms of the agreement, the parties to the agreement would collectively (i) contribute RMB100 million for the registered capital of Zhongtianxin and (ii) contribute RMB100 million for a capital reserve for Zhongtianxin. In particular, Guoxin Group and VMF Consulting Company agreed to make cash contributions of RMB98 million and RMB4 million, respectively, to Zhongtianxin. In addition, Vimicro China agreed to ma k e a cash contribution of RMB26 million and provide certain intellectual property, appraised at RMB72 million by an independent third-party valuation firm, as part of its investment in Zhongtianxin. As of December 31, 2013, these amounts had been paid in full.

Vimicro China, Guoxin Group and VMF Consulting Company each holds 49%, 49% and 2%, respectively, of the equity interests of Zhongtianxin. Pursuant to a nominee agreement between Vimicro China and VMF Consulting Company, VMF Consulting Company is holding t he 2% of equity interest as nominee on behalf of Vimicro China . Our investment in Zhongtianxin is accounted for using the equity method as Guoxin Group may exercise substantive participating rights in accordance with the constitutional documents of Zhongtianxin. The establishment of Zhongtianxin reflects our efforts to expand our video surveillance business by cooperating with a state-owned enterprise and engaging in high cash demand video surveillance projects, such as build-transfer, or BT projects, and surveillance integration projects .

Beijing Zhongxing Tianshi Consulting Company, or VMF Consulting Company, is a related party controlled by Zhonghan (John) Deng and Zhaowei (Kevin) Jin, who are members of our management team and managed by Xiaodong (Dave) Yang, who acted as our director until May 2012.

Deconsolidation of Visiondigi

In 2012, we restructured our investments in and deconsolidated Visiondigi, an entity established in Shanghai in July 2009 to focus on research and development, production and sales of network video surveillance products and solutions. Visiondigi was incorporated as a limited liability company by Vimicro China and three DSP experts. In January 2010, Visiondigi introduced Ningbo Sunny Optoelectronic Information Co., Ltd., or Ningbo Sunny, a wholly-owned subsidiary of Sunny Optical Technology Co., Ltd., a company listed on the Hong Kong Stock Exchange, as a minority shareholder. In 2012, we restructured our investments in Visiondigi. In particular, (i) we transferred 35.26% of the equity interest in Visiondigi to an independent third party individual for a consideration of RMB0.3 million, and (ii) entered into a nominee arrangement with the other shareholders of Visiondigi to hold an aggregate of 5.97% of equity interest on behalf of such shareholders. After the restructuring, we beneficially owned 12.03% of equity interest in Visiondigi. As a result, in 2012, we deconsolidated Visiondigi in 2012 and its financial results were presented as “discontinued operations” on our consolidated financial statements.

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Repurchase of Shares held by General Atlantic

In December 2013 we entered into a purchase and sale agreement with General Atlantic investment funds to repurchase ordinary shares and ADSs held by General Atlantic. The securities owned by General Atlantic represented 19.6% of the Company’s outstanding shares as of the date of the Agreement. In December 2013, we repurchased 11,267,767 shares held by General Atlantic and in January 2014, we repurchased 11,267,755 shares held by General Atlantic. These two repurchases constituted all of the shares held by General Atlantic at that time. The total consideration for the transaction was approximately $11.1 million, which we funded from our working capital.

B.                      Business Overview

Overview

We are a leading video processor and video surveillance solution provider. Our video surveillance business comprises system-level solutions including surveillance cameras, system and management software, digital video decoders, recorders and servers. We believe the expansion of our video surveillance business will capitalize on China’s growing demand in this industry. Our video process or business comprises PC camera processors and surveillance processors that we design, develop and market. These mixed-signal semiconductor products are used in both PC/notebooks as well as surveillance products.

We have a growing video surveillance business which generated approximately 67. 9 % of our revenue in 2013 compared to 2 4 . 9 % of our revenue in 2012. We aim to establish a leading position in the video surveillance market with our system-level solutions and semiconductor products. We intend to continue to identify and actively pursue additional markets which we believe have the potential for high volume sales of video semiconductor products and video surveillance products. To execute our strategy in relation to the video surveillance market, we co-founded the Surveillance Digital Video Audio Coding Standard Working Group, or SVAC Working Group. In December 2010, the Standardization Administration of China released a national standard for SVAC, which was prepared by the SVAC Working Group. The SVAC standard has been approved by the national standardization committee in China and has been applied in industry use starting in May 2011. The SVAC standard is the first national standard for the Chinese video surveillance industry and is considered crucial for the establishment of the public security and criminal prevention system in China. For further information relating to our recent efforts in developing video surveillance market, see “—Our Solutions and Competitive Strengths—Leading Role in Developing the SVAC Standard.”

With respect to our video processor business, we are one of the leading suppliers of PC camera processors in terms of the number of peripheral PC cameras shipped worldwide in 2013. Our PC camera processors are incorporated into the products of well-known notebook computer vendors, such as the largest notebook vendor in the world and the largest personal computer maker in China. We provide a broad range of surveillance processors for surveillance applications ranging from home surveillance to professional commercial surveillance applications. Our surveillance processors provide various features such as image signal processing, video compression, audio compression, video analytics, video storage and networking.

We conduct most of our operations in China and believe that we benefit from our access to high-quality design talent, a competitive cost environment, growing electronics design and manufacturing industries and increasingly significant domestic video surveillance markets in China. Founded in 1999, we began volume shipments of our mixed-signal PC camera processors in September 2001. We introduced our first mixed-signal video products in September 2001. Our net revenue increased from $59.0 million in 2011 to $71.2 million in 2012, and decreased to $64. 5 million in 2013. We incurred net loss attributable to Vimicro International Corporation of $28.2 million, $0.6 million and $ 8 . 4 million in 2011, 2012 and 2013, respectively.

Our Solutions and Competitive Strengths

Our solutions consist of semiconductors, software and system-level reference designs. We have designed our solutions to support a broad range of standards, baseband platforms and components in order to facilitate our customers’ designs, assembly and supply chain management processes. We believe that our products and solutions, our location in China and our team of experienced managers and engineers provide us with a number of significant competitive strengths, including:

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·                           Leading Role in Developing the SVAC Standard . We aim to establish a leading position in the video surveillance market with system-level solutions and semiconductor products including surveillance processors, surveillance cameras, system and management software, digital video decoders, recorders and servers, among other things. We intend to continue to identify and actively pursue additional markets which we believe have the potential for high volume sales of video semiconductor products and video surveillance products. To execute our strategy in relation to video surveillance market. For more information and recent developments with respect to the SVAC standard, please see “Item 4. Information on the Company—B. Business Overview—Technology—Surveillance Video and Audio Coding (SVAC) standard.”

·                           Expertise in Mixed-Signal, System-on-Chip Design. Integrating analog and digital circuits in a single semiconductor product is inherently difficult due to noise interference and other technical challenges. Our experienced teams of mixed-signal design engineers are skilled in integrating a variety of multi-voltage, analog and digital functional building blocks in our SoC designs. The high level of integration of our single-chip products delivers several benefits to our customers, including low power consumption, small size and cost effectiveness. All of our products are implemented in standard CMOS processes and manufactured using leading-edge process technologies.

·                           Leading Design Capabilities in Audio, Imaging and Video Algorithms and Related Technologies. Our teams of designers have experience in multimedia systems and a variety of audio, imaging and video technologies. We are able to integrate multiple multimedia functions in a single semiconductor product. We have created sophisticated high performance signal processing algorithms for many stages of video processing, including sampling, filtering, coding, decoding, synthesis, compression, storage, playback, transmission and receiving (modulation/demodulation). Using these algorithms, our multimedia SoC solutions are able to perform image, video and audio DSP functions such as data recovery, signal quality enhancement, noise reduction, sample rate conversion, auto exposure, white-balance and focus control, and video and audio signal reconstruction. As a co-founder of SVAC Working Group, we initiated and participated in the establishment of the core algorithm for the SVAC standard. The proprietary intelligent video analysis algorithm can fulfill functions such as image quality diagnosis, overstepping analysis, face snapshot and recognition and calculation of the number of people within a camera’s view.

·                           Proprietary Technologies Enabling High Performance Signal Processing Capabilities. Our mixed-signal video processors enable high performance real-time processing of large volumes of audio, image and video signal data. Our adaptable processor architecture incorporates circuitry that can be modified by software commands to permit different types of tasks to be performed by the same processor. We believe that this architecture allows our products to achieve processing speed, signal quality and power consumption performance comparable to that obtained from competing fixed function hardware. However, unlike fixed function hardware, which is suitable for single applications such as video processing, our products can support a variety of multimedia applications such as audio, video and imaging using a single processor. Since our processors are designed solely for multimedia applications, rather than a broad spectrum of computing tasks, our processors avoid the need for the complex control software used by CPUs and baseband processors, and can therefore offer significantly better processing speed, signal quality and power consumption performance.

·                           Application-Level Software Development Capabilities . We seek to differentiate our products and speed our customers’ time-to-market through developing application-level software capabilities. We work closely with other technology leaders to enable innovative multimedia applications through the integration of value-added software features. We offer video management software, including a carrier-grade ViSS security platform that offers sophisticated centralized management of users, configurations and video monitoring, customized versions for various industries and diversified 3G , 4G terminal applications. Our video management software adopts SIP protocol, which is widely used in China’s telecom operator networks and tightly integrates with video analytics. It acts as a core piece that connects the hardware in a surveillance system and has a wide array of advanced features to cover customers’ surveillance needs. Our video management software also meets the requirement of GB/T.28181, the latest standard from the Ministry of Public Security of China.

·                           Extensive Network of Sales, Marketing and Customer Support Resources . We have an extensive network of sales, marketing and customer support resources, including offices in Mountain View California, Hong Kong, Taipei, Beijing, Shanghai, Shenzhen and Nanjing. We have entered into distribution and support agreements with partners whom we have trained to support our products to cover additional areas such as Japan and specific large customers in South Korea and elsewhere. We maintain an extensive technical support team in Beijing and in other cities in China to provide high-quality, low-cost support services for our global sales force.

·                           Proximity to the Growing Electronics Design and Manufacturing Industry and Electronics Markets in China. We market and sell our products and solutions to an increasing number of companies in the electronics industry that have established design, manufacturing and assembly facilities in China. Our close proximity to these facilitates provides opportunities for efficient cooperation, marketing, manufacturing improvements and after-sales support.

·                           Ability to Enter Local Public Purchase Programs and to Penetrate Certain Vertical Domestic Markets. We have won various awards and endorsements from local governments in China for technological innovation and self-developed intellectual properties. Our extensive industry experience allows us to enter public projects, government procurement programs and vertical industries that are dominated by state-owned enterprises. We collaborate closely with various national research institutions and leading domestic enterprises in China to develop products and solutions that are tailored to specific local requirements, in areas of security, surveillance and other multimedia applications.

·                           Ability to Benefit from Worldwide Sourcing of Semiconductor and System Design Talent . Our management and engineering team leaders have significant international experience that they have leveraged in guiding us to our current position. We believe that this has enabled us to attract skilled and experienced engineers in Silicon Valley and elsewhere with expertise in mixed-signal design to support our growth and continued technology innovation. In addition, we believe this position gives us a competitive advantage in recruiting candidates from China’s top universities. China has established a significant educational system for advanced semiconductor design, and graduates a large number of advanced degree holders in engineering each year, creating a large pool of motivated and qualified candidates. As a result, we have been consistently able to hire qualified engineering graduates at a competitive cost. Recruiting and retaining research and development talent comprises one of the most significant expenses for semiconductor design companies. Our access to high-quality, low-cost design talent in China provides us with a significant competitive advantage relative to semiconductor designers based in higher-cost areas.

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Products

We design, develop and market video surveillance solutions and mixed-signal video processors for PC cameras and surveillance products . We provide our customers with system-level solutions and comprehensive products that include highly integrated semiconductors, customizable firmware and software, software development tools, reference designs and applications support. Our products support a broad range of standards, platforms and components in order to facilitate our customers’ designs and their assembly and supply chain management processes.

Video Surveillance Business

The video surveillance market primarily consists of video capturing, compression, transmission, storage, processing, display and video analysis products. We provide complete hardware-software surveillance solutions for our customers, which are used in a variety of government, business, and industrial applications. Our solutions fully support the SVAC standard, China’s domestic standard for surveillance video.

Our main products in the video surveillance business include hardware and software. The hardware portion of this business is comprised of digital video recorders (DVRs), network video recorders (NVRs), video servers, digital high-definition camera, and other equipment. The hardware is based on our proprietary integrated chips, which offers functions such as image signal processing, audio and video compression, video analytics, video storage, real-time network monitoring and other functions. Our video intelligent surveillance system (ViSS) software comprises the centerpiece of our video surveillance systems and this software is integrated into the surveillance solutions that we sell. ViSS offers a platform for unified surveillance, storage and management solutions utilizing broadband network infrastructure to connect independent monitoring sites across a broad geographical area. ViSS can meet the monitoring needs of city roadways, airports, shopping centers, banks, schools, and other large facilities where surveillance is vital. ViSS also provides system management tools that enhance the visual and audio monitoring capabilities of multiple sites over telecommunication networks. ViSS represents one of the most stable carrier-class video surveillance platforms available in the industry.

The following table sets forth the features of our video recorder products (including DVR, NVR and SVR) from 2009 to the year end of 2013.

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(1)                   “Month introduced” means the month during which we began shipments of the product.

The following table sets forth the features of our IP camera products , including IP camera, camera module and IP Dome, from 2009 to the year end of 2013.

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(1)                   “Month introduced” means the month during which we began shipments of the product.

The following table sets forth the features of our security platform from 2009 to the year end of 2013.

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(1)                   “Month introduced” means the month during which we began shipments of the product.

Video Processors

We design different models of PC camera processors and surveillance processors based on the same core technology platform with modifications in successive models with improved performance and functionality. Our PC camera processors are fully compatible with sensors that are based on CMOS technology, the primary type of technology for sensors. We also provide a broad range of video processors for surveillance applications, ranging from home surveillance to professional commercial surveillance applications. Our surveillance processors offer various features such as image signal processing, video compression, audio compression, video analytic, video storage, and real-time network monitoring. All of our PC camera processors and surveillance processors are single-chip processors manufactured under our own brand name using our proprietary intellectual property. While our principal focus is on providing our customers with proprietary, high performance products, we also develop and sell a range of basic, complementary semiconductor products in order to provide more comprehensive solutions for our customers.

The following table sets forth major PC camera processors we have developed and shipped in volume from 2009 to the year end of 2013.

(1)                  “Month introduced” means the month during which we began shipments of the product.

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The following table sets forth major surveillance processors we have developed and shipped in volume from 2009 to the year end of 2013.

In 2011, 2012 and 2013, we shipped 44.4 million, 52.3 million and 22.1  million units, respectively, of PC camera processors. Our PC camera processors have been incorporated into PC cameras sold by leading PC camera vendors, including Logitech and other major global brands. We started to ship surveillance proces sors in 2013.

Technology

We have developed a broad portfolio of technologies to support multiple functions that are required for video processors and video surveillance solutions . Our products integrate multiple multimedia applications, numerous industry-standard formats, advanced input/output capabilities, analog functions, on-chip memory, and complex algorithms to provide high-quality still picture, video and audio and are designed to allow efficient use of silicon.

We provide multimedia signal processing products that exceed the quality levels required by multiple key industry standards, which enables our customers to offer products with superior quality and functions. We have established a rigorous design process to support the integration of numerous functional blocks into a low-cost single-chip product on a rapid time-to-market schedule. This process enables us to adapt to evolving industry standards and quickly improve features of our products to support our customers’ rapid product release cycles.

Leveraging our PC camera processor technologies, we have expanded our business into the video surveillance industry. With devoted resources such as support from our sophisticated research and development team, we are capable of providing end-to-end solution packages and key digital surveillance products to customers. We supply the full range of products with digital, networking, intelligentization and high-definition features, such as front-end IP Camera, back-end NVR, D1 and 1080P high-definition products. Our core technologies include the following:

Multimedia SoC Design and Video, Imaging, Audio and Graphic Technologies

Our team of designers has extensive experience in multimedia systems and a variety of audio, imaging and video technologies, including leading industry standards and compression technologies such as MIDI, MP3, MPEG 2, MPEG4 , H.264 SVAC and JPEG. This enables us to integrate multiple multimedia functions into a single semiconductor product. We have created sophisticated high performance signal processing algorithms for various stages of video processing, including sampling, filtering, coding and decoding, synthesis, compression, storage, playback, transmission and receiving (modulation/demodulation).

·                           Video. We possess a broad portfolio of video technologies to support leading industry standards and compression technologies, such as JPEG, MPEG2, MPEG4, AVS and H.264. In addition, we have developed a variety of technologies to provide high video quality and differentiated features, including interlaced to progressive and progressive to interlaced, audio video synchronization, noise reduction, resolution enhancement, sample rate conversion, scaling, auto focus, face tracking algorithms and signal reconstruction.

·                           Imaging. We have developed a number of image processing algorithm technologies to provide high-quality imaging capabilities in our products. Such technologies include color interpolation, color space conversion and correction, white balance, noise reduction, auto exposure, focus control, resolution enhancement, signal quality enhancement, wide dynamic range, contrast enhancement and dead pixel detection and correction technologies.

·                           Audio. We have developed a broad portfolio of audio technologies to support leading industry standards and compression technologies such as MIDI, MP3, WMA, AAC, AMR and our proprietary versatile multimedia data (VMD). We have developed several audio processing algorithms and other capabilities to provide a superior aural experience to end users and differentiate our customers’ products in the market, including wave engine, wave engine codec, surround sound audio, 3D audio, noise cancellation, echo cancellation and all-digital amplifier technologies.

·                           Graphics. To support graphics capabilities for user interface and other applications in video surveillance devices, we have developed a number of graphics signal processing capabilities, including support for low power 2D and 3D graphics such as drawing polygons, mobile flash and java.

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Embedded DSP and Multimedia Signal Processing Algorithms

To support the development of highly integrated multimedia SoC’s incorporating multiple multimedia capabilities, we have developed adaptable processor architecture. The processor can be modified by software commands to reconfigure it in an optimal manner for the processing of different types of tasks such as audio, video, imaging and graphics processing. We believe that this architecture allows our products to achieve processing speed, signal quality and power consumption performance comparable to that obtained from competing fixed function hardware that is suitable for a single application such as video processing. Since our processors are designed solely for multimedia applications, rather than a broad spectrum of computing tasks, our processors avoid the need for the complex and power inefficient control and processing software used by general purpose CPUs and baseband processors, and can therefore offer significantly better processing speed, signal quality and power consumption performance than those general-purpose processors.

Design Methodology

Multimedia SoC design usually requires integration of each of the aforementioned technological capabilities into a single chip on a rapid product design cycle. We use a number of industry leading standard and proprietary CAD and design methodologies to accomplish this. Our design methodologies in algorithms, software and hardware co-design enables integration of multimedia signal processing algorithms with mixed-signal design to ensure that our algorithms are optimized for efficient silicon implementation and high yield manufacturing. To meet stringent time-to-market requirements and rapid product cycles of multimedia semiconductor design, we have developed a methodology based on software simulation, hardware simulation, single and multi-FPGA emulation, software-hardware co-simulation, processor based software-hardware co-emulation and digital and analog co-simulation. In addition, we have developed proprietary multimedia mixed-signal development platforms for system-level integration at the customer site.

Surveillance Video and Audio Coding (SVAC) standard

We aim to establish a leading position in the video surveillance market with system-level solutions and semiconductor products including surveillance cameras, system and management software, digital video decoders, recorders and servers, among other things. We intend to continue to identify and actively pursue additional markets which we believe have the potential for high volume sales of multimedia semiconductor products and video surveillance products. To execute our strategy in relation to video surveillance market:

·                   We co-founded the SVAC Working Group. The goals of SVAC Working Group are to develop standards for advanced audio video coding and safety system and improve synchronization among various safety and alarm systems. In December 2010, Standardization Administration of China released a national standard for SVAC, which was prepared by the SVAC Working Group. The SVAC standard has been approved by the national standardization committee in China and has been applied in industry use starting in May 2011. The SVAC standard is the first national standard for the Chinese video surveillance industry and is considered crucial for the establishment of the public security and criminal prevention system in China.

·                   We, through Vimicro China and Vimicro Tianjin, participated as senior members in the Beijing Surveillance Video & Audio Coding Industry Alliance, or SVAC Alliance, a non-profit organization, in Beijing in August 2011. The purpose of SVAC Alliance is to (i) enhance the application and implementation of SVAC, (ii) promote the SVAC standard and its industrialization process, (iii) create a SVAC industrial cooperation platform, and (iv) enhance the technical level of video surveillance in China. SVAC Alliance attracted more than 40 research institutes, universities, companies and other industry participants.

·                   We entered into a framework agreement with the Fuzhou local municipal government to jointly develop, produce, and market SVAC-based security surveillance products in Fuzhou, the capital city of Fujian province in China. We also incorporated Vimicro Fuzhou which currently focuses on developing 4G standard SVAC-based IP cameras and also undertakes maintenance work for our surveillance products.

·                   We set up a joint venture with Guoxin Group in Shanxi province to develop, produce, and market surveillance video and audio coding SVAC-based surveillance security products and related video sensing and intelligence applications.

·                   We secured a government procurement contract from the Jinzhong City Public Security Bureau of Shanxi province to provide SVAC-based security surveillance products and services in 2012.

·                   The SVAC industry and technology alliance conference was held on July 23, 2013 in Beijing and was attended by representatives from the Ministry of Public Security (MPS), the Standardization Administration of the People’s Republic of China (SAC), the Ministry of Science and Technology, the Ministry of Industry and Information Technology (MIIT), the National Development and Reform Commission (NDRC), as well as the members of the SVAC Alliance. MPS and Vimicro together co-founded the SVAC Alliance, for the development, promotion, and commercialization of the SVAC standard. The SVAC Alliance now counts most major Chinese surveillance companies and research institutions as its members. Hikvision Digital Technology Co., Ltd. and Dahua Technology , the two largest video-surveillance companies in China, recently joined the SVAC Alliance. At the conference, the formation of a cross-ministry SVAC Promotion Office was announced, which will be directly led by the Chinese government. T he SVAC Promotion Office has authorized MPS to draft a provision for security-technology management. As a result of these initiatives, it appears t he SVAC standard has entered a new phase — the deployment phase in China.

·                   In July 2013, Zhongtianxin signed an agreement with the Public Security Bureau of Taiyuan, Shanxi province, valued at approximately $31 million, for the first phase of a major video-surveillance system, to be installed along highways, sidewalks, and at key public facilities. Vimicro Tianjin would receive approximately $20 million from selling surveillance products to Zhongtianxin under this agreement.

·                   In September 2013, Vimicro Tianjin received an order for a SVAC-based technology solution in Ziyang city in Sichuan province, valued at approximately $9 million. The system will be comprised of hundreds of video surveillance stations installed in the city. This project represents the first phase of a larger installation in Ziyang city and in the surrounding town .

·                   In December 2013, Zhongtianxin received an order for a SVAC-based technology solution, valued at nearly $41 million. In connection with this contract, Vimicro received purchase orders in the amount of approximately $20.3 million as of the date of this annual report. This order is from the Baoding Public Security Bureau for a city-wide SVAC-based surveillance network project in Baoding city in Hebei province. The network is being installed for security, surveillance, and traffic monitoring. The system will be comprised of several thousand video surveillance stations, and the project represents the first phase of a multiyear deployment and includes equipment and installation.

·                   In April 2014, we signed an agreement regarding SVAC-compliant chips with the First Research Institute of the Ministry of Public Security. We expect that cooperation with First Research Institute of the Ministry of Public Security will continue to develop future SVAC national standards with the respect to core chips, safety programs, promotions, and other system features.

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Scene-based Image Processing Technology

We have launched a scene-based, high-fidelity image processing technology for the surveillance market. This new technology has been adopted by the Chinese National Standard for Technical Specification of SVAC. Our SVAC-enabled digital video processor is designed with low-power and configurable multi-core architecture that substantially boosts the performance of video surveillance systems and improves security capabilities.

Core Chip Technology

Utilizing our digital-multimedia core chip technology, we have been focusing on development and innovation of our video surveillance business line. We have invested significant resources in the research and development of our video surveillance business, in order to quickly adapt to the evolving industry standards and respond to customers’ demand for intelligent high-definition digital-core video surveillance solutions. Our VC 710X Series Multi-Media Image Processor Core Chip released in October  201 3 , which was designed specifically for both PC cameras and notebook cameras and that can be used in the video surveillance industry, has brought wide interest from many high definition digital camera vendors and IP surveillance camera vendors .  Considering the surveillance industry is moving into full HD, WDR (Wide Dynamic Range) applications, we have enhanced these image processing capabilities and implemented them into several of our new Multimedia SoC chip products. This core chip utilizes our self-developed intelligent visual calculation analysis technology, which provides a technological platform for facial recognition, behavioral analysis, high-definition facial image capture and single frame subject number calculation. Our advanced core chip technology is fully integrated with our IPC, DVS, HVR, SVR, NVR board designs and our ViSS software platform, creating a competitive advantage for our full range of products, from front end IP cameras to back end NVRs and from basic D1 to 1080P high-definition products.

Key Technology in Printed Circuit Board

We possess sophisticated printed circuit board design capabilities for IP camera, DVS, HVR, SVR and NVR. We are the first manufacturer in the industry to fulfill above 32-channel analog/digital mixed video recording and management technology in China.

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Video Management Software Technology

We offer video management software, including a carrier-grade ViSS security platform that offers sophisticated centralized management of users, configurations and video monitoring, customized versions for various industries and diversified 3G terminal applications. Our video management software adopts SIP protocol, which is widely used in China telecom operator networks, and closely integrates with video analytics. It acts as a core piece that connects the hardware in a surveillance system and has a wide array of advanced features to cover customers’ surveillance needs. Our video management software also meets the requirement of GB/T.28181, the latest standard from Ministry of Public Security of China.

Customers

Customers of our video surveillance business mainly include government entities, telecommunications operators and other entities in China, such as schools, banks, railway companies, supermarkets and theaters. We sell our video surveillance products primarily to distributors and system integrators. We expect our revenue of sales of video surveillance products to end-users as a percentage of our total video surveillance revenue to continue to increase.

Many of the leading brand owners in our PC camera processor markets use original design manufacturers, or ODMs, which are companies that specialize in the design and manufacture of products for brand owners. Accordingly, a significant portion of our revenue is derived from our sales to ODMs, who incorporate our video processors into end products that they supply to brand owners. Our major ODM customers include Akkord International Limited and Namuga Co. Ltd. We also sell our products to distributors, to original equipment manufacturers, or OEMs, who incorporate our video processors in their end products, and to design houses and module manufacturers. In most cases, we ship products to and receive payments directly from distributors and ODMs rather than brand owners for whom the ODMs design and manufacture products. As a result, we do not always have the ability to confirm directly with brand owners that our video processors are incorporated in their end products. Our representative customers and distributors in the PC camera markets in 2013 are Han v ision Electronics Co., Ltd., Richpower Co., Ltd. , T-Link Technology Co., Ltd.

For our surveillance processors, we have not engaged design houses or ODMs. We currently manufacture modules incorporating our surveillance processors and supply the modules directly to brand owners, such as Zhejiang Dahua Technology Co., Ltd., Yaan Group, Jabsco Electronic Technology Co., Ltd. and Guangzhou Lilin Electronic Technology Co., Ltd. In the future, we may sell our surveillance processors directly to brand owners or to design houses, which will incorporate the surveillance processors into end products that they supply to brand owners.

Substantially all of our customers are based in Asia. We anticipate that most of our revenues will continue to be derived from sales to our customers in Asia. However, we believe that a significant number of PC cameras designed and manufactured by our customers are sold to end users outside of the Asia-Pacific region. The following table sets forth our net revenue by country of domicile of the customer for the periods indicated.

Net revenue from external customers amounted to $54.7 million, $70.3 million, $42.4 million for the years ended December 31, 2011, 2012 and, 2013, respectively. Third party transections took 93%, 99%, 66% of total revenue in 2011, 2012 and 2013.

Revenue from mainland China increased by $26.0 million, or 142.6%, from 2012 to 2013. This corresponded with a decrease in revenue from Hong Kong of $32.6 million, or 61.5%. These shifts reflected the increased revenue contribution from our video surveillance business for which the majority of customers are located within mainland China. The majority of our video processor customers are located outside mainland China .

A small number of customers have historically accounted for a substantial portion of our net revenue and accounts receivable balance. In 2013, sales to our top five and top ten customers (including related parties) collectively accounted for approximately 74 % and 82 %, respectively, of our net revenue for the year, and accounts receivable balance attributable to these customers amounted to 6 1 % and 7 5 %, respectively, of our total accounts receivable as of December 31, 2013. Richpower Co., Ltd., one of our major China-based distributors for our video processor business and one of our largest customers in 2013, accounted for approximately 63% and 26% of our net revenue in 2012 and 2013, respectively. As of December 31, 2013, accounts receivable balance attributable to top five and ten customers (in terms of accounts receivable balance) collectively represented approximately 58 % and 70%, respectively, of our total accounts receivable balance, and revenue derived from these customers accounted for 15% and 46%, respectively, of our total revenues in 2013. As of December 31, 2012 and 2013, accounts receivable due from ASB, a distributor of our video surveillance products and one of our top five customers in 2013, accounted for 48% and 33%, respectively, of our total accounts receivable. We are exposed to risks relating to the concentration of sales to and accounts receivables due from a limited number of customers. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business—We sometimes extend credit to our customers in the video surveillance projects. Failure or delay in collecting trade receivables from these customers could affect our liquidity.”

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Sales and Marketing

Our marketing staff works closely with our research and development staff and our customers to develop demand for our products. When designing products, we aim to anticipate our customers’ needs and to meet their increasingly complex and specific design requirements. We also strive to design products that will achieve broad market acceptance and generate widespread end user demand, including demand for follow-on and derivative products using our solutions.

Video surveillance business

We sell most of our video surveillance products and services through our extensive sales network in China. We have approximately 118 sales personnel in our video surveillance business. We divide our market by geographic regions and industries. Each region or industry is managed by a marketing manager who is responsible for technical support, management and client relations within the region or industry. In addition to our own sales and marketing force, we have established close relationships with a number of sales agents in order to take advantage of their regional resources and provide products and services that are tailored to the needs of our customers in those regions. We expect our revenue of sales of video surveillance solution products to end-users as a percentage of our total revenue to continue to increase. We also market and promote our products by attending industry exhibitions and advertising our products in industry magazines and periodicals.

We co-founded the SVAC Working Group. The goals of SVAC Working Group are to develop standards for advanced audio video coding and safety system and improve synchronization among various safety and alarm systems. In December 2010, Standardization Administration of China released a national standard for SVAC, which was prepared by the SVAC Working Group. The SVAC standard has been approved by the national standardization committee in China and has been applied in industry use starting in May 2011. The SVAC standard is the first national standard for the Chinese video surveillance industry and is considered crucial for the establishment of the public security and criminal prevention system in China;

In addition, in August 2011, we, through Vimicro China and Vimicro Tianjin, participated as senior members in the SVAC Alliance, a non-profit organization, in Beijing. The purpose of the SVAC Alliance is to (i) enhance the application and implementation of SVAC, (ii) promote the SVAC standard and its industrialization process, (iii) create a SVAC industrial cooperation platform, and (iv) enhance the technical level of video surveillance in China. In July 2013, there were 54 members of the SVAC Alliance, including Hikvision Digital Technology Co., Ltd. and Dahua Technology, the two largest video-surveillance companies in China.

Video processor business

We sell our products through both our direct sales staff and authorized sales representatives. Our direct sales staff is located in Beijing, Shenzhen, and Taipei, covering major regional markets in mainland China and Taiwan . Our direct sales staff includes trained field application engineers who assist our customers in designing, testing and qualifying their devices that incorporate our products. Our network of authorized sales representatives also play important roles in our sales, in particular in the Taiwan, South Korea , Japan and mainland China markets, where many of our principal customers are located. We intend to expand our sales and marketing network to develop new customers in Asia. Our sales are made primarily pursuant to individual purchase orders rather than long-term commitments. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, we believe that our backlog is not a good indicator of our future sales. Our time-to-market typically ranges from three to six months for our PC processors and surveillance processors and may be significantly longer for first-time customers.

We engage in marketing activities such as attending conferences and exhibitions and participating in industry specific organizations to promote our products and brand name. We were a founding member of MultiMedia Telecommunications Association, or MMTA, which was established in October 2004 by leading participants in China’s telecommunications industry, such as China Mobile, China Unicom, China Telecom, China Netcom, Huawei Technologies Co., Ltd. and ZTE Corporation, to promote domestic and international technical innovation and standards and to promote 3G applications in China. MMTA has established a number of key working groups focusing on developing and promoting industry standards in areas such as streaming technology, mobile TV, DRM and mobile surveillance. We have also taken steps to promote our video surveillance processors. In particular, we have taken a leading role in the SVAC Working Group, the implementation of SVAC standard and the establishment of the SVAC Alliance. We believe these activities, in addition to our research and development activities with respect to surveillance processors, has helped us promote our SVAC-based surveillance processor business.

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We believe that the above activities have been instrumental in promoting our products and brand name in the video processor market.

Manufacturing

Video surveillance business

We have established assembly line s and a test center s in Tianjin , Fuzhou, and Taiyuan for our video surveillance business, which produce all of our video recorder products (including NVR, DVR and SVR) and some of our IP camera products. We also use OEMs, for example, Shenzhen Jabsco Electronic Technology Co. Ltd., when there is a large demand for our video surveillance solution products. In addition, in May 2013, Vimicro Tianjin completed the construction of a project for the research, development and production of digital high-definition video surveillance products and solutions. We are in the process of applying for the necessary governmental approvals to utilize this facility.

Video processor business

We develop our proprietary designs and provide them to third-party foundries to produce silicon wafers for our video processors. By utilizing third-party foundries to produce silicon wafers for our video processors, we are able to focus more of our resources on product design and eliminate the high cost of building and operating advanced semiconductor fabrication facilities. The bulk of our video processors are manufactured with 0.18 micron , 0.13 micron and 65 nanometer CMOS process technolog ies. We periodically negotiate with these third-party foundries to establish price, volume, timing and other terms.

We have historically purchased substantially all of our silicon wafers from TSMC in Taiwan, and SMIC, in China, both of which are leading foundries in the world. We usually order sufficient processors each quarter in advance to ensure that we have sufficient supply to support our current and planned sales growth. As the price of our raw materials has been stable in recent years and due to our long-term relationships with these foundries, we have enjoyed consistent pricing in the past. We have the ability to negotiate our price each quarter or every half year when we order our products for the subsequent quarter. We work closely with these foundries in order to achieve high manufacturing yields in the fabrication process, which is an important aspect of our cost containment efforts.

We have developed our own automatic testing process for mixed-signal semiconductors and outsource most of our assembly and testing requirements to independent assembly and testing houses. We engage ASE and SPIL for our assembly and testing requirements. We have also designed and incorporated on-chip test circuits into some of our video processor products. We use standard, readily available packages for all of our products. We currently meet our entire mixed-signal semiconductor testing requirements through the use of logic testing equipment. For cost reduction purposes, we continue to evaluate the relative costs and benefits of outsourcing the testing of our mixed-signal semiconductors.

Quality Assurance

For video processor products, w e focus on product quality through all stages of the design and manufacturing process. Our designs are subject to extensive circuit simulation before being committed to test manufacture. In an effort to reduce production costs, we commit a new product to volume production only after sample wafers are fabricated and sample processors are manufactured, packaged and tested. We qualify each of the foundries and assembly and testing companies we use through a series of industry standard product stress tests, as well as an audit and an analysis of their quality assurance systems and, in the case of foundries, their manufacturing capability. We also monitor quality and reliability throughout the production cycle by reviewing electrical parametric data from these foundries and assembly and testing companies. We closely monitor foundry production for consistent quality and reliability. We have been certified with ISO 9001 for the quality system used in manufacturing our video processor products.

For product quality standardization and quality improvements of our video surveillance solution products , we closely monitor the production process through all stages of the design and manufacturing process. We monitor and test product functionality to ensure that the products will satisfy the customers’ demands. We have also developed a system to manage the documentation of the production cycle, including documentation from the suppliers’ management, documentation from raw material, manufacturing and assembly testing, documentation relating to product performance inspection, documentation relating to product aging evaluation, as well as documentation relating to the quality of finished products to be delivered. We are ISO 9001 certified for our quality system and CQC certified for product safety.

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Intellectual Property

We design substantially all of our video processors in-house and rely on a combination of patents, trademarks, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. As of December 31, 2013, we had 561 registered patents and 326 pending patent applications in China, 59 registered patents and 47 pending patent applications in the United States, one registered patent and six pending patent applications in Taiwan and four pending patent applications in South Korea. Our issued patents and pending patent applications relate primarily to technology we developed for our video processors and video surveillance solutions . As of December 31, 2013, we registered 91 trademarks in China, including a trademark that incorporates our English name “Vimicro.” We have registered our domain name www.vimicro.com with ChinaDNS.

Competition

The video processor semiconductor industry is highly competitive and dynamic and is characterized by rapid technological changes, evolving industry standards, price reductions and rapid product obsolescence. Our ability to compete effectively depends on defining, designing and regularly introducing new products that meet or anticipate the design needs of our customers’ next generation products and applications. We face competition from various companies, including certain of our customers.

In the PC camera processor market, we face competition primarily from ALi Corporation, EMPIA Technology Inc., Sonix Technology Co., Ltd. and Sunplus Technology Industrial Corp. We also face competition from large, diversified semiconductor vendors such as Realtek and Ricoh . In the surveillance processor market, we mainly face competition from Texas Instruments Incorporated, Ambarella Incorporated and HiSilicon Technologies Co.

In the video surveillance solution market, competition is largely based on price, product quality, distribution capability and after-sales services. The video surveillance industry in China is highly competitive, with a large number of domestic players engaging in the business of designing, manufacturing and installing video surveillance products. We also face competition from international companies since China’s entry into the World Trade Organization in 2001. Due to the rapid growth of the market and increasing demand for customized products, we believe that the video surveillance market in China will remain competitive with a large number of companies offering differentiated products targeting different customers.

A significant part of the video surveillance solution market involves video capturing, compression, transmission, storage, processing, display and video analysis. Leveraging our video processor technologies, we have expanded our business into the video surveillance solution market, where we face competition mainly from companies such as Sony, Samsung, Texas Instruments Incorporated, Hikvision Digital Technology Co., Ltd , Zhejiang Uniview Technology Co., Dahua Technology, Axis, HiSilicon Technologies Co., Ltd. and Ambarella Incorporated.

The most significant factors that affect our competitiveness are:

·                           the performance and cost effectiveness of our products relative to those of our competitors’ products;

·                           the level of integration and power efficiency of our products;

·                           the quality and reliability of our products;

·                           our ability to deliver products in required volumes, on a timely basis and at competitive prices;

·                           our ability to rapidly introduce new products to market; and

·                           our customer support capabilities.

We believe we compete favorably on the basis of these factors. However, many of our existing and potential competitors have significantly greater financial, technical, manufacturing, marketing, sales and other resources than we do. We cannot assure you that we will be able to compete successfully against our current or future competitors.

REGULATION

The semiconductor industry in China is subject to substantial regulation. This section summarizes the most significant PRC regulations governing our business in China.

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Regulations and Policies that Encourage the Development of Semiconductor Design Companies

Preferential Taxation Policies

Promulgation of PRC New Income Tax Law. In March 2007, the National People’s Congress adopted the New EIT Law, which became effective as of January 1, 2008. Under the New EIT Law, the enterprise income tax rate for domestic and foreign enterprises is unified at 25%, and enterprises established prior to March 16, 2007 that were eligible for preferential tax treatment according to the then effective PRC EIT Law for Foreign Investment Enterprise and Foreign Enterprise, administrative regulations, and circulars with equivalent effect shall be subject to transitional rules to gradually change their rates to 25%. Certain qualified “high and new technology companies” may be entitled to a 15% preferential tax rate if they meet the definition of “high and new technology enterprise” set out in the Implementation Rules of the New EIT Law. The Implementation Rules of the New EIT Law as well as a series of clarification rules were promulgated by the State Council and the taxation authorities in December 2007 and early 2008. On April 14, 2008, the Measures on the Qualification of High and New Technology Enterprises were promulgated. In accordance with these laws and rules, the preferential tax rates granted to PRC entities that previously qualified as “high and new technology enterprises” will not automatically be applicable under the new tax regime unless they qualify as “high and new technology enterprises” pursuant to the New EIT Law, its Implementation Rules, and relevant working guidance promulgated by the authorities. Vimicro China was recognized as a “high and new technology enterprise” by the competent government authorities and under the New EIT Law, effective in 2008, it was entitled to a preferential tax rate of 15% for three years from January 1, 2008. Vimicro China’s application to renew its “high and new technology enterprise” status was duly approved and is currently enjoying a preferential tax rate of 15% for 2011 -2013 .

Restriction on Foreign Investment in Value-Added Telecommunications Business

In July 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the Circular. The Circular reiterated the regulations on foreign investment in telecommunications businesses, which requires foreign investors to set up foreign-invested enterprises and obtain a business operating license, or VT license, for conducting any value-added telecommunications business in China. Under the Circular, a domestic company that holds a VT license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by a VT license holder or its shareholder(s). The Circular further requires each VT license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to a lack of interpretative materials from the regulator, it is unclear what impact the Circular will have on us or other domestic providers of value-added telecommunications services that have adopted the same or similar corporate and contractual structures as ours.

Intellectual Property Protection for Semiconductors

China has adopted legislation related to intellectual property rights, including trademarks, patents and copyrights. China is a signatory to the main international conventions on intellectual property rights and became a member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization, in December 2001. Set forth below are major PRC laws and international treaties effective in China protecting intellectual property rights in semiconductors:

·                           the Patent Law of the People’s Republic of China , or the Patent Law, revised at the seventh meeting of the Standing Committee of the Ninth National People’s Congress of the People’s Republic of China on August 25, 2000 and the revised implementing regulation of the Patent Law issued by the State Council on June 15, 2001, effective July 1, 2001; the third amendment of the Patent Law was adopted by the People’s Congress on December 27, 2008 and became effective on October 1, 2009 and the amended implementing regulation of the Patent Law was issued by the State Council on January 9, 2010, effective on February 1, 2010;

·                           the Paris Convention for the Protection of Industrial Property of the World Intellectual Property Organization, of which China became a member state on March 19, 1985;

·                           the Patent Cooperation Treaty , of which China became a member state on January 1, 1994;

·                           the General Principles of the Civil Law of the People’s Republic of China adopted at the fourth session of the Sixth National People’s Congress of the People’s Republic of China on April 12, 1986, effective January 1, 1987. In this legislation, intellectual property rights were defined in China’s basic civil law for the first time as a civil right of citizens and legal persons;

·                           the Regulations for the Protection of the Layout Design of Integrated Circuits , or the Layout Design Regulations, adopted March 28, 2001 at the 36th session of the executive meeting of the State Council, effective October 1,2001;