F-1 1 h03859fv1.htm FORM F-1 fv1
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As filed with the Securities and Exchange Commission on June 25, 2010
Registration No. 333-      
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form F-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Camelot Information Systems Inc.
(Exact Name of Registrant as Specified in its Charter)
 
         
British Virgin Islands   7371   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
Beijing Publishing House
A6 North Third Ring Road
Xicheng District, Beijing 100120
The People’s Republic of China
Tel: +(86-10) 5810-0888
(Address, including zip code, and telephone number, including area code of registrant’s principal executive offices)
 
 
 
 
CT Corporation System
111 Eighth Avenue
New York, NY10011
Tel: +1 (212) 894-8940
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
         
Gregory G. H. Miao
Skadden, Arps, Slate, Meagher & Flom
42nd Floor, Edinburgh Tower,
The Landmark
15 Queen’s Road, Central
Hong Kong SAR
Tel: +(852) 3740-4700
  Peter X. Huang
Skadden, Arps, Slate,
Meagher & Flom LLP
30th Floor, Tower 2
China World Trade Center
No. 1, Jian Guo Men Wai Avenue
Beijing 100004 China
Tel: +(8610) 6535-5500
  Chris K.H. Lin
Simpson Thacher & Bartlett LLP
ICBC Tower, 35th Floor
3 Garden Road, Central
Hong Kong SAR
Tel: +(852) 2514-7600
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
     
Title of Each Class of
    Aggregate
    Amount of
Securities to be Registered     Offering Price(3)     Registration Fee
Ordinary shares, with no par value(1)(2)
    US$250,000,000     US$17,825
             
 
(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6. Each American depositary share represents four (4) ordinary shares.
(2) Includes (i) ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public and (ii) ordinary shares that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside of the United States.
(3) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED          , 2010
 
Preliminary Prospectus
 
 
(CAMELOT INFORMATION SYSTEMS INC LOGO)
 
Camelot Information Systems Inc.
 
 American Depositary Shares
 
Representing           Ordinary Shares
 
 
 
 
This is our initial public offering. We are offering           American depositary shares, or ADSs, each representing four (4) of our ordinary shares, with no par value. Certain of our shareholders identified in this prospectus, which includes entities affiliated with our directors and other affiliated entities, are offering an additional          ADSs. The estimated initial public offering price is between US$     and US$      per ADS. The ADSs may be evidenced by American Depositary Receipts, or ADRs. We will not receive any proceeds from the ADSs sold by the selling shareholders.
 
Prior to this offering, there has been no public market for our ADSs or ordinary shares. We have been authorized to have our ADSs listed on the New York Stock Exchange, or the NYSE, under the symbol ‘‘CIS.”
 
See “Risk Factors” beginning on page 9 to read about risks you should consider before buying our ADSs.
 
 
 
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
                 
    Per ADS   Total
 
Public offering price
  US$           US$        
Underwriting discount
  US$     US$  
Proceeds, before expenses, to us
  US$     US$  
Proceeds, before expenses, to the selling shareholders
  US$     US$  
 
To the extent that the underwriters sell more than           ADSs, the underwriters have an option to purchase up to an aggregate of           additional ADSs from certain selling shareholders at the initial public offering price less the underwriting discount.
 
 
The underwriters expect to deliver the ADSs to the purchasers on or about          , 2010.
 
 
Goldman Sachs (Asia) L.L.C. Barclays Capital
William Blair & Company Cowen and Company Oppenheimer & Co.
 
 
 
Prospectus dated       , 2010.


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You should rely only on the information contained in this prospectus or to which we have referred you. We have not authorized anyone to provide you with information that is different from that contained in this prospectus. We are offering to sell, and are seeking offers to buy, the ADSs only in jurisdictions where such offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.
 
We have not undertaken any efforts to qualify this offering for offers to individual investors in any jurisdiction outside the United States. Therefore, individual investors located outside the United States should not expect to be eligible to participate in this offering.
 
Until          , 2010 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
You should read the entire prospectus carefully, including the “Risk Factors” section beginning on page 9 and the audited consolidated financial statements and the accompanying notes to these financial statements beginning on page F-1 before making an investment decision.
 
Our Company
 
We are a leading domestic provider of enterprise application services and financial industry IT services in China, and we focus on enterprises operating in the Chinese market. According to IDC, a leading independent research firm, we are the largest domestic provider of SAP-based Enterprise Resource Planning services, or the ERP services in China as measured by 2009 revenue. Our flexible delivery model also allows us to provide IT services to other areas of the Asia-Pacific region, including Taiwan and Japan, which we believe further distinguishes us from our competitors.
 
We focus on providing services at the higher end of the IT value chain. Our primary service lines are:
 
  •  enterprise application services, or EAS, which primarily consist of (i) packaged software services for leading ERP software packages, and (ii) software development and maintenance services; and
 
  •  financial industry IT services, or FIS, which primarily consist of software solutions, system support and maintenance, as well as IT consulting services for the financial industry.
 
We provide services to a wide range of industries, including financial services, resources and energy, manufacturing and automobile, technology, as well as telecommunication, media and education. We provide our services to enterprise customers directly as well as indirectly through international IT service providers such as IBM, Accenture and HP. We have enjoyed strong business relationships with IBM and Accenture since 2000 and with HP since 2002. As part of our long-term collaboration with IBM, we have entered into a number of strategic initiatives, including the joint development of a service delivery center focused on enterprise application software and services. After working with us for a number of years, IBM became one of our shareholders in December 2007. Our other major customers include industry leading companies such as Hitachi, NRI, Sinopec (through PCITC) and Lenovo. We have been granted a number of awards, including the Best Business Model Innovation Enterprise Award in China’s Software Industry and Outstanding Solution in Financial Information Development of China’s Software Industry, both jointly awarded by the Chinese Software Industry Association and China Information World in June 2008.
 
We deliver a majority of our services to our customers on-site through our professionals based in Beijing, Shanghai, Dalian, Zhuhai, Nanjing, Taipei and Tokyo, as well as through our professionals based in Kunshan and Jiaxing which primarily support our Shanghai operations. In addition, we manage a number of dedicated delivery teams to service our Japan-based customers from our facility in Dalian. As of March 31, 2010, we had 2,474 IT professionals. The scale of our operations enhances our ability to execute multiple large and specialized projects, and facilitates our monitoring and management of additional projects. In addition, we maintain a proprietary database of more than 9,000 qualified IT professionals, which provides us with a highly scalable delivery capacity to address our customers’ needs and to maintain high productivity. We were named one of China’s Top Employers in 2007 by Corporate Research Foundation, an independent research firm.
 
Since the establishment of our company, we have grown significantly through organic growth. Since 2006, we have also made a number of strategic acquisitions that expanded our presence in China and the Asia-Pacific region. In 2007, 2008 and 2009, our net revenues totaled US$51.4 million, US$90.8 million and US$118.0 million, respectively, representing a compound annual growth rate, or CAGR, of 51.5%. During the same periods, our net income attributable to Camelot Information Systems Inc. totaled US$7.3 million, US$9.3 million and US$13.0 million, respectively, representing a CAGR of


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33.2%. For the three months ended March 31, 2010, our net revenues and net income attributable to Camelot Information Systems Inc. totaled US$35.3 million and US$1.0 million, respectively. Excluding share-based compensation, acquisition-related intangible amortization, gain from extinguishment of liability, postponed initial public offering costs, and changes in fair value of contingent consideration, our non-GAAP net income attributable to Camelot Information Systems Inc. for 2007, 2008 and 2009 would have been US$8.8 million, US$11.6 million and US$18.4 million, respectively, representing a CAGR of 45.0%. For the three months ended March 31, 2010, our non-GAAP net income attributable to Camelot Information Systems Inc. would have been US$3.4 million. For a reconciliation of our non-GAAP net income attributable to Camelot Information Systems Inc. to the U.S. GAAP net income attributable to Camelot Information Systems Inc., see footnote (3) on page 7 of this prospectus.
 
Our Industry
 
According to IDC, China’s IT services industry reached $10.7 billion in 2009 and is projected to reach $18.2 billion in 2013, growing at a CAGR of 13.8% from 2008 to 2013. The enterprise applications market in China was US$3.7 billion in 2009 and is expected to reach US$6.3 billion in 2013, with a CAGR of 13.3% from 2008 to 2013. In addition, IDC projects China’s total spending on banking IT solutions was approximately US$1.0 billion in 2009 and is expected to increase to US$2.0 billion in 2013, representing a CAGR of 18.5% from 2008 to 2013. There are a number of key factors contributing to the growth of China’s IT services industry, including China’s sizeable and growing domestic market, favorable government support, strong demand for greater operational efficiency and data transparency, as well as technology advancement to compete more effectively.
 
We believe that we are well-positioned to capitalize on the growth trends in the IT services industry in China.
 
Our Competitive Strengths
 
We believe the following strengths distinguish us from our competitors and enable us to capitalize on the projected growth in China’s IT services and solutions industry:
 
  •  leadership in China’s fast-growing enterprise applications market, including in the high-end SAP-based ERP segment, with a recognized brand name;
 
  •  strong position in mission critical software solutions in China’s fast-growing financial IT industry;
 
  •  scalable delivery capacity with a large pool of qualified professionals;
 
  •  established relationships with leading international IT service providers and enterprise customers;
 
  •  track record of rapid and profitable expansion;
 
  •  disciplined acquisitions of strategic businesses; and
 
  •  management team with complementary blend of extensive international experience and local market intelligence.
 
Our Business Strategy
 
Our goal is to become the market leader in each of the IT services and solutions markets in China that we address. To that end, we intend to continue to:
 
  •  broaden service offering;
 
  •  expand delivery channels;
 
  •  capitalize on cross-selling opportunities;


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  •  attract, retain and motivate qualified employees;
 
  •  pursue strategic acquisitions that complement our growth strategy; and
 
  •  enhance and streamline solution development.
 
Our Challenges
 
The primary challenges we face include:
 
  •  our ability to attract, train and retain a large and cost-effective pool of qualified professionals;
 
  •  our ability to compete effectively in the highly competitive markets for IT services;
 
  •  the continuing increase in wages for IT professionals in China; and
 
  •  our dependence on a small number of customers.
 
In addition, we face a number of other risks and uncertainties that may materially and adversely affect our business, financial condition, results of operations and prospects. See “Risk Factors.”
 
Corporate Information
 
Our holding company, Camelot BVI, was incorporated in the British Virgin Islands in November 2000, and subsequently established a number of operating subsidiaries in China. We conduct a significant majority of our business through our operating subsidiaries in China.
 
Our principal executive offices are located at Beijing Publishing House, A6 North Third Ring Road, Xicheng District, Beijing, 100120, The People’s Republic of China. Our telephone number at this address is (86-10) 5810-0888 and our fax number is (86-10) 5810-0900.
 
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website is http://www.camelotchina.com. The information contained on our website is not part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.


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The Offering
 
The following information assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs in the offering, unless otherwise indicated.
 
ADSs offered by us
     ADSs, representing           ordinary shares.
 
ADSs offered by the selling shareholders
     ADSs, representing           ordinary shares.
 
ADSs outstanding immediately after this offering
     ADSs (or     ADSs if the underwriters exercise the over-allotment option in full).
 
Ordinary shares outstanding immediately after this offering
     ordinary shares (or           ordinary shares if the underwriters exercise the over-allotment option in full).
 
Over-allotment option We and certain selling shareholders have granted to the underwriters an option, which is exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of           additional ADSs at the initial public offering price after deducting underwriting discounts and commissions, solely for the purpose of covering over- allotments.
 
The ADSs Each ADS represents four (4) ordinary shares, with no par value, that will be held on deposit with the custodian for Citibank, N.A., as depositary. As an ADS holder, you will not be treated as one of our shareholders. You will have rights as provided in the deposit agreement. Under the deposit agreement, you may instruct the depositary to vote the ordinary shares underlying your ADSs. You must pay a fee for each issuance or cancellation of an ADS, distribution of securities by the depositary or any other depositary service in accordance with the terms set forth in the deposit agreement. For more information about our ADSs, see “Description of American Depositary Shares” in this prospectus and the deposit agreement, which is included as an exhibit to the registration statement of which this prospectus forms a part.
 
Use of proceeds Our net proceeds from this offering are expected to be approximately US$      million, or approximately US$      million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial public offering price of US$      per ADS (the mid-point of the estimated initial public offering price range shown on the front cover of this prospectus). We intend to use our net proceeds from this offering for working capital and general corporate


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purposes as well as funding possible future strategic acquisitions.
 
We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders.
 
Risk factors See “Risk Factors” in this prospectus beginning on page 9 and other information included in this prospectus for a discussion of the risks you should carefully consider before deciding to invest in our ADSs.
 
Listing We have been authorized to have our ADSs listed on the NYSE under the symbol “CIS.” Our ordinary shares will not be listed on any exchange or quoted for trading on any automated quotation system or any over-the-counter trading system.
 
Dividend policy We currently intend to retain all of our earnings to finance the development and expansion of our business, and therefore do not intend to declare or pay any cash dividends in the foreseeable future.
 
Depositary Citibank, N.A.
 
Lock-up We, the selling shareholders, our directors and executive officers and certain other holders of our shares and options have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”
 
Payment and settlement We expect our ADSs to be delivered against payment on or about          , 2010.


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Summary Consolidated Financial Data
 
The following summary consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009, and the consolidated balance sheet data as of December 31, 2008 and 2009, have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2007 have been derived from our audited financial statements, which are not included in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2009 and 2010 and the summary consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments that we consider necessary to fairly present our financial position and results of operations for the periods presented. You should read the summary consolidated financial data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future period. In addition, our unaudited results as of and for the three months ended March 31, 2010 may not be indicative of our results of operations as of and for the full year ending December 31, 2010.
 
                                         
    For the Year Ended
   
    December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    (U.S. dollars in thousands, except share and per share data)
 
Consolidated statement of operations data:
                                       
Net revenues
    51,380       90,772       118,003       20,522       35,312  
Cost of revenues(1)(2)
    (35,620 )     (64,187 )     (81,976 )     (14,745 )     (26,540 )
                                         
Gross profit
    15,760       26,585       36,027       5,777       8,772  
                                         
Selling and marketing expenses(1)(2)
    (1,796 )     (3,818 )     (6,199 )     (1,100 )     (2,370 )
General and administrative expenses(1)
    (5,700 )     (11,613 )     (12,627 )     (3,299 )     (4,255 )
Research and development costs
          (1,705 )     (1,496 )     (635 )     (426 )
Postponed initial public offering cost
          (2,457 )                  
Changes in fair value of contingent consideration for acquisitions of Agree and Tansun
                (549 )           (306 )
                                         
Total operating expenses
    (7,496 )     (19,593 )     (20,871 )     (5,034 )     (7,357 )
Government subsidies
    27             56              
                                         
Income from operations
    8,291       6,992       15,212       743       1,415  
Interest expense
    (6 )     (310 )     (96 )     (14 )     (123 )
Interest income
    396       244       118       16       44  
Dividend income from short-term investment
          11                    
Gain/(loss) on short-term investment
          (115 )     44              
Gain from extinguishment of liability
          3,926                    
                                         
Income before provisions for income taxes
    8,681       10,748       15,278       745       1,336  
Provisions for income taxes
    (1,374 )     (1,400 )     (2,241 )     (110 )     (289 )
Equity in earnings of an affiliate, net of income taxes
    6                          
                                         
Net income
    7,313       9,348       13,037       635       1,047  
Less: Net (loss)/income attributable to noncontrolling interest
          (66 )     (71 )     2       (14 )
                                         
Net income attributable to Camelot Information Systems Inc.(3)
    7,313       9,282       12,966       637       1,033  
                                         
Net income per share attributable to shareholders of Camelot Information Systems Inc.(4) 
                                       
Basic-ordinary shares
    0.06       0.07       0.10       0.00       0.01  
Basic-Series A convertible preferred shares
    0.06       0.07       0.10       0.00       0.01  
Basic-Series B convertible preferred shares
    0.06       0.07       0.10       0.00       0.01  
Diluted-ordinary shares
    0.06       0.07       0.10       0.00       0.01  
                                         
Weighted average shares used in calculating net income per share(4):
                                       
Basic-ordinary shares
    73,691,478       77,394,257       82,035,859       79,574,814       90,572,994  
Basic-Series A convertible preferred shares
    39,652,097       44,055,018       44,055,018       44,055,018       44,055,018  
Basic-Series B convertible preferred shares
    55,059       4,019,328       4,019,328       4,019,328       4,019,328  
Diluted-ordinary shares
    114,516,885       127,587,315       133,017,168       130,096,588       146,854,714  
                                         


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(1) Includes the following amounts of share-based compensation expenses for the periods indicated:
 
                                         
    For the Year Ended
  For the Three Months Ended
    December 31,   March 31,
    2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Cost of revenues
    89       130       147       33       40  
Selling and marketing expenses
    55       94       158       25       50  
General and administrative expenses
    355       852       938       242       321  
                                         
Total share-based compensation expenses
    499       1,076       1,243       300       411  
                                         
 
(2) Includes the following amounts of amortization expense related to intangible assets acquired for business combination for the periods indicated:
 
                                         
    For the Year Ended
  For the Three Months Ended
    December 31,   March 31,
    2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Cost of revenues
    8       360       440       22       521  
Selling and marketing expenses
    946       2,372       3,224       566       1,161  
                                         
Total
    954       2,732       3,664       588       1,682  
                                         
 
(3) To supplement the net income attributable to Camelot Information Systems Inc. presented in accordance with U.S. GAAP, we use the non-GAAP financial measure of net income attributable to Camelot Information Systems Inc., which is adjusted from results based on U.S. GAAP to exclude share-based compensation, acquisition-related intangible amortization, gain from extinguishment of liability, postponed initial public offering costs, and changes in fair value of contingent consideration. The non-GAAP financial measure is provided as additional information to help our investors compare business trends among different reporting periods on a consistent basis and to enhance investors’ overall understanding of our current financial performance and prospects for the future. The non-GAAP financial measure should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of the non-GAAP financial measure may be different from the calculation used by other companies, and therefore comparability may be limited.
 
The following table sets forth the reconciliation of our non-GAAP net income attributable to Camelot Information Systems Inc. to the U.S. GAAP net income attributable to Camelot Information Systems Inc.
 
                                         
        For the Three Months Ended
    For the Year Ended December 31,   March 31,
    2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Net income attributable to Camelot Information Systems Inc. (U.S. GAAP)
    7,313       9,282       12,966       637       1,033  
Share-based compensation
    499       1,076       1,243       300       411  
Acquisition-related intangible amortization
    954       2,732       3,664       588       1,682  
Gain from extinguishment of liability
          (3,926 )                  
Postponed initial public offering costs
          2,457                    
Changes in fair value of contingent consideration
                549             306  
                                         
Total non-GAAP adjustments
    1,453       2,339       5,456       888       2,399  
                                         
Net income attributable to Camelot Information Systems Inc. (non-GAAP)
    8,766       11,621       18,422       1,525       3,432  
                                         
 
(4) Share and per share information presented in this prospectus has been adjusted to reflect all splits of our ordinary shares, including the 4-for-1 stock split effected May 2010. See Note 22 “Subsequent Events” to the Consolidated Financial Statements for the year ended December 31, 2009.
 


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    As of December 31,   As of March 31, 2010
                    Pro Forma
    2007   2008   2009   Actual   as Adjusted(1)
    (U.S. dollars in thousands)
 
Consolidated balance sheet data:
                                       
Cash and cash equivalents
    18,851       22,916       33,820       18,611          
Total assets
    72,352       118,905       191,267       182,795          
Total liabilities
    12,162       32,412       75,310       65,289          
Total equity
    60,190       86,493       115,957       117,506          
                                         
Total liabilities and equity
    72,352       118,905       191,267       182,795          
                                         
 
 
(1) Our consolidated balance sheet data as of March 31, 2010 is adjusted to give effect to (a) the issuance of an aggregate of 7,932,000 ordinary shares in May 2010 (these shares were reflected as shares to be issued in equity as of March 31, 2010, and consist of 1,800,000 ordinary shares in connection with the debt extinguishment with Red River Valley, 3,932,000 ordinary shares in connection with the acquisition of Tansun, and 2,200,000 ordinary shares as a settlement of the contingent consideration of US$3.2 million in connection with the acquisition of Yinfeng); (b) the automatic conversion of all our preferred shares into ordinary shares using a conversion ratio of one for one immediately prior to the closing of this offering, and the issuance; and (c) sale of ADSs by us in this offering, assuming an initial public offering price of US$      per ADS (the mid-point of the estimated initial public offering price range), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$      per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total equity by US$      million.

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RISK FACTORS
 
You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before you decide to buy our ADSs. Any of the following risks could materially and adversely affect our business, prospects, financial condition and results of operations. In any such case, the trading price of our ADSs could decline, and you could lose all or part of your investment.
 
Risks Related to Our Business and Our Industry
 
We may be unable to attract and retain skilled professionals in the competitive job market for IT professionals.
 
Our business involves the delivery of professional services and is highly labor-intensive. Our ability to execute current and future projects and to obtain new customers depends largely on our ability to attract, train, motivate and retain highly skilled personnel, particularly project managers, independent consultants, project leaders and domain experts. We believe that there is significant demand for those personnel. The loss of a significant number of our professionals or the inability to attract, hire, develop, train and retain additional skilled personnel may materially and adversely affect our ability to manage, staff and successfully complete our existing projects and obtain new projects. Increasing competition for these individuals may also significantly increase our labor costs, which may materially and adversely affect our profit margins and results of operations.
 
The markets for IT services in China are highly competitive, and we may not be able to compete effectively.
 
The markets for IT services in China are highly competitive and we expect competition to intensify in the future. The profiles and identities of our competitors may vary among our service lines and customers. In our enterprise application services business, we primarily compete with Chinese IT services firms, and our competitors include Neusoft Corporation and Hand Enterprise Solutions Co., Ltd. Competitors in our financial industry IT services business include Longtop Financial Technologies Limited and Digital China Holdings Limited. In addition, we may also compete with foreign IT service providers, including firms based in India, such as Tata Consultancy Services and Infosys Technologies Ltd., as well as domestic offshore IT services providers such as VanceInfo Technologies Inc. Some of the firms with which we compete in these markets have significantly greater financial resources and more established market positions than us. Furthermore, many of our competitors have acquired, and may continue to acquire in the future, companies that may enhance their market shares and service offerings. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Our ability to compete may be further limited by the non-compete provisions in the agreements with some of our customers. If we are unable to compete successfully with our existing or new competitors, our financial results may be materially and adversely affected.
 
Wages for IT professionals in China have increased in recent years and may continue to increase at a higher rate in the future, making us potentially less competitive and less profitable.
 
Historically, wages for comparably skilled technical personnel in the Chinese IT services industry were lower than in developed countries, such as in Japan, the U.S. or Europe. In recent years, wages in the China IT services industry have increased and may continue to increase in the future. In order to attract and retain skilled personnel, we may need to continue to increase the wages of our work force. In addition, under the Regulations on Paid Annual Leave for Employees, which became effective on January 1, 2008, employees who have served more than one year for a specific employer are entitled to a paid vacation ranging from 5 to 15 days, depending on length of service. Furthermore, employees who waive such vacation time at the request of employers shall be


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compensated for three times their normal salaries for each waived vacation day. This mandated paid-vacation regulation, coupled with the trend of increasing wages, may result in increased wages for our services, making us potentially less competitive, and may increase our cost of revenues and operating expenses, resulting in lower profit margins.
 
We depend on a small number of customers to derive a significant portion of our revenues and this dependence is likely to continue.
 
We derive a significant portion of our revenue from a limited number of customers. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, net revenues from our largest customer accounted for 34.5%, 31.6%, 31.6% and 36.9%, respectively, of our net revenues, and net revenues from our largest five customers accounted for 60.6%, 48.4%, 49.0% and 54.0%, respectively, of our net revenues. We experience a relatively high customer base concentration in each of our two service lines. If we lose any one of our major customers or any of these customers significantly reduces its volume of business with us, our net revenues and profitability would be substantially reduced. In addition, the volume of work we perform for specific customers may vary from year to year, particularly since we are generally not the exclusive service provider for our customers. Our high customer base concentration may also adversely affect our ability to negotiate contract prices with these customers, which may in turn materially and adversely affect our results of operations. We expect revenues from these customers will continue to account for a significant portion of our revenues.
 
In addition, our success depends significantly on our ability to maintain strong relationships with international IT service providers. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, we derived 41.6%, 38.9%, 38.8% and 40.1%, respectively, of our net revenues from providing our services through international IT service providers such as IBM, Accenture and HP, including a significant amount of net revenues from IBM. We expect to continue to depend on relationships with such international IT service providers for a significant portion of our net revenues in the foreseeable future. Our business prospects, financial condition or operating results could be materially and adversely affected if such IT service providers terminate their relationships or reduce volume of business with us, either because they choose to work with our competitors or because they choose to directly offer similar services that compete with our business. Further, our business prospects, financial condition or operating results could be materially and adversely affected if those service providers to whom we provide services are unsuccessful in obtaining new projects.
 
If our delivery center agreements with IBM are terminated or are not renewed for any reason, or if IBM purchases our delivery center, our relationship with IBM as well as our overall business, operating results and financial condition will be materially and adversely affected.
 
In addition to our then existing business with IBM, in March 2008, we entered into a technical services agreement and a master statement of work, or a master SOW, with IBM to establish a delivery center to deliver enterprise application services exclusively for IBM’s customers. Our net revenues derived from this delivery center totaled US$1.4 million in 2008, US$15.7 million in 2009 and US$7.3 million for the three months ended March 31, 2010, or 1.6%, 13.3% and 20.7% of our total net revenues, respectively. We expect this delivery center to continue to account for a material percentage of our total net revenues for the foreseeable future.
 
The technical services agreement contains a number of key commercial and legal provisions, including:
 
  •  Termination.  The initial term is three years and can be renewed by IBM for one or more years with substantially the same terms and conditions. The technical services agreement may be terminated at an earlier date upon the occurrence of certain events, including, among others, a change of control, liquidation or bankruptcy of our company, and a failure by us to meet certain service standards.


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  •  Purchase of our delivery center.  After March 24, 2010 but prior to January 24, 2011 (or 60 days prior to the expiration of the initial term of the technical services agreement), IBM has the right to purchase our delivery center, which may be completed only after the expiration of the initial term on March 24, 2011. The purchase price generally will be determined based on the net book value of the delivery center. Such purchase may also be made by IBM if our technical services agreement were terminated by IBM for other reasons.
 
  •  Non-compete undertaking.  We have agreed not to compete with IBM, in the field of SAP consulting services, for any existing or future business opportunity from IBM’s existing customers that is either continual or relating to any services provided by us under the technical services agreement. However, such non-compete undertaking does not apply to our existing customers. Our non-compete undertaking is effective throughout the initial term of the technical services agreement, i.e. until March 24, 2011, and, should IBM purchase our delivery center as described above, for a period of 18 months after the completion of the purchase.
 
In light of the materiality of the delivery center to our relationships with IBM and our future operating results, we may face a number of risks and uncertainties to our business. For instance, there is no assurance that (i) our delivery center agreements will not be terminated or will be renewed after the initial term; and (ii) IBM will not exercise its right to purchase the delivery center. In particular, since the purchase price as stipulated in the technical services agreement is to be determined based on the net book value, we may not be adequately compensated for the value of our delivery center. In addition, there may be ambiguities in the interpretation of the scope of our non-compete undertaking, particularly in light of our potential overlapping customer base with IBM. As a result, we cannot assure you that we will not enter into a dispute with IBM relating to future customers and projects. The occurrence of any of the foregoing may materially and adversely affect our relationship with IBM, which has historically been our largest customer and strategic account, thereby materially and adversely affecting our overall business, results of operations and financial condition. In particular, should IBM purchase our delivery center, this may lead to a loss of a significant number of our IT professionals and a significant decrease of our business volume with IBM, which in turn will have a material adverse effect on our business development and the implementation of our strategies. See “— Risks Related to Our Business and Our Industry — We depend on a small number of customers to derive a significant portion of our revenues and this dependence is likely to continue.”
 
Our historical outstanding accounts receivable have been relatively high. Inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.
 
Historically, our outstanding accounts receivable have been relatively high. As of December 31, 2007, 2008 and 2009 and March 31, 2010, our outstanding accounts receivable were US$31.2 million, US$44.9 million, US$68.2 million and US$76.0 million, respectively. Although we conduct credit evaluations of our customers, we generally do not require collateral or other security from our customers. In addition, we have had a relatively high customer concentration. As a result, an extended delay or default in payment relating to a significant account will have a material and adverse effect on the aging schedule and turnover days of our accounts receivable. Our inability to collect our accounts receivable on a timely basis, if at all, could materially and adversely affect our financial condition, liquidity and results of operations.
 
Our revenues are highly dependent on customers primarily located in the PRC and certain other regions in Asia-Pacific.
 
Prior to 2006, we derived all of our revenues from the PRC. However, as a result of a number of strategic acquisitions since 2006, we currently also derive a significant portion of our revenues from customers in Taiwan and Japan. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, net revenues from China, Taiwan and Japan in aggregate totaled US$47.9 million, US$88.7 million, US$117.2 million and US$34.3 million, respectively, representing 93.2%, 97.7%,


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99.3% and 97.2% of total net revenues, respectively. Accordingly, our revenues are highly dependent on the Greater China region and Japan, and in particular, on the continued technology spending of our existing and prospective customers in these regions. The growth in technology spending generally decreases in a challenging economic environment. Adverse economic conditions in the regions may cause some customers to reduce or defer their expenditures for IT services. Therefore, a decline in the level of economic activity in the Greater China region and Japan could materially and adversely affect our net revenues and profit margins.
 
Our business is sensitive to global economic conditions. A severe or prolonged downturn in the global economy could materially and adversely affect our revenues and results of operations.
 
Recent global market and economic conditions have been unprecedented and challenging with tight credit conditions and recession in most major economies continuing into 2010. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues and the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The grim economic outlook has negatively affected business and consumer confidence globally and contributed to volatility of unprecedented levels.
 
The Chinese economy also faces challenges as a result of the current global economic crisis. The stimulus plans and other measures implemented by the Chinese government may not work effectively or quickly enough to avert a severe downturn in economic activity. Continued turbulence in the international markets and prolonged declines in consumer spending, as well as any slowdown of economic growth in China, may adversely affect our liquidity and financial condition.
 
Our business and growth may be severely disrupted if we lose the services of our senior management and key technical personnel or if such persons compete against us and our non-compete agreements cannot be enforced.
 
Our future success is significantly dependent upon the continued service of our senior management and key technical personnel. In particular, we rely heavily on the founders of our company, Mr. Yiming Ma and Ms. Heidi Chou, to continue to manage our business, operations and sales and marketing activities as well as to maintain personal and direct relationships with our major customers. The loss of Mr. Yiming Ma, Ms. Heidi Chou or any other members of our senior management or key technical personnel may materially and adversely affect our business and operations. For instance, it could jeopardize our relationships with customers and result in the loss of customer engagements. If we lose the service of any senior management member or key technical personnel, we may not be able to locate and obtain the service of qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt our business and growth. In addition, if any of our senior management or key technical personnel joins a competitor or forms a competing company, we may lose customers, know-how, key technical professionals and employees. Each of our senior management members and key technical personnel has entered into an employment agreement with us which contains non-competition provisions. However, if any dispute arises between any of our senior management members or key technical personnel and us, we cannot assure you that we will be able to successfully enforce these provisions.
 
Our business will be negatively affected if we are not able to anticipate and keep pace with rapid changes in technology or if growth in the use of technology in business by our customers is not as rapid as in the past.
 
The markets for IT services are characterized by rapid technological changes, evolving industry standards, changing customer preferences and frequent new product and service introductions. Our success will depend, in part, on our ability to develop and implement technology services and solutions and anticipate and keep pace with rapid and continuing changes in technology, industry


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standards and customer preferences. We may not be successful in anticipating or responding to these developments on a timely basis, and our service or solution offerings may not be successful in the marketplace. For example, if SAP-based ERP systems become obsolete or less accepted among end users, the demand for our services could be materially and adversely affected. In addition, services, solutions and technologies developed by our competitors may make our service or solution offerings uncompetitive, obsolete or force us to reduce prices, thereby adversely affecting our profit margins. Any one of these circumstances could materially and adversely affect our ability to obtain and successfully complete customer engagements.
 
Our growth prospects may be adversely affected if the market for our services and the industries that we service fail to grow as expected.
 
Our operations are conducted in two service lines. Our enterprise application services business primarily focuses on SAP-based ERP services. SAP competes with international players such as Oracle Corporation, or Oracle, and local players such as UFIDA Software Co., Ltd. and Kingdee International in China. If SAP fails to compete effectively against these companies in China, or if the demand for ERP services in China experiences lower than expected growth, if at all, our business and growth prospects may be materially and adversely affected. Our financial industry IT services business primarily services banks and insurance companies in China and Taiwan, where the financial services industry is extensively regulated. Accordingly, any significant regulatory changes in the industry may affect demand for our services. In addition, any adverse development in the financial services IT industry in China and Taiwan, whether due to a downturn in the economy or otherwise, may lead to reduced procurement budget of our financial institution customers, which may in turn lead to lower demand for our services, thereby adversely affecting our business and growth prospects.
 
Our quarterly results have fluctuated in the past and may continue to fluctuate significantly depending upon numerous factors, many of which are beyond our control.
 
Our quarterly results have fluctuated in the past and may continue to fluctuate significantly depending upon numerous factors, including:
 
  •  seasonal changes that affect purchasing patterns among our customers;
 
  •  the size, complexity, timing, pricing terms and profitability of significant projects;
 
  •  currency exchange fluctuations;
 
  •  changes in our pricing policies or those of our competitors; and
 
  •  the effect of seasonal hiring patterns and the time we require to train and productively utilize our new employees.
 
Many of these factors are beyond our control. If our net revenues or net income in a quarter fall below the expectations of securities analysts or investors, the market price of our ADSs could fall significantly. In particular, our first quarter sales and results of operations are usually lower than other quarters due to the general slowdown in business activities in China during the Chinese New Year period. Unanticipated variations in the number and timing of our projects or employee utilization may cause significant variations in operating results in any particular quarter. Therefore, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. In addition, the timing of invoicing and collection on our accounts receivable is affected by the budget cycles of our large enterprise customers in China.


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Most of our engagements with customers are singular in nature and do not necessarily provide for subsequent engagements.
 
Our customers generally retain us on an engagement-by-engagement basis in connection with specific projects, rather than on a recurring basis under long-term contracts. Although a substantial majority of our revenue is generated from repeat business, which we define as revenue from a customer who also contributed to our revenue during the prior year, our engagements with our customers are typically for projects that are singular in nature. Therefore, we must seek to obtain new engagements when our current engagements are successfully completed or are terminated as well as maintain relationships with existing customers and secure new customers to expand our business. In addition, in order to expand our business, we may need to continue to expand our sales and marketing group, which would increase our expenses but may not necessarily result in a substantial increase in business. If we are unable to generate a substantial number of new engagements for projects on a continual basis, our business and results of operations may be materially and adversely affected.
 
Many contracts with our customers generally can be terminated without cause and with little or no notice or penalty, which could negatively impact our revenue and profitability.
 
We often provide services to end customers through international IT service providers. In these cases, our contracts are signed with these service providers rather than with our end customers. A number of our contracts with international IT service providers can be terminated with or without cause, without any notice and without termination-related penalties. However, historically, we have not experienced any terminations of any significant contracts. In addition, such contracts can be terminated immediately upon the termination of the international IT service providers’ contracts with the end customers under circumstances beyond our control. As a result, our revenue-generating engagements with many customers are not predictable and a high level of net revenues in one period is not necessarily predictive of continued high levels of net revenues in future periods. Our business depends on the decisions and actions of our customers, and a number of factors relating to our customers beyond our control might result in the termination of a project or the loss of a customer, including:
 
  •  financial difficulties;
 
  •  a change in strategic priorities, resulting in a reduced level of IT spending; and
 
  •  a change in outsourcing strategy by moving more work to in-house IT departments or to our competitors.
 
We are subject to certain risks relating to our fixed-price contracts.
 
A significant portion of our customer contracts are on a fixed-price basis. As a result, we are subject to risks associated with estimating, planning and performing fixed-price, fixed-timeframe projects, and we bear the risk of cost overruns, completion delays and wage inflation in connection with these projects. If we fail to accurately estimate the resources and time required for a future project, or future rates of wage inflation, or if we fail to complete our contractual obligations within the contracted timeframe, our profitability may suffer.
 
In addition, a number of our fixed-price contracts contain pricing terms that condition a portion of the payment of fees by the customer on our ability to meet defined performance goals, service levels and completion schedules set forth in the contracts. Our failure to meet these goals or customer expectations in such contracts may result in less profitable or unprofitable engagements.


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We may be liable to our customers for damages caused by a violation of intellectual property rights, the disclosure of other confidential information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not be sufficient to cover these damages.
 
We often have access to, and are required to collect and store, sensitive or confidential customer information. Many of our customer agreements do not limit our potential liability for breaches of confidentiality. If any person, including any of our employees, penetrates our network security or misappropriates sensitive or confidential customer information, we could be subject to significant liability from our customers or from our customers’ customers for breaching contractual confidentiality provisions or privacy laws. The protection of the intellectual property rights and other confidential information of our customers is particularly important for us since our operation is mainly based in China. China, as well as Chinese companies, has not traditionally enforced intellectual property protection to the same extent as more developed countries such as the United States. Despite measures we take to protect the intellectual property and other confidential information of our customers, unauthorized parties, including our employees and sub-contractors, may attempt to misappropriate certain intellectual property rights that are proprietary to our customers or otherwise breach our customers’ confidences. Unauthorized disclosure of sensitive or confidential customer information or a violation of intellectual property rights may subject us to liabilities, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, damage our reputation and cause us to lose customers.
 
Many of our contracts involve projects that are critical to the operations of our customers’ businesses, and provide benefits to our customers that may be difficult to quantify. Any failure in a customer’s system or any breach of security could result in a claim for substantial damages against us, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services for a customer, or poor execution of such services, could result in a customer terminating our engagement and seeking damages from us.
 
Although we attempt to limit our contractual liability for consequential damages in rendering our services, these limitations on liability may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. We do not have insurance coverage against potential losses or claims with respect to the IT services we provide. We do not maintain general liability insurance coverage, such as coverage for errors or omissions. While we believe that our practice is in line with the general practice in the IT services industry, there may be instances when we will have to internalize losses, damages and liabilities because of the lack of insurance coverage, which may in turn adversely affect our financial condition and results of operations.
 
We may face intellectual property infringement or indemnity claims that could be time-consuming and costly to defend. If we fail to defend ourselves against such claims, we may lose significant intellectual property rights and may be unable to continue providing our existing services.
 
It is critical that we use and develop our technology and services without infringing upon the intellectual property rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual property litigation is expensive and time-consuming and could divert management’s attention from our business. A successful infringement or indemnity claim against us, whether with or without merit, could, among others things, require us to pay substantial damages, develop non-infringing technology, re-brand our name or enter into royalty or license agreements that may not be available on acceptable terms, if at all, and cease to make, license or use products that have infringed a third party’s intellectual property rights. Protracted litigation could also result in existing or potential clients deferring or limiting their purchase or use of our services until resolution of such litigation, or could require us to indemnify our clients against infringement claims in certain instances. In addition, we may be unaware of intellectual property registrations or applications relating to our services that may give rise to potential infringement claims against us. Parties making infringement or indemnity


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claims may be able to obtain an injunction to prevent us from delivering our services or using technology containing the allegedly infringing intellectual property. Any intellectual property litigation could materially and adversely affect our business, results of operations or financial condition.
 
Our financial results could suffer if we are unable to achieve or maintain the productivity and utilization of our professionals.
 
Our profitability depends to a large extent on the productivity and utilization of our professionals. Productivity and utilization of our professionals are affected by a number of factors, including, among other things, the number and size of customer engagements, the timing of the commencement, completion and termination of engagements, our ability to transition our professionals efficiently from completed engagements to new engagements, the hiring of additional professionals, unanticipated changes in the scope of customer engagements, our ability to forecast demand for our services and thereby maintain an appropriate number of professionals, billing rates for our professionals and conditions affecting the industries in which we practice as well as general economic conditions. Any of the factors above may result in low productivity and utilization of our employees and materially and adversely affect our results of operations and employee morale.
 
If we are unable to achieve and maintain adequate overall productivity and utilization of our professionals, our financial results could materially suffer.
 
Any inability to manage our growth could disrupt our business, undermine our competitive position and reduce our profitability.
 
We have grown significantly in recent years as a result of the expansion of our service offerings and the undertaking of major acquisitions both within China and elsewhere. The total number of our IT professionals increased from 1,346 as of December 31, 2007 to 2,474 as of March 31, 2010. We expect our growth to place significant strain on our management and other resources. Specifically, we will need to continue to develop and improve our operational, financial and other internal controls, both in China and elsewhere. Continued growth imposes challenges on us in:
 
  •  recruiting, training and retaining sufficient skilled technical, marketing and management personnel;
 
  •  adhering to our high quality and process execution standards;
 
  •  preserving our culture, values and entrepreneurial environment;
 
  •  developing and improving our internal administrative infrastructure, particularly our financial, operational, communications and other internal systems; and
 
  •  maintaining high levels of customer satisfaction.
 
We cannot assure you that we will be successful in managing such risks and our failure to do so may disrupt our business, undermine our competitive position and reduce our profitability.
 
We are subject to financial and business risks on completed or future acquisitions.
 
Since 2006, we have completed a number of strategic acquisitions to complement our business. We are subject to a number of special financial and business risks in connection with our acquisition efforts, including among others, diversion of our management’s time, attention, and resources, decreased utilization during the integration process, loss of key acquired personnel, difficulties in integrating diverse corporate cultures, increased costs to improve or coordinate managerial, operational, financial, and administrative systems including dilutive issuances of equity securities, including convertible securities, assumption of legal liabilities, potential write-offs related to the impairment of goodwill, and additional conflicts of interest. In addition, we may be unable to manage an acquired entity profitably or successfully integrate its operations with our own. Any of these factors may adversely affect the growth of our business and results of operations.


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In addition, although we conduct due diligence in connection with our acquisitions, we may not be aware of all the risks associated with the acquired businesses. Any discovery of adverse information concerning the acquired businesses since the completion of the acquisitions could materially and adversely affect our business, financial condition and results of operations. While we are entitled to seek indemnification in certain circumstances, successfully asserting indemnification or enforcing such indemnification could be costly and time-consuming or may not be successful at all. In addition, these acquired businesses may have significant lower gross margins than our existing business, which may apply downward pressure on our overall gross margin in the future.
 
Furthermore, the acquired companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the products or services in which the acquired companies specialize, and the loss of key customers and personnel. If we are unable to realize the benefits envisioned for such acquisitions, our overall profitability and growth plans may be adversely affected.
 
We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
 
Historically, we have expanded our business and acquired additional customers through strategic acquisitions. We intend to continue to selectively acquire high-quality IT services companies to support our future growth. However, we may not be able to identify suitable future acquisition candidates. Even if we identify suitable candidates, we may be unable to complete an acquisition on terms commercially acceptable to us. Moreover, competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. If we fail to identify appropriate candidates or complete desired acquisitions, we may not be able to implement our growth strategies effectively or efficiently. In addition, the expenses we incur in evaluating and pursuing acquisitions could have a material adverse effect on our results of operations. Any of these factors may materially and adversely affect the growth of our business and results of operations.
 
As a result of our significant growth and acquisitions in recent years, evaluating our business and prospects may be difficult and our past results may not be indicative of our future performance.
 
Our business has grown and evolved significantly in recent years, both through organic growth and our strategic acquisitions. In light of the significance of our recent acquisitions, a period-to-period comparison of our historical operating results may not be meaningful. In addition, we may not be able to achieve a similar growth rate in future periods because of the continuing evolution of our business model. Therefore, you should not rely on our past results or historical rate of growth as an indication of our future performance.
 
Any significant failure in our information technology systems could subject us to contractual liabilities to our customers, harm our reputation and adversely affect our results of operations.
 
Our business and operations are highly dependent on the ability of our information technology systems to timely process various transactions across different markets and solutions. The proper functioning of our financial control, accounting, customer service and other data processing systems, together with the communication systems between our various subsidiaries and delivery centers is critical to our business and our competitiveness. Our business activities may be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. We may be liable to our customers for breach of contract for interruptions in service. Due to the numerous


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variables surrounding system disruptions, the extent or amount of any potential liability cannot be predicted. Moreover, actual or perceived concerns that our systems may be vulnerable to disruptions or unauthorized entry may deter customers from using our services.
 
Fluctuation in the value of the Renminbi may materially and adversely affect on our business.
 
A significant portion of our revenues and assets and liabilities are denominated in currencies other than the Renminbi such as Japanese Yen, the New Taiwan dollar, and the U.S. dollar. The value of the Renminbi against the U.S. dollar, Japanese Yen and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under this policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 17.5% appreciation of the Renminbi against the U.S. dollar, an approximately 0.4% depreciation against Japanese Yen and an approximately 16.7% appreciation against the New Taiwan dollar, from July 21, 2005 to March 31, 2010. There remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against these currencies. In June 2010, officials at the People’s Bank of China, which is China’s central bank, made statements suggesting willingness of the PRC government to allow increasing flexibility in the band within which the Renminbi is permitted to fluctuate. We expect that a significant portion of our revenues will continue to be generated in currencies other than the Renminbi, including Japanese Yen, the New Taiwan dollar, and the U.S. dollar, for the foreseeable future and that a substantial majority of our expenses, including personnel costs, as well as operating expenditures, will continue to be denominated in Renminbi. Consequently, the results of our operations may be adversely affected as Renminbi appreciates against the U.S. dollar and other foreign currencies. In addition, any significant revaluation of the Renminbi may materially and adversely affect the value of, and any dividends payable on, our ADSs in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of paying dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us. In addition, an appreciation in the value of the Renminbi against foreign currencies could make our services more expensive for our international customers as well as reduce the competitiveness of our PRC customers in the international market, thus potentially leading to a reduction in our net revenue and profitability.
 
As very limited types of hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations, we have not entered into any such hedging transactions. Accordingly, we cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies. See “— Risks Related to Doing Business in China — PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.”
 
We face risks and uncertainties relating to our international operations.
 
Outside of the PRC, we have operations in a number of overseas locations such as Taiwan and Japan. We expect our net revenues derived from international markets to continue to account for a significant portion of our revenues in the future. Our international operations carry additional financial and business risks, including greater difficulties in managing and staffing foreign operations, cultural


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differences that may result in lower utilization, currency fluctuations that could adversely affect our financial position and operating results, unexpected changes in regulatory requirements, greater difficulties in collecting accounts receivable, longer sales cycles, restrictions on the repatriation of earnings, difficulties in enforcing judgments across multiple jurisdictions, and potentially adverse tax consequences, such as trapped foreign losses. If our revenues derived from international operations increase relative to our total net revenues, these factors could have a more pronounced effect on our results of operations.
 
Our corporate actions are substantially influenced by our principal shareholders, who can cause us to take actions in ways with which you may not agree.
 
Currently, our largest shareholders include our founders, Mr. Yiming Ma and Ms. Heidi Chou. Immediately upon completion of this offering, Mr. Yiming Ma and Ms. Heidi Chou each will own approximately     % of our outstanding ordinary shares and voting power. Mr. Yiming Ma and Ms. Heidi Chou are husband and wife. Mr. Yiming Ma and Ms. Heidi Chou acting individually or as a group could exert substantial influence over matters such as electing directors and approving acquisitions, mergers or other business combination transactions. Any concentration of ownership and voting power, including the concentration of ownership and voting power resulted from the relationship between Mr. Yiming Ma and Ms. Heidi Chou, may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.
 
In addition, among our largest shareholders are the CVCI Funds. These two private equity investment funds focus on investing in emerging markets, and may acquire interests in businesses that directly or indirectly compete with certain portions of our business. In addition, CVCI Funds may pursue certain acquisition opportunities that may be complementary to our business and, as a result, such acquisition opportunities may not be available to us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
If we grant employee stock options and other share-based compensation in the future, our net income could be materially and adversely affected.
 
Share-based compensation is important to attract and retain key personnel. Under our 2006 Plan, we have a significant number of options to purchase ordinary shares outstanding as well as a significant number of option shares reserved for future issuance. We may adopt other equity incentive plans in the future. Issuances of options under such plans have in the past led to, and we expect in the future will continue to lead to, incurrence of share-based compensation expenses. We account for compensation costs for all stock options, including stock options granted to our directors and employees, using the fair value method and recognize the expense in our consolidated statement of operations in accordance with the accounting guidance of share-based payment under U.S. GAAP, which may materially and adversely affect our net income. Moreover, the additional expenses associated with share-based compensation may reduce the attractiveness of our current and future equity incentive plans.


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In the course of preparing our consolidated financial statements, certain material weaknesses, a significant deficiency and other control deficiencies in our internal control over financial reporting were identified. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely affected.
 
Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company and have limited accounting personnel and other resources with which to address our internal control over financial reporting. In the course of preparing our consolidated financial statements, we and our independent registered public accounting firm identified certain material weaknesses and a significant deficiency, each as defined in the U.S. Public Company Accounting Oversight Board Standard AU Section 325, Communications About Control Deficiencies in an Audit of Financial Statements, or AU 325, over financial reporting as of December 31, 2009. As defined in AU 325, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis, and a “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for the oversight of the company’s financial reporting.
 
The material weaknesses identified primarily related to: (i) lack of a comprehensive accounting policies and procedures manual in accordance with U.S. GAAP accessible to accounting personnel to ensure that accounting policies and procedures are followed; and (ii) lack of dedicated resources to take responsibility for finance and accounting functions and the preparation of financial statements in compliance with U.S. GAAP. The significant deficiency identified was a lack of a qualified internal tax team that can address our income tax accounting and compliance matters from a U.S. GAAP perspective.
 
Following the identification of these material weaknesses, the significant deficiency and other control deficiencies, we have taken measures and plan to continue to take measures to remedy these weaknesses and deficiencies. However, the implementation of these measures may not fully address these material weaknesses and the significant control deficiency in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct these material weaknesses and the significant control deficiency or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected.
 
Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and significant deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the certain material weaknesses and a significant deficiency that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financing reporting, additional significant deficiencies and material weaknesses may have been identified.
 
Upon completion of this offering, we will become a public company in the United States that is subject to the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31,


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2011. In addition, beginning at the same time, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. If we fail to remedy the problems identified above, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely impact the market price of our ADSs. We will need to incur significant costs and use significant management and other resources in order to comply with Section 404 of the Sarbanes-Oxley Act.
 
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE corporate governance standards applicable to U.S. issuers, including the requirements that a majority of an issuer’s directors consist of independent directors. This may afford less protection to our holders of ordinary shares and ADSs.
 
Section 303A of the Corporate Governance Rules of the NYSE requires listed companies to have, among other things, a majority of its board members be independent and a nominating and corporate governance committee consisting solely of independent directors. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. The corporate governance practice in our home country, the British Virgin Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating and corporate governance committee. We may rely on the foreign private issuer exemption and a majority of our board of directors may not consist of independent directors, where it is a possibility that fewer board members will be exercising independent judgment and the level of board oversight on the management of our company may decrease as a result.
 
We may be subject to significant fines, penalties and/or prosecution because our Hong Kong operations are not compliant with certain local registration and/or licensing requirements as well as other Hong Kong laws and regulations.
 
We acquired our Hong Kong operations in 2006 through Camelot BVI and Triumph, which are companies limited by shares incorporated in the British Virgin Islands and which became the two partners of our Hong Kong operations. Under applicable Hong Kong law, Camelot BVI and Triumph are deemed to have established a place of business and carried on a business in Hong Kong since their acquisitions of our Hong Kong operations. Therefore, both were required to obtain business registration certificates from the Business Registration Office of the Hong Kong government and to be registered with the Companies Registry of the Hong Kong government within one month of their acquisitions of our Hong Kong operations. However, neither Camelot BVI nor Triumph obtained such certificates nor did they undertake such registration. Accordingly, our Hong Kong operations and, in turn, Camelot BVI and Triumph have continued to be not in compliance with the registration and/or licensing requirements in Hong Kong. As a result of such non-compliance, each of Camelot BVI and Triumph, as well as the officers or agents of each of Camelot BVI and Triumph who authorized such non-compliance, face a maximum one-time fine of HK$53,000 (US$6,800) and a daily fine of HK$700 (US$90.3) for each day of non-compliance, or an aggregate total of approximately US$250,000 up to June 30, 2010. As at the date of this prospectus, there has been no prosecution initiated by the relevant authorities. We are unable to reasonably estimate the actual amount that we may have to pay if the authorities were to become aware of the non-compliance and were to commence proceedings.
 
In addition, as an employer, our Hong Kong operations are required to comply with legal obligations with regard to mandatory provident funds and compensation insurance for its employees under the Mandatory Provident Fund Schemes Ordinance (Cap. 485), or MPFSO, and under the Employees’ Compensation Ordinance (Cap. 282), or ECO, of the Hong Kong laws respectively. Our Hong Kong operations were not compliant with certain provisions of the MPFSO for a duration of approximately


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10 months between 2006 and 2007 by failing to ensure, in relation to one employee at the time that such employee becomes a member of a registered mandatory provident fund scheme and to make and deduct the respective employer and employee mandatory provident fund contributions in a total amount of HK$20,000 to the employee’s account of such scheme. Our Hong Kong operations were also not compliant with certain provisions of the ECO by failing to take out worker’s compensation insurance in relation to the said one employee.
 
As a result of the foregoing, our Hong Kong operations may be subject to fines, penalties and/or prosecutions under local laws and regulations. In recent enforcement cases under the MPFSO, defaulting employer(s) have been ordered to repay all unpaid contributions, and a surcharge or a penalty of the higher of HK$5,000 or 5% of the total unpaid amount. Our Hong Kong operations will make up these default contributions into the relevant employee’s mandatory provident fund scheme account and has been in compliance with its legal obligations under the MPFSO since October 2007. Furthermore, with respect to the failure to take out compensation insurance, any fines, penalties and/or prosecutions to which our Hong Kong operations may be subject, may include, but not be limited to, facing a maximum fine of HK$100,000 (US$13,000). To date, none of our Hong Kong operations’ employees have been injured whilst at work and our Hong Kong operations are now in full compliance with the ECO.
 
Risks Related to Doing Business in China
 
Adverse changes in political and economic policies of the PRC government could materially and adversely affect the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our results of operations.
 
A significant majority of our operations are conducted in China and a significant majority of our net revenues are derived from customers in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, 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. Furthermore, while the economy of China has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China, could materially and adversely affect the overall economic growth of China and market demand for our IT services. Such changes could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our results of operations.
 
Uncertainties with respect to the PRC legal system could materially and adversely affect us.
 
We conduct substantially all of our business through our subsidiaries in China. Our subsidiaries in China are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and Sino-foreign equity joint ventures. 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 legal protections available to us. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have retroactive effects. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.


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The implementation of the PRC Labor Contract Law may increase our operating expenses and adversely affect our business and results of operations.
 
On June 29, 2007, the PRC National People’s Congress enacted the Labor Contract Law, which became effective on January 1, 2008. The Labor Contract Law formalizes workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions and provides for specific standards and procedures for the termination of an employment contract. In addition, the Labor Contract Law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases. As there has been little guidance as to how the Labor Contract Law will be interpreted and enforced by the relevant PRC authorities, there remains substantial uncertainty as to its potential impact on our business and results of operations. The implementation of the Labor Contract Law may increase our operating expenses, in particular our personnel expenses and labor service expenses. In the event that we decide to significantly reduce the number of our employees or otherwise change our employment or labor practices, the Labor Contract Law may also limit our ability to effect these changes in a manner that we believe to be cost-effective or desirable, which could materially and adversely affect our business and results of operations.
 
PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.
 
A significant majority of our net revenues and expenses are denominated in Renminbi. If our net revenues denominated in Renminbi increase or expenses denominated in Renminbi decrease in the future, we may need to convert a portion of our net revenues into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transaction, can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated to 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.
 
Foreign exchange transactions by our PRC subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC governmental authorities, including the SAFE. To utilize the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries. However, any loans from offshore holding company to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits, usually the balance between the total investment amount and the registered capital contribution, and must be registered with the SAFE or its local counterparts.
 
We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce, or the MOFCOM, or its local counterparts. We cannot assure you that we will be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be adversely affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.


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Therefore, it is difficult to change our capital expenditure plans once the relevant funds have been remitted from our company to our PRC subsidiaries. These limitations on the free flow of funds between us and our PRC companies could restrict our ability to act in response to changing market conditions and reallocate funds among our PRC companies on a timely basis. Moreover, according to a circular jointly issued by the Ministry of Finance and the State Administration of Taxation on September 19, 2008, if the debt-to-equity ratio of a non-financial enterprise exceeds two-to-one, the interest expenses accrued from the exceeded debt shall not be deducted before taxation unless the shareholder loan in question can meet certain conditions. Although there is uncertainty at this time as to how the circular will be interpreted and implemented, such circular may have a negative impact on our PRC subsidiaries’ abilities to obtain loans from its shareholders.
 
The discontinuation of any of the preferential tax treatments or financial incentives currently available to us in the PRC or imposition of any additional PRC taxes on us could adversely affect our financial condition and results of operations.
 
China passed a new PRC Enterprise Income Tax Law and its implementing rules, both of which became effective on January 1, 2008. The PRC Enterprise Income Tax Law significantly curtails tax incentives granted to foreign-invested enterprises under the Foreign Invested Enterprise Income Tax Law. The PRC Enterprise Income Tax Law, however, (i) reduces the statutory rate of enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules promulgated by State Council on December 26, 2007, and (iii) introduces new tax incentives, subject to various qualification criteria.
 
The PRC Enterprise Income Tax Law and its implementing rules permit certain “high-technology enterprises strongly supported by the state” which hold independent ownership of core intellectual property and simultaneously meet a list of other criteria, financial or non-financial, as stipulated in the implementation rules of the PRC Enterprise Income Tax Law, to enjoy a reduced 15% enterprise income tax rate subject to certain new qualification criteria. Certain of our subsidiaries have been recognized by the local provincial level Municipal Science and Technology Commission, Finance Bureau, and State and Local Tax Bureaus as “high and new technology enterprises” and were further registered with the local tax authorities to be eligible to the reduced 15% enterprise income tax rate. The continued qualification of a “high and new technology enterprise” will be subject to annual evaluation and a three-year review by the relevant government authority in China. If any of our subsidiaries fail to maintain the “high and new technology enterprise” qualification or renew such qualification when the valid term expires, their applicable enterprise income tax rate may increase to up to 25%, which could have a material adverse effect on our financial condition and results of operations.
 
Preferential tax treatment granted to our subsidiaries by the local governmental authorities is subject to review and may be adjusted or revoked at any time. The discontinuation of any preferential tax treatments currently available to us will cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.
 
We have also in the past been granted certain governmental financial subsidies. Government agencies may decide to reduce or eliminate subsidies at any time. We cannot assure you of the continued availability of the government incentives and subsidies currently enjoyed by some of our PRC subsidiaries. The discontinuation of these governmental incentives and subsidies could adversely affect our financial condition and results of operations.


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Our global income and the dividends we may receive from our PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.
 
Under the PRC Enterprise Income Tax Law and its implementing rules, both became effective from January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” The State Administration of Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals or foreigners, like our company, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. While we do not believe we should be considered a resident enterprise, if the PRC authorities were to subsequently determine that we should be so treated, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability.
 
Pursuant to the PRC Enterprise Income Tax Law, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. We are a British Virgin Islands holding company and substantially all of our income may come from dividends from our PRC subsidiaries. To the extent these dividends are subject to withholding tax, the amount of fund available to us to meet our cash requirements, including the payment of dividends to our shareholders and ADS holders, will be reduced.
 
In addition, because there remains uncertainty regarding the interpretation and implementation of the PRC Enterprise Income Tax Law and its implementation rules, it is uncertain whether, if we are regarded as a PRC resident enterprise, dividends we pay with respect to our ordinary shares or ADSs, or the gain you may realize from the transfer of our ordinary shares or ADSs, would be treated as income derived from sources within the PRC and be subject to PRC tax. If we are required under the PRC Enterprise Income Tax Law to withhold PRC income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders, or if you are required to pay PRC income tax on the transfer of our ordinary shares or ADSs, your investment in our ADSs or ordinary shares may be materially and adversely affected.
 
We may rely on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.
 
We are a holding company, and we may rely on dividends and other distributions on equity paid by our operating subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. If any of our operating subsidiaries 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. Furthermore, relevant PRC laws and regulations permit payments of dividends by our operating subsidiaries only out of their respective retained earnings, if any, determined in


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accordance with PRC accounting standards and regulations. In addition, we have on occasion failed to make certain PRC government filings on a timely basis in connection with our acquisitions, which may also restrict the ability of these acquired entities to make dividend payments to our holding company.
 
Under PRC laws and regulations, our operating subsidiaries are required to set aside 10% of their respective after-tax profits each year to fund a statutory surplus reserve. This reserve is not distributable as dividends until the accumulated amount of such reserve has exceeded 50% of their respective registered capital. As a result of these PRC laws and regulations, our operating subsidiaries are restricted in their ability to transfer a portion of their respective net assets to us in the form of dividends. Limitations on the ability of our operating subsidiaries to pay dividends to us could adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
 
Our company may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in our ADSs or ordinary shares to adverse tax consequences.
 
In light of our company’s significant cash balances (taking into account the proceeds from this offering) and the uncertainty as to the extent, if any, that our company’s unbooked intangibles may be taken into account for the current taxable year, our company may be classified as a PFIC for the current taxable year. With respect to the 2011 taxable year and subsequent taxable years, however, we presently do not anticipate that our company should be classified as a PFIC based upon the expected value of our assets, including unbooked intangibles, and the composition of our income and assets as reasonably approximated for purposes of applying the PFIC rules. We may be or become classified as a PFIC for the current or one or more future taxable years if, among other things, our market capitalization is less than anticipated or subsequently declines. Because there are uncertainties in the application of the relevant rules and PFIC status is a fact-intensive determination made on an annual basis, no assurance can be given that we are not or will not become classified as a PFIC. If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation — Material United States Federal Income Tax Considerations”) would be subject to special rules generally intended to reduce or eliminate any benefits from the deferral of United States federal income tax that a U.S. Holder could derive from investing in a non-United States corporation that does not distribute all of its earnings on a current basis. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. For more information, see the section entitled “Taxation — Material United States Federal Income Tax Considerations — Passive Foreign Investment Company Considerations.”
 
Prospective investors are urged to consult their tax advisors concerning the United States federal income tax consequences of an investment in our ADSs or ordinary shares if we are classified as a PFIC for our current or subsequent taxable years.
 
We face risks related to natural disasters and health epidemics in China, which could materially and adversely affect our business and results of operations.
 
Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemics in China. For example, in May 2008, Sichuan Province suffered a strong earthquake measuring approximately 8.0 on the Richter scale that caused widespread damage and casualties. The May 2008 Sichuan earthquake may materially and adversely affect the economic conditions in the areas affected by the earthquake. The government is still in the process of assessing the overall economic impact of the May 2008 Sichuan earthquake. We cannot assure you that the May 2008 Sichuan earthquake will not have a significant impact on the overall economic conditions in the PRC. In addition, in the last decade, the PRC has suffered health epidemics related to the outbreak of avian influenza, H1N1 influenza and severe acute respiratory syndrome. Such outbreaks have also occurred


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in other regions of the Asia-Pacific, such as Taiwan, in which we have operations. Any future natural disasters or health epidemics in the PRC and other regions of the Asia-Pacific could materially and adversely affect our business and results of operations.
 
The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under recently adopted PRC regulation; any requirement to obtain prior CSRC approval could delay this offering and a failure to obtain this approval could materially and adversely affect our business, operating results, reputation and ADSs’ trading price and may also create uncertainties for this offering; such regulation also establishes more complex procedures for acquisitions conducted by non-PRC investors which could make it more difficult to pursue growth through acquisitions.
 
On August 8, 2006, six PRC regulatory agencies, namely, the MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, or SASAC, the State Administration of Taxation, the State Administration for Industry and Commerce, or SAIC, the CSRC and SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006 and amended on June 22, 2009. This M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and directly or indirectly controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on a non-PRC stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.
 
While the application of the M&A Rule remains unclear, we believe, based on the advice of our PRC counsel, Jincheng Tongda & Neal Law Firm, that CSRC approval is not required in connection with this offering because we have no current PRC shareholders and we are not controlled by any PRC natural person or legal person, and accordingly, we should not be recognized as a SPV under the M&A Rule. However, as it is uncertain how the M&A Rule will be interpreted or implemented, we cannot assure you that the relevant PRC government agency, including the CSRC, or PRC courts would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory agencies subsequently determine that we are required to obtain the CSRC’s approval for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could materially and adversely affect our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered by this prospectus.
 
The M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by non-PRC investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a non-PRC investor takes control of a PRC domestic enterprise. We have grown our business in part by acquiring complementary businesses, and we may continue to do so in the future. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM or its local counterparts, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.


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Recent PRC regulations relating to offshore investment activities by PRC residents and employee stock options granted by overseas-listed companies may increase our administrative burden, restrict our overseas and cross-border investment activity or otherwise adversely affect the implementation of our acquisition strategy. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
 
SAFE promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. Under the SAFE regulations, PRC residents who make, or have previously made, direct or indirect investments in offshore companies, will be required to register those investments. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update such registration with the local branch of SAFE in the event of any material change involving its round-trip investment, any capital variation, such as an increase or decrease in capital, any transfer or swap of shares, merger, divestiture, long-term equity or debt investment or creation of any security interest. If any PRC shareholder fails to make the required SAFE registration or file or update the registration, the PRC subsidiaries of that offshore parent company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation, to their offshore parent company, and the offshore parent company may also be prohibited from injecting additional capital into their PRC subsidiaries. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
 
We cannot provide any assurances that all of our future shareholders who are PRC residents will make or obtain the applicable registrations or approvals required by these SAFE regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.
 
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could materially and adversely affect our business and prospects.
 
On March 28, 2007, SAFE adopted the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly-listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly-listed company, to register with SAFE and complete certain other procedures. Under our 2006 Plan, we have a significant number of options to purchase ordinary shares outstanding as well as a significant number of option shares reserved for future issuance. We and our PRC employees and directors who have been granted stock options will be subject to the Stock Option Rule when our company becomes an overseas publicly-listed company. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and legal sanctions.
 
The Stock Option Rule has not yet been made publicly available nor formally promulgated by SAFE, but we believe that SAFE has begun enforcing its provisions. Nonetheless, it is not predictable


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whether SAFE will continue to enforce the Stock Option Rule or adopt additional or different requirements with respect to equity compensation plans. If it is determined that our equity incentive plan is subject to Stock Option Rule, failure to comply with such provisions may also prevent us from being able to grant equity compensation to our employees, which is a significant component of the compensation of many of our PRC employees. In that case, our business operations may be materially and adversely affected.
 
Certain of our leased property interests may be defective and we may be forced to relocate our operations from the properties affected by such defects, which could cause a significant disruption to our business.
 
Certain of our leased properties in China, all of which are used as offices, contain defects in their respective leasehold interests. Such defects include (i) the lack of evidence showing the landlord’s proper title or right to lease the property and/or (ii) the landlord’s failure to duly register the respective lease with the relevant PRC authority. According to relevant PRC laws, if a tenant lacks evidence of the landlord’s title or right to lease the property, the relevant lease agreement may not be valid or enforceable, and subject to challenge by third parties. Similarly, although the failure to register a lease agreement will not affect its effectiveness between the tenant and the landlord, such lease agreement may be subject to challenge by, and unenforceable against, a bona fide third party who leases the same property from the landlord and has duly registered the lease with the relevant PRC authority. The landlord and the tenant may also be subject to administrative fines for failures to register the relevant lease.
 
We have initiated steps to cause our landlords to procure valid evidence as to the title or right to lease, as well as to complete the lease registration procedures. However, we cannot assure you that such defects will be cured in a timely manner or at all. Our business may be interrupted and additional relocation costs may be incurred if we are required to relocate our operations affected by these defects. Moreover, if our lease agreements are challenged by third parties, it could result in a diversion of our management’s attention and cause us to incur costs associated with defending these actions, even if such challenges are ultimately determined in our favor.
 
Changes to the political status and international relations of Taiwan may affect our business, operations and financial conditions.
 
Several of our subsidiaries are incorporated in Taiwan. Taiwan has a unique international political status given that Taiwan and the Chinese mainland have been separately governed since 1949. Differences in the interpretation of the status of Taiwan between Taiwan and the PRC have given rise to continuous political debates which in turn have, from time to time, affected the political status of Taiwan. Although significant economic and cultural relations between Taiwan and the PRC have been established during recent years, the PRC has refused to renounce the possibility that it may in the future forcefully gain control of Taiwan. Changes in the relations between Taiwan and the PRC may have an adverse effect on Taiwan’s economy. We cannot be assured that present tensions will not be exacerbated, which could have an adverse impact on Taiwan’s economy and in turn our business, operations and financial condition.
 
Risks Related to Our ADSs and This Offering
 
There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.
 
Before this initial public offering, there was no public market for our ADSs or ordinary shares. We cannot assure you that an active public market for our ADSs will develop or that the market price of our ADSs will not decline below their initial public offering price. The initial public offering price of our ADSs will be determined by negotiations between us and the underwriters and may not be indicative


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of prices that will prevail in the trading market. You may be unable to resell your ADSs at a price that is attractive to you.
 
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 various factors, which include the following:
 
  •  actual or anticipated fluctuations in our quarterly operating results;
 
  •  changes in financial estimates by securities research analysts;
 
  •  announcements by us or our competitors of new services, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
  •  technological breakthroughs in the IT services industry;
 
  •  potential litigation or administrative investigations;
 
  •  addition or departure of key personnel;
 
  •  fluctuations in the exchange rate between the U.S. dollar and Renminbi;
 
  •  release or expiry of lock-up or other transfer restrictions on our outstanding ordinary shares or ADSs;
 
  •  sales or perceived sales of additional ordinary shares or ADSs; and
 
  •  general market conditions or other developments affecting us or our industry.
 
In addition, the securities markets have 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 materially and adversely affect the market price of our ADSs.
 
Because the initial public offering price is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.
 
If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$      per ADS (assuming no exercise by the underwriters of options to acquire additional ADSs), representing the difference between our net tangible book value per ADS as of          , after giving effect to this offering and an initial public offering price of US$      per ADS. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options.
 
We may need additional capital and may not be able to raise funds on acceptable terms, if at all. In addition, any funding through the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders and any funding through indebtedness could restrict our operations.
 
We may require additional cash resources to finance our continued growth or other future developments, including any investments or acquisitions we may decide to pursue. The amount and timing of such additional financing needs will vary principally depending on the timing of new product and service launches, investments and/or acquisitions, and the amount of cash flow from our operations. 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 or securities convertible into our ordinary shares 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.


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Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
 
  •  investors’ perception of, and demand for, securities of IT service solutions providers;
 
  •  conditions of the U.S. and other capital markets in which we may seek to raise funds;
 
  •  our future results of operations, financial condition and cash flows;
 
  •  governmental regulations of foreign investment in China or other jurisdictions;
 
  •  economic, political and other conditions in China and other jurisdictions; and
 
  •  PRC governmental policies relating to foreign currency borrowings.
 
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all, especially if the current extreme volatilities in the capital markets worldwide continue or worsen as a result of recent global financial services and economic crises. If we fail to raise additional funds, we may need to sell debt or additional equity securities or to reduce our growth to a level that can be supported by our cash flow. Without additional capital, we may not be able to:
 
  •  further develop or enhance our customer base;
 
  •  acquire necessary technologies, products or businesses;
 
  •  expand operations in China and elsewhere;
 
  •  hire, train and retain employees;
 
  •  market our software solutions, services and products; or
 
  •  respond to competitive pressures or unanticipated capital requirements.
 
Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.
 
Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering (assuming no exercise by the underwriters of options to acquire additional ADSs), we will have           ordinary shares outstanding, including           ordinary shares represented by           ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act, except to the extent acquired by persons deemed to be our “affiliates.” The remaining ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus and, in the case of the ordinary shares that certain option holders will receive when they exercise their share options, until the later of (i)          , the first anniversary of the exercise date, and (ii) the expiration of the aforementioned 180-day lock-up period, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. Any or all of these shares (other than those held by certain option holders) may be released prior to expiration of the lock-up period at the discretion of the underwriters. To the extent shares are sold into the market either prior to or after the expiration of the lock-up period, the market price of our ADSs could decline.
 
Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.
 
Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. The minimum notice period required to convene a general meeting will be seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’


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meeting to permit you to withdraw your ordinary shares in order to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. In addition, in your capacity as an ADS holder, you will not be able to call a shareholder meeting. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested.
 
The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.
 
Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at our shareholders’ meetings unless:
 
  •  we have failed to timely provide the depositary with notice of meeting and related voting materials;
 
  •  we have instructed the depositary that we do not wish a discretionary proxy to be given;
 
  •  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
 
  •  a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
 
  •  the voting at the meeting is to be made on a show of hands.
 
The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
 
We will incur increased costs as a result of being a public company.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and rules subsequently implemented by the U.S. Securities and Exchange Commission have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and make some of our corporate activities more time-consuming and costly. Also, we will incur additional costs associated with satisfying our public company reporting requirements. We are evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
Our management will have broad discretion over the use of the proceeds from this offering and may not apply the proceeds of this offering in ways that increase the value of our common stock.
 
Our management will have broad discretion to use the net proceeds we receive from this offering as it sees fit. We could, therefore, spend the proceeds from this offering in ways you may not agree with or that do not yield a favorable return to you. We intend to use the net proceeds we


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receive from this offering for working capital and general corporate purposes, as well as funding possible future strategic acquisitions. We have not allocated these net proceeds for any specific purposes, and you will not have the opportunity to influence our decisions on how to use these proceeds.
 
You may not receive distributions on ordinary shares or any value for them if it is unlawful or impractical to make them available to you.
 
Subject to the terms and conditions of the deposit agreement, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on 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 is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs, in which case it may determine not to make such a distribution. Neither we nor the depositary have any obligation to register ADSs, ordinary shares, rights or other securities subject to such distribution under U.S. securities laws. Neither we nor the depositary have any obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the distribution we make on our ordinary shares or any value for them if it is unlawful or impractical for us to make them available to you. These restrictions may materially and adversely affect the value of your ADSs.
 
You may be subject to limitations on transfers 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 body, or under any provision of the deposit agreement, or for any other reason.
 
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. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempted 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. Moreover, we may not be able to establish an 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.
 
In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions 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.


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You may have difficulty enforcing judgments obtained against us.
 
We are a company incorporated under the laws of the British Virgin Islands and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in the PRC. In addition, a majority of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside 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 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.


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CONVENTIONS APPLICABLE TO THIS PROSPECTUS
 
Unless we indicate otherwise or the context requires, all information in this prospectus reflects the following:
 
  •  no exercise by the underwriters of their over-allotment option to purchase up to     additional ADSs representing four (4) ordinary shares;
 
  •  conversion of all outstanding Series A and Series B convertible preferred shares into ordinary shares immediately prior to the closing of this offering;
 
  •  a 500-for-1 stock split that became effective in May 2006, a 1.5-for-1 stock split that became effective in December 2007 and a further 4-for-1 stock split that became effective in May 2010; and
 
  •  does not reflect (i)      ordinary shares issuable upon the exercise of outstanding stock options at a weighted average exercise price of US$      per ordinary share as of March 31, 2010,      of which      were then exercisable; and (ii)       ordinary shares reserved for future grants under our stock incentive plan.
 
Except where the context otherwise requires and for purposes of this prospectus only:
 
  •  “Accenture” refers to Accenture (Shanghai) Company Ltd. and its affiliates;
 
  •  “Across Japan” refers to Across Japan Co., Ltd.;
 
  •  “Agree” refers to Agree Technology Co., Ltd. and its PRC and offshore affiliates;
 
  •  “Asialink” refers to Asialink Information Technologies (Shanghai) Co., Ltd.;
 
  •  “Bank of China” refers to Bank of China Limited and its affiliates;
 
  •  “Bayshore” refers to Bayshore Consulting and Services Co., Ltd. and its PRC and offshore affiliates;
 
  •  “Beijing Heng En” refers to Beijing Heng En Technology Co., Ltd. and its PRC and offshore affiliates;
 
  •  “BVI Act” refers to the BVI Business Companies Act, 2004 (as amended from time to time);
 
  •  “CVCI Funds” refers to Citigroup Venture Capital International Growth Partnership, L.P. and Citigroup Venture Capital International Co-Investment, L.P.;
 
  •  “Camelot Beijing” refers to Beijing Camelot Technology Co., Ltd.;
 
  •  “Camelot BVI” refers to Camelot Information Systems Inc.;
 
  •  “Camelot Nanjing” refers to Nanjing Camelot Information Systems Co., Ltd.;
 
  •  “Camelot Shanghai” refers to Shanghai Camelot Information Technology Co., Ltd. and its subsidiaries;
 
  •  “Camelot Taiwan” refers to Taiwan Camelot Information Inc.;
 
  •  “Camelot Yantai” refers to Yantai Q.B.Eleven Outsourcing Service Company;
 
  •  “Camelot,” “we,” “us,” “our company” or “our” refers to Camelot Information Systems Inc. and its consolidated subsidiaries;
 
  •  “China” or the “PRC” refers to the People’s Republic of China, excluding Taiwan and the special administrative regions of Hong Kong and Macau;
 
  •  “Dalian Yuandong” refers to Dalian Yuandong Digital Co., Ltd. and its PRC and offshore affiliates;
 
  •  “Faceita” refers to Beijing Faceita Information System Ltd. and its affiliates;
 
  •  “Greater China” refers to the PRC, Taiwan and the special administrative regions of Hong Kong and Macau;


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  •  “Harmonation” refers to Harmonation Inc. and its affiliates;
 
  •  “Hitachi” refers to Hitachi, Ltd. and its affiliates;
 
  •  “Hwawei” refers to Hwawei Digital Financial Technologies Co., Ltd. and its affiliates;
 
  •  “IBM” refers to IBM Global Services China Co., Ltd. and its affiliates;
 
  •  “Jiaxing Camelot” refers to Jiaxing Camelot Software Company Limited;
 
  •  “King’s” refers to King’s Trading Co;
 
  •  “Konwell” refers to Konwell Technologies Ltd. and its affiliates;
 
  •  “Lenovo” refers to Lenovo Group Limited and its affiliates;
 
  •  “NRI” refers to Nomura Research Institute, Ltd. and its affiliates;
 
  •  “NT$” refers to the legal currency of Taiwan;
 
  •  “PCITC” refers to Petro-CyberWorks Information Technology Company Limited, a joint venture between Sinopec and PCCW Limited;
 
  •  “Red River Valley” refers to Beijing Red River Valley Information Technology Co., Ltd. and its offshore affiliates;
 
  •  “RMB” or “Renminbi” refers to the legal currency of the PRC;
 
  •  “Ruiyin” refers to Intelligent Information Technology Co., a subsidiary of Harmonation which holds 58.25% of its equity interests;
 
  •  “Shanghai Camelot” refers to Shanghai Camelot Software Co., Ltd.;
 
  •  “Sinopec” refers to China Petroleum & Chemical Corporation and its affiliates;
 
  •  “Tansun” refers to Beijing Tansun Software Technology Co., Ltd. and its PRC and offshore affiliates;
 
  •  “Triumph” refers to Triumph Consulting & Service Co., Ltd. and its affiliates;
 
  •  “U.S. GAAP” or “GAAP” means accounting principles generally accepted in the United States of America;
 
  •  “US$” or “U.S. dollars” refers to the legal currency of the United States;
 
  •  “VLife” refers to VLife Technology Co., Ltd. and its PRC and offshore affiliates; and
 
  •  “Yinfeng” refers to Beijing Yinfeng Technology Development Co., Ltd and its offshore affiliates.
 
Our financial statements are expressed in U.S. dollars, which is our reporting currency. The functional currency of Camelot BVI is U.S. dollars and the functional currencies of our operating subsidiaries may vary based on the location of these entities. A majority of our net revenues and a significant majority of our expenses are denominated in Renminbi, or RMB, the legal currency of China. This prospectus contains amounts denominated in Japanese Yen, Hong Kong dollars and New Taiwan dollars, and contains translations of certain Renminbi, Hong Kong dollars, New Taiwan dollars and Japanese Yen amounts into U.S. dollars at specified rates. With respect to amounts not recorded in our reporting currency, or U.S. dollars, amounts of our assets and liabilities were translated from each subsidiary’s functional currency at the exchange rates as of the relevant balance sheet date; equity amounts were translated at historical exchange rates; and amounts of revenues, expenses, gains and losses were translated using the average rates for the relevant period. We make no representation that any currency amounts could have been, or could be, converted into any other currency at any particular rate, or at all. On June 18, 2010, the noon buying rates were RMB6.8267 to US$1.00, NT$32.120 to US$1.00 and JPY90.79 to US$1.00. For more information, see “Exchange Rate Information.”


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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements include but are not limited to statements relating to:
 
  •  our expansion plans;
 
  •  our anticipated growth strategy;
 
  •  our plans to recruit more employees;
 
  •  our plans to invest in research and development to enhance our service lines;
 
  •  our future business development, results of operations and financial condition;
 
  •  expected changes in our net revenues and certain cost or expense items;
 
  •  our ability to attract and retain customers; and
 
  •  trends and competition in the IT services industry.
 
These statements may be found in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in this prospectus generally. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks discussed in “Risk Factors” and elsewhere in this prospectus. In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements.
 
This prospectus contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also include projections based on a number of assumptions. The IT services industry may not grow at the rate projected by market data, or at all. The failure of this industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the IT services industry results in significant uncertainties in any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.
 
Unless otherwise indicated, information in this prospectus concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. Unless otherwise indicated, none of the independent industry publication market data cited in this prospectus was prepared on our or our affiliates’ behalf.
 
The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. You should not place undue reliance on any forward-looking statements.


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OUR HISTORY AND CORPORATE STRUCTURE
 
Our History
 
We are a British Virgin Islands holding company and conduct a significant majority of our business through our operating subsidiaries in China. Our holding company, Camelot Information Systems Inc., or Camelot BVI, was incorporated in the British Virgin Islands in November 2000, and subsequently established a number of operating subsidiaries in China.
 
In May 2006, we issued an aggregate of 30,201,000 Series A preferred shares to the CVCI Funds for US$20.0 million. The number of Series A preferred shares issued to the CVCI Funds was subject to a one-time adjustment based on our financial performance in 2005. In addition, as part of our issuance of the Series A preferred shares, we granted the CVCI Funds an option to purchase additional Series A preferred shares. In April 2007, as a result of the CVCI Funds’ exercise of the option and the one-time adjustment on the previously-issued Series A preferred shares, we issued to the CVCI Funds an additional 13,854,018 Series A preferred shares for US$10.0 million. Immediately following these transactions, CVCI Funds held 37.4% of our issued and outstanding shares on an as-converted basis.
 
In December 2007, we issued 2,411,597 Series B preferred shares to IBM WTC Asia Investments LLC for US$3.0 million and 1,607,731 Series B preferred shares to Lehman Brothers Offshore Partners Ltd., or LBOP, for US$2.0 million. Immediately following this issuance, IBM and LBOP held 2.0% and 1.3%, respectively, of our issued and outstanding shares on an as-converted basis.
 
Historically, we have made a number of strategic acquisitions to complement our growth, including the acquisitions of Triumph, Bayshore and Dalian Yuandong in 2006. Our significant acquisitions since 2007 include the following:
 
  •  In January 2007, we acquired 100% of Hwawei for US$1.4 million in cash. Hwawei provides specialized applications software implementation and development services to the financial service industry in Taiwan.
 
  •  In February 2008, we acquired 100% of Red River Valley for US$4.0 million and agreed to pay an additional US$8.0 million in cash over a period of two years starting from the acquisition date. However, in July 2008, as a result of our renegotiation with the previous equity holders of Red River Valley, the remaining consideration payment of US$8.0 million was waived for a total consideration of US$3.3 million, consisting of (i) US$1.2 million in cash; and (ii) 1,800,000 of our shares with a fair value of US$2.1 million issued in May 2010. Red River Valley provides packaged software services tailored to the steel manufacturing industry in China to enhance operational productivity.
 
  •  In April 2008, we acquired 100% of VLife for US$3.0 million in cash and 2,250,000 of our ordinary shares issued in July 2008. VLife focuses on providing application software development and implementation services to life insurance companies in Taiwan by incorporating specific insurance regulations, actuarial requirements and industry prerequisites.
 
  •  In April 2008, we acquired 100% of Yinfeng for (i) an initial consideration of RMB57.2 million (approximately US$8.2 million) and 1,000,000 of our ordinary shares issued in September 2009; and (ii) an additional performance-based consideration of 2,200,000 of our ordinary shares based on the fair value of US$1.47 per share as of December 31, 2009, issued in May 2010. Yinfeng provides mission critical risk management and internal auditing solutions, including the development of anti-money laundering systems, for banks in China.
 
  •  In July 2008, we acquired 85.47% equity interest in Harmonation for US$4.8 million in cash and 833,336 of our ordinary shares issued in July 2008. Harmonation provides image solution and business process management application services to financial services companies in Taiwan to enhance operational efficiency, minimize storage costs and reduce paper expenses.


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  •  In July 2009, we acquired 100% of Agree for RMB50.0 million (approximately US$7.3 million) in cash and 4,866,180 shares of our ordinary shares issued in September 2009. In addition, we agreed to pay an additional performance-based cash consideration to Agree of an amount between RMB63.0 million (approximately US$9.2 million) and RMB75.0 million (approximately US$11.0 million) upon the earlier of January 1, 2012 or within ten (10) days of the closing of this offering based on Agree’s performance in 2009 and 2010. Agree provides comprehensive software solutions for automating teller systems and branch operations to clients in the financial services industry in China through developing mission critical financial software platforms and applications.
 
  •  In December 2009, we acquired 100% of Tansun for (i) an initial payment of RMB60.0 million (approximately US$8.8 million) in cash plus 3,932,000 of our ordinary shares issued in May 2010; and (ii) additional performance-based cash consideration of up to RMB50.0 million (approximately US$7.4 million). Tansun provides core business and enterprise software solutions and services for the financial services industry in China, including the consultation, design, development, implementation, testing and maintenance for key functions, such as corporate loan, risk management, supply chain financing, commercial loan, cash management, and internal collaboration and workflow.


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Our Corporate Structure
 
The following diagram illustrates our corporate structure and the place of formation and affiliation of each of our major subsidiaries as of the date of this prospectus.
 
(DIAGRAM)


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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from this offering of approximately US$      million, or approximately US$      million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and the estimated offering expenses payable by us and based upon an assumed initial public offering price of US$      per ADS (the mid-point of the estimated initial public offering price range shown on the front cover of this prospectus). We will not receive any of the proceeds from the sale of ADSs by the selling shareholders. A US$1.00 increase (decrease) in the assumed initial public offering price of US$      per ADS would increase (decrease) the net proceeds from this offering by US$      million, after deducting the underwriting discounts and the estimated offering expenses payable by us and assuming no exercise of the underwriters’ over-allotment option and no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.
 
We have no current specific plan for the net proceeds from this offering and intend to use these proceeds for working capital and general corporate purposes, as well as funding possible future strategic acquisitions. In addition, this offering will create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and enhance our ability to use our shares as purchase consideration in future acquisitions.
 
The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds. The occurrence of unforeseen events or changed business conditions could result in application of the net proceeds of this offering in a manner other than as described in this prospectus.


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DIVIDEND POLICY
 
Since our inception, we have not declared or paid any dividends on our ordinary shares. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and to expand our business.
 
We are a holding company established in the British Virgin Islands, and our ability to pay dividends to our shareholders depends upon dividends that we receive from our subsidiaries. See “Risk Factors — Risks Related to Doing Business in China — We may rely on dividends and other distributions on equity paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to pay dividends to us could have a material adverse effect on our ability to conduct our business.”
 
If we were deemed to be non-resident for PRC tax purposes, dividends paid to our British Virgin Islands holding company from profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by our PRC subsidiaries to our non-PRC shareholders, the withholding tax would be 10%, unless such non-PRC shareholder’s tax jurisdiction has a tax treaty with China that provides for a different withholding arrangement. However, see “Risk Factors — Risks Related to Doing Business in China — Our global income and the dividends we may receive from our PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”
 
Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. Cash dividends on our ADSs, if any, will be paid in U.S. dollars.
 
Holders of our ADSs will be entitled to receive dividends, if any, subject to the terms of the deposit agreement, to the same extent as the holders of our ordinary shares. Cash dividends will be paid to the depositary in U.S. dollars, which will distribute them to the holders of ADSs according to the terms of the deposit agreement. Other distributions, if any, will be paid by the depositary to the holders of ADSs in any means it deems legal, fair and practical. See “Description of American Depositary Shares — Dividends and Distributions.”


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CAPITALIZATION
 
The following table shows our capitalization as of March 31, 2010:
 
  •  on an actual basis reflecting the 4-for-1 stock split effected in May 2010;
 
  •  on a pro forma basis to reflect (i) the issuance of an aggregate of 7,932,000 ordinary shares in May 2010 (these shares were reflected as shares to be issued in our equity as of March 31, 2010, and consist of 1,800,000 ordinary shares in connection with the debt extinguishment with Red River Valley, 3,932,000 ordinary shares in connection with the acquisition of Tansun, and 2,200,000 ordinary shares as a settlement of the contingent consideration of US$3.2 million in connection with the acquisition of Yinfeng); and (ii) the automatic conversion of all our outstanding preferred shares into an aggregate of 48,074,346 ordinary shares assuming a conversion ratio of one for one immediately prior to the closing of this offering; and
 
  •  on a pro forma as adjusted basis to reflect the automatic conversion of all of our outstanding preferred shares into 48,074,346 ordinary shares immediately prior to the closing of this offering and our sale of           ADSs in this offering at an assumed initial public offering price of US$          , the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us.
 
You should read this table together with our consolidated financial statements and related notes included in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                         
    As of March 31, 2010
            Pro Forma as
    Actual   Pro Forma   Adjusted(1)
    (U.S. dollars in thousands)
 
Bank borrowings, less current portion
    336       336          
Equity:
                       
Series A convertible preferred shares (no par value, 44,055,018 shares authorized, 44,055,018 shares issued and outstanding)
    28,725                
Series B convertible preferred shares (no par value, 4,019,328 shares authorized, 4,019,328 shares issued and outstanding)
    5,000                
Ordinary shares (no par value, 451,925,654 shares authorized, 82,640,994 shares issued and outstanding, and 130,715,340 shares issued and outstanding on a pro forma basis)
                   
Shares to be issued
    11,035                
Additional paid-in capital
    20,610       65,370          
Statutory reserves
    4,403       4,403          
Retained earnings
    39,824       39,824          
Accumulated other comprehensive income
    7,438       7,438          
                         
Total Camelot Information Systems Inc. shareholders’ equity
    117,035       117,035          
Noncontrolling interest
    471       471          
                         
Total equity
    117,506       117,506          
                         
Total capitalization
    117,842       117,842          
                         
 
 
(1) A US$1.00 increase (decrease) in the assumed initial public offering price of US$      per ADS would increase (decrease) each of pro forma as adjusted additional paid-in capital, total shareholders’ equity and total capitalization by US$      million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.


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DILUTION
 
If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the initial public offering price per ordinary share underlying the ADSs substantially exceeding the net tangible book value per ordinary share attributable to our presently outstanding ordinary shares.
 
Our net tangible book value as of March 31, 2010 was approximately US$          million, or US$          per ordinary share outstanding at that date, and US$          per ADS. Net tangible book value is determined by subtracting the value of our intangible assets and total liabilities from our total assets. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the issuance of an aggregate of 7,932,000 ordinary shares in May 2010, the conversion of all outstanding Series A and Series B preferred shares into ordinary shares upon completion of this offering, and the proceeds from this offering, from the assumed initial public offering price per ordinary share, which is the mid-point of the estimated initial public offering price range shown on the front cover of this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
 
Without taking into account any other changes in net tangible book value after March 31, 2010, other than to give effect to (i) the issuance and sale by us of the          ADSs offered in this offering at the assumed initial public offering price of US$          per ADS, the mid-point of the estimated price range shown on the front cover of this prospectus, with estimated net proceeds of approximately US$          million after deducting underwriting discounts and commissions and estimated offering expenses payable by us, (ii) automatic conversion of all our Series A and Series B preferred shares outstanding as of March 31, 2010 into ordinary shares upon the closing of this offering, and (iii) the issuance of an aggregate of 7,932,000 ordinary shares in May 2010, our pro forma net tangible book value as of March 31, 2010 would have been US$          million, or US $          per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, and US$          per ADS. This represents an immediate increase in pro forma net tangible book value of US$          per ordinary share, or US$          per ADS, to existing shareholders and an immediate dilution in pro forma net tangible book value of US$          per ordinary share, or US$          per ADS, to new investors in this offering.  The following table illustrates this per ordinary share dilution:
 
         
Initial public offering price per ordinary share
  US$             
Net tangible book value per ordinary share as of March 31, 2010
  US$  
Net tangible book value per ordinary share as of March 31, 2010, as adjusted to give effect to the issuance of an aggregate of 7,932,000 ordinary shares in May 2010 and the conversion of our Series A and Series B preferred shares into ordinary shares
  US$  
Increase in net tangible book value per ordinary share attributable to this offering
  US$  
Net tangible book value per ordinary share after giving effect to this offering, as adjusted to give effect to the issuance of an aggregate of 7,932,000 ordinary shares in May 2010 and the conversion of our Series A and Series B preferred shares into ordinary shares
  US$  
         
Dilution per ordinary share to new investors
  US$  
Dilution per ADS to new investors
  US$  
         
 
A US$1.00 increase/(decrease) in the assumed initial public offering price would increase/(decrease) (i) net tangible book value per share by US$          and (ii) dilution per share by US$          , assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.


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The following table summarizes, on a pro forma basis as of March 31, 2010, the differences between existing shareholders and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per share and the average price per ADS, each paid before deducting the underwriting discount and our estimated offering expenses.
 
                                                 
                    Average
  Average
    Shares Purchased   Total Consideration   Price
  Price
    Number   Percent   Amount   Percent   per Share   per ADS
    (Thousands, except per share and per ADS data)
 
Existing holders of ordinary shares
                                               
Investors purchasing ADSs in this offering from our company
                                               
Total
            100.0 %             100.0 %                
                                                 
 
The discussion and tables above assume no exercise of outstanding stock options. As of March 31, 2010, there were stock options exercisable to purchase a total of 11,655,328 of our ordinary shares, with a weighted average exercise price of US$0.99 per share. To the extent that any of these stock options are exercised, there will be further dilution to new investors.


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EXCHANGE RATE INFORMATION
 
A significant majority of our business are conducted in Renminbi. Our periodic reports to our shareholders in U.S. dollars will use the then-current exchange rates. We make no representation that any amounts in Renminbi or U.S. dollar could be or could have been converted into each other at any particular rate or at all. The PRC government imposes controls over its foreign exchange in part through direct regulation of the conversion of Renminbi into foreign currency as we have disclosed in “Risk Factors — Risks Related to Doing Business in China — Fluctuation in the value of Renminbi may have a material adverse effect on our business and on your investment” and “— PRC regulations on currency exchange and foreign investment may limit our ability to receive and use our revenues effectively and may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries.” We also conduct a significant amount of business in New Taiwan Dollar and in Japanese Yen.
 
The following table sets forth, for the periods indicated, the noon buying rates for U.S. dollars in New York City for cable transfers in Renminbi.
 
                                 
    Noon Buying Rate
Period
  Period End   Average(1)   High   Low
    (RMB per US$1.00)
 
2005
    8.0702       8.1940       8.2765       8.0702  
2006
    7.8041       7.9723       8.0702       7.8041  
2007
    7.2946       7.6072       7.8127       7.2946  
2008
    6.8225       6.9193       7.2946       6.7800  
2009
    6.8259       6.8307       6.8470       6.8176  
December
    6.8259       6.8275       6.8299       6.8244  
2010
                               
January
    6.8268       6.8269       6.8295       6.8258  
February
    6.8258       6.8285       6.8330       6.8258  
March
    6.8258       6.8262       6.8270       6.8254  
April
    6.8247       6.8256       6.8275       6.8229  
May
    6.8305       6.8275       6.8310       6.8245  
June (through June 18)
    6.8267       6.8298       6.8323       6.8267  
 
 
Source: Federal Reserve Bank of New York for period ends indicated through December 2008, and the H.10 statistical release of the Federal Reserve for period ends thereafter.
 
(1) Determined by averaging the noon buying rates on each business day during the relevant period.
 
The following table sets forth, for the periods indicated, the noon buying rates for U.S. dollars in New York City for cable transfers in New Taiwan Dollar.
 
                                 
    Noon Buying Rate
Period
  Period End   Average(1)   High   Low
        (NT$ per US$1.00)    
 
2005
    32.800       32.131       33.770       30.650  
2006
    32.590       32.506       33.310       31.280  
2007
    32.430       32.855       33.410       32.260  
2008
    32.760       31.517       33.550       29.990  
2009
    31.950       33.020       35.210       31.950  
December
    31.950       32.246       32.380       31.950  
2010
                               
January
    31.940       31.866       32.040       31.650  
February
    32.120       32.062       32.140       31.980  
March
    31.730       31.829       32.040       31.700  
April
    31.310       31.477       31.740       31.300  
May
    32.000       31.835       32.330       31.400  
June (through June 18)
    32.120       32.285       32.430       32.120  
 
 
Source: Federal Reserve Bank of New York for period ends indicated through December 2008, and the H.10 statistical release of the Federal Reserve for period ends thereafter.
 
(1) Determined by averaging the noon buying rates on each business day during the relevant period.


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The following table sets forth, for the periods indicated, the noon buying rates for U.S. dollars in New York City for cable transfers in Japanese Yen.
 
                                 
    Noon Buying Rate  
Period
  Period End     Average(1)     High     Low  
          (JPY per US$1.00)        
 
2005
    117.88       110.11       120.93       102.26  
2006
    119.02       116.31       119.81       110.07  
2007
    111.71       117.81       124.09       108.17  
2008
    90.79       103.39       110.48       87.84  
2009
    93.08       93.68       100.71       86.12  
December
    93.08       89.95       93.08       86.62  
2010
                               
January
    90.38       91.10       93.31       89.41  
February
    88.84       90.14       91.94       88.84  
March
    93.40       90.72       93.40       88.43  
April
    94.24       93.45       94.51       92.03  
May
    90.81       91.97       94.68       89.89  
June (through June 18)
    90.79       91.52       92.33       90.79  
 
 
Source: Federal Reserve Bank of New York for period ends indicated through December 2008, and the H.10 statistical release of the Federal Reserve for period ends thereafter.
 
(1) Determined by averaging the noon buying rates on each business day during the relevant period.


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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following selected consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009 and the consolidated balance sheet data as of December 31, 2008 and 2009, have been derived from our audited consolidated financial statements, which are included elsewhere in this prospectus. The consolidated statement of operations data for the years ended December 31, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have been derived from audited financial statements which are not included in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2009 and 2010 and the summary consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments that we consider necessary to fairly present our financial position and results of operations for the periods presented.
 
You should read the selected consolidated financial data in conjunction with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future period. In addition, our unaudited results as of and for the three months ended March 31, 2010 may not be indicative of our results as of and for the full year ending December 31, 2010.
 
                                                         
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2005   2006   2007   2008   2009   2009   2010
    (U.S. dollars in thousands, except share and per share data)
 
Consolidated statement of operations data:
                                                       
Net revenues
    17,832       33,521       51,380       90,772       118,003       20,522       35,312  
Cost of revenues(1)(2)
    (12,147 )     (21,909 )     (35,620 )     (64,187 )     (81,976 )     (14,745 )     (26,540 )
                                                         
Gross profit
    5,685       11,612       15,760       26,585       36,027       5,777       8,772  
                                                         
Selling and marketing expenses(1)(2)
    (130 )     (1,171 )     (1,796 )     (3,818 )     (6,199 )     (1,100 )     (2,370 )
General and administrative expenses(1)
    (1,470 )     (5,080 )     (5,700 )     (11,613 )     (12,627 )     (3,299 )     (4,255 )
Research and development costs
                      (1,705 )     (1,496 )     (635 )     (426 )
Postponed initial public offering costs
                      (2,457 )                  
Changes in fair value of contingent consideration for acquisitions of Agree and Tansun
                            (549 )           (306 )
                                                         
Total operating expenses
    (1,600 )     (6,251 )     (7,496 )     (19,593 )     (20,871 )     (5,034 )     (7,357 )
Government subsidies
          51       27             56              
                                                         
Income from operations
    4,085       5,412       8,291       6,992       15,212       743       1,415  
Interest expense
    (18 )     (21 )     (6 )     (310 )     (96 )     (14 )     (123 )
Interest income
    6       447       396       244       118       16       44  
Dividend income from short term investment
                      11                    
Gain/(loss) on short-term investment
                      (115 )     44              
Gain from extinguishment of liability
                      3,926                    
                                                         
Income before provisions for income taxes
    4,073       5,838       8,681       10,748       15,278       745       1,336  
Provisions for income taxes
    (230 )     (390 )     (1,374 )     (1,400 )     (2,241 )     (110 )     (289 )
Equity in earnings/(loss) of an affiliate, net of income taxes
    5       (5 )     6                          
                                                         
Net income
    3,848       5,443       7,313       9,348       13,037       635       1,047  
Less: Net (loss)/income attributable to non controlling interest
                      (66 )     (71 )     2       (14 )
                                                         
Net income attributable to Camelot Information Systems Inc. 
    3,848       5,443       7,313       9,282       12,966       637       1,033  
                                                         


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    For the Year Ended December 31,   For the Three Months Ended March 31,
    2005   2006   2007   2008   2009   2009   2010
    (U.S. dollars in thousands, except share and per share data)
 
Net income per share attributable to shareholders of Camelot Information Systems Inc.(3) 
                                                       
Basic-ordinary shares
    0.06       0.06       0.06       0.07       0.10       0.00       0.01  
Basic-Series A convertible preferred shares
          0.06       0.06       0.07       0.10       0.00       0.01  
Basic-Series B convertible preferred shares
                0.06       0.07       0.10       0.00       0.01  
Diluted-ordinary shares
    0.06       0.06       0.06       0.07       0.10       0.00       0.01  
                                                         
Weighted average shares used in calculating net income per share(3):
                                                       
Basic-ordinary shares
    67,650,000       73,691,478       73,691,478       77,394,257       82,035,859       79,574,814       90,572,994  
Basic-Series A convertible preferred shares
          19,527,224       39,652,097       44,055,018       44,055,018       44,055,018       44,055,018  
Basic-Series B convertible preferred shares
                55,059       4,019,328       4,019,328       4,019,328       4,019,328  
Diluted-ordinary shares
    67,650,000       93,218,702       114,516,885       127,587,315       133,017,168       130,096,588       146,854,714  
                                                         

 
 
(1) Includes the following amounts of share-based compensation expenses for the years indicated:
 
                                                         
        For the Three Months Ended
    For the Year Ended December 31,   March 31,
    2005   2006   2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Cost of revenues
      —       27       89       130       147       33       40  
Selling and marketing expenses
      —       25       55       94       158       25       50  
General and administrative expenses
      —       142       355       852       938       242       321  
                                                         
Total share-based compensation expenses
      —       194       499       1,076       1,243       300       411  
                                                         
 
(2) Includes the following amounts of amortization expense related to intangible assets acquired for business combination for the years indicated:
 
                                                         
        For the Three Months
    For the Year Ended December 31,   Ended March 31,
    2005   2006   2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Cost of revenues
      —       215       8       360       440       22       521  
Selling and marketing expenses
      —       888       946       2,372       3,224       566       1,161  
                                                         
Total
      —       1,103       954       2,732       3,664       588       1,682  
                                                         
 
(3) Share and per share information presented in this prospectus has been adjusted to reflect all splits of our ordinary shares, including the 4-for-1 stock split effected May 2010. See Note 22 “Subsequent Events” to the Consolidated Financial Statements for the year ended December 31, 2009.

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                        As of March 31, 2010
    As of December 31,       Pro Forma
    2005   2006   2007   2008   2009   Actual   as Adjusted(1)
    (U.S. dollars in thousands)
 
Consolidated balance sheet data:
                                                       
Cash and cash equivalents
    2,243       13,544       18,851       22,916       33,820       18,611          
Total assets
    17,407       52,483       72,352       118,905       191,267       182,795          
Total liabilities
    6,460       12,864       12,162       32,412       75,310       65,289          
Total equity
    10,947       39,619       60,190       86,493       115,957       117,506          
                                                         
Total liabilities and equity
    17,407       52,483       72,352       118,905       191,267       182,795          
                                                         
 
 
(1) Our consolidated balance sheet data as of March 31, 2010 is adjusted to give effect to (a) the issuance of an aggregate of 7,932,000 ordinary shares in May 2010 (these shares were reflected as shares to be issued in equity as of March 31, 2010, and consist of 1,800,000 ordinary shares in connection with the debt extinguishment with Red River Valley, 3,932,000 ordinary shares in connection with the acquisition of Tansun, and 2,200,000 ordinary shares as a settlement of the contingent consideration of US$3.2 million in connection with the acquisition of Yinfeng); (b) the automatic conversion of all our preferred shares into ordinary shares using a conversion ratio of one for one immediately prior to the closing of this offering; and (c) the issuance and sale of ADSs by us in this offering, assuming an initial public offering price of US$      per ADS (the mid-point of the estimated initial public offering price range), after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A US$1.00 increase (decrease) in the assumed initial public offering price of US$      per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ equity by US$      million.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.
 
Overview
 
We are a leading domestic provider of enterprise application services and financial industry IT services in China, and we focus on enterprises operating in the Chinese market. According to IDC, we are the largest domestic provider of SAP-based ERP services in China as measured by 2009 revenue. Our flexible delivery model also allows us to provide IT services to other areas of the Asia-Pacific region, including Taiwan and Japan, which we believe further distinguishes us from our competitors.
 
We focus on providing services at the higher end of the IT value chain. Our primary service lines are:
 
  •  enterprise application services, or EAS, which primarily consist of (i) packaged software services for leading ERP software packages, and (ii) software development and maintenance services; and
 
  •  financial industry IT services, or FIS, which primarily consist of software solutions, system support and maintenance, as well as IT consulting services for the financial industry.
 
Since the establishment of our company, we have grown significantly through organic growth. Since 2006, we have also made a number of strategic acquisitions that expanded our presence in China and the Asia-Pacific region. In 2007, 2008 and 2009, our net revenues totaled US$51.4 million, US$90.8 million and US$118.0 million, respectively, representing a CAGR of 51.5%. During the same periods, our net income attributable to Camelot Information Systems Inc. totaled US$7.3 million, US$9.3 million and US$13.0 million, respectively, representing a CAGR of 33.2%. For the three months ended March 31, 2010, our net revenues and net income attributable to Camelot Information Systems Inc. totaled US$35.3 million and US$1.0 million, respectively. Excluding share-based compensation, acquisition-related intangible amortization, gain from extinguishment of liability, postponed initial public offering costs, and changes in fair value of contingent consideration, our non-GAAP net income attributable to Camelot Information Systems Inc. would have been US$8.8 million, US$11.6 million and US$18.4 million for 2007, 2008 and 2009, respectively, representing a CAGR of 45.0%. For the three months ended March 31, 2010, our non-GAAP net income attributable to Camelot Information Systems Inc. would have been US$3.4 million. For a reconciliation of our non-GAAP net income attributable to Camelot Information Systems Inc. to the U.S. GAAP net income attributable to Camelot Information Systems Inc., see footnote (3) on page 7 of this prospectus.
 
Factors Affecting Our Results of Operations
 
We believe the most significant factors that affect our business and results of operations include the following:
 
  •  Productivity and utilization.  The changes in productivity and utilization of our professionals are affected by the number and size of customer engagements, the timing of the commencement, completion and termination of engagements, billing rates of our professionals, and our ability to transition our professionals efficiently from completed engagements to new engagements. A key indicator we use to assess the productivity and utilization of our professionals is net revenues per employee, which as calculated based on the simple average


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  number of employees at the beginning and end of each period, totaled approximately US$38,800, US$51,300, US$48,000 and US$12,200, for 2007, 2008, 2009 and March 31, 2010, respectively. To enhance productivity and utilization of our professionals during the recent periods of economic uncertainty, we have increased the use of outsourcing services and are cautious in hiring permanent employees. Billing rates of our professionals have remained relatively stable in recent years and are expected to continue to remain relatively stable for the foreseeable future. The productivity and utilization of our professionals will continue to affect our net revenues, gross profit and net income in the future.

 
  •  Customer diversity.  In recent years, as we have expanded significantly in the financial industry IT services business, we have diversified our customer base. While we are seeking out new customers in both of our service lines, we intend to continue to enhance our strategic relationships and address the needs of our existing customers. Our ten largest customers accounted for 76.1%, 64.6%, 63.0% and 65.0% of our net revenues in 2007, 2008, 2009 and for the three months ended March 31, 2010, respectively. The gain or loss of significant customers, or any significant change in the business volume from a particular customer will affect our operating performance. In particular, we have maintained a strong relationship with IBM for the past 12 years. IBM has been our largest customer in 2007, 2008, 2009 and for the three months ended March 31, 2010, accounting for 34.5%, 31.6%, 31.6% and 36.9% of our net revenues, respectively. As part of our cooperation with IBM, we have entered into a number of initiatives, including the joint development of a service delivery center in March 2008, focused on enterprise application software and services. Our net revenues derived from this delivery center totaled US$1.4 million in 2008, US$15.7 million in 2009 and US$7.3 million for the three months ended March 31, 2010, or 1.6%, 13.3% and 20.7% of our total net revenues, respectively. As this delivery center becomes more successful, we expect IBM to continue to be our largest customer and the net revenues contribution from IBM may increase even as we intend to continue to diversify our customer base.
 
  •  Acquisitions.  As part of our growth strategy, we make, and plan to continue to make, strategic acquisitions from time to time to complement our existing business. We identify potential acquisitions targets based on a variety of factors, such as the target’s profitability, growth potential, customer base, business and portfolio mix, domain expertise, shared management vision, and our ability to integrate the target’s business with our existing business. In recent years, our acquisitions (including those of VLife, Yinfeng, Harmonation, Agree and Tansun) have been primarily in the financial industry IT services area, which we believe will experience significant growth as banks continue to modernize their IT infrastructure. Although these acquisitions have helped us increase our net revenues and maintain our gross margins, they have also increased the absolute amounts of our operating expenses, which were US$7.5 million, US$19.6 million, US$20.9 million and US$7.4 million in 2007, 2008, 2009 and for the three months ended March 31, 2010, respectively. In addition, in light of the number of acquisitions we have made in recent years, our acquisition-related intangible amortization expenses have significantly affected our net income. As we continue to pursue acquisition opportunities in the future, our operating results and other aspects of our financial performance will be affected accordingly.
 
  •  Quality, range and delivery of services.  We intend to increase our net revenues by continuing to expand our service offerings and providing quality service to our existing customers and to attract new customers. As a result, our financial results are affected by the market demand for our services, the amount of which is significantly dependent on the quality, range and delivery of our services as well as our industry expertise compared to those of our competitors. In particular, as part of our strategy, we will continue to expand our service offerings to provide high quality end-to-end solutions of customized software, onsite and offsite services, training and maintenance. Our acquisitions of Agree and Tansun are part of this effort in expanding our financial industry IT services business. The market acceptance of these services and our


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  ability to attract new customers based on the offering of these services will affect our operating results. To expand our delivery channels, we are seeking to enter into additional cooperative programs with leading IT service providers, and build alternative delivery models (such as a remote delivery model) for our services. Our ability to expand into these additional delivery channels will affect the growth prospects of our business.

 
  •  Ability and related costs incurred to attract, retain and motivate qualified employees. Our ability to attract, train and retain a large and cost-effective pool of qualified professionals, including our ability to leverage and expand our proprietary database of qualified IT professionals, to develop additional joint training programs with universities, and our employees’ job satisfaction, will affect our financial performance. We have incurred significant costs, and plan to incur additional costs in the future, to attract qualified professionals to work for us. Our compensation and benefits expenses for our IT professionals, totaled US$15.5 million, US$20.1 million, US$29.4 million and US$8.4 million for 2007, 2008, 2009 and for the three months ended March 31, 2010, respectively, which reflected 30.2%, 22.2%, 24.9% and 23.7% of our net revenues, respectively. These costs have included share-based compensation expenses of US$89,000, US$130,000, US$147,000 and US$40,000 for options granted to our IT professionals for the years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2010, respectively, which we expect will continue to increase after we become a publicly-listed company.
 
Description of Certain Line Items
 
Net Revenues
 
Our net revenues represent our total revenues less applicable business taxes and related surcharges. Our net revenues in 2007, 2008 and 2009 and for the three months ended March 31, 2010 were US$51.4 million, US$90.8 million, US$118.0 million and US$35.3 million, respectively. Our business taxes and related surcharges in 2007, 2008 and 2009 and for the three months ended March 31, 2010 were US$1.7 million, US$2.9 million, US$3.9 million and US$1.2 million, respectively.
 
Net Revenues by Service Line
 
We provide our services primarily through two service lines: (i) enterprise application services; and (ii) financial industry IT services. The following table sets forth our net revenues by service line for the years indicated.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
Enterprise application services
    44,344       86.3 %     65,266       71.9 %     79,423       67.3 %     14,350       69.9 %     25,005       70.8 %
Financial industry IT services
    7,036       13.7       25,506       28.1       38,580       32.7       6,172       30.1       10,307       29.2  
                                                                                 
Total net revenues
    51,380       100.0 %     90,772       100.0 %     118,003       100.0 %     20,522       100.0 %     35,312       100.0 %
                                                                                 
 
From 2007 to March 31, 2010, the growth of our enterprise application services business was primarily attributable to organic growth. Since 2008, we strengthened our financial industry IT services business significantly through a number of acquisitions, including VLife, Yinfeng, Harmonation, Agree and Tansun and our operating results in financial industry IT services business in these periods increased accordingly. See “— Results of Operations” for more details.


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Net Revenues by Pricing Model
 
Our customer contracts may be categorized by pricing model into time-and-expense contracts and fixed-price contracts. Under time-and-expense contracts, we are compensated for actual time incurred by our IT professionals at negotiated daily billing rates. Under some of these contracts, we also may be able to charge overtime rates in addition to the daily rate. Fixed-price contracts require us to perform services throughout the contractual period, and we are paid in installments upon completion of specified milestones under the contracts. Our billing rates have generally remained stable in 2007, 2008 and 2009 and for the three months ended March 31, 2010. The following table sets forth our net revenues by pricing model for the years indicated.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
Time-and-expense contracts
    35,427       69.0 %     45,818       50.5 %     59,667       50.6 %     10,503       51.2 %     19,959       56.5 %
Fixed-price contracts
    15,953       31.0       44,954       49.5       58,336       49.4       10,019       48.8       15,353       43.5  
                                                                                 
Total net revenues
    51,380       100.0 %     90,772       100.0 %     118,003       100.0 %     20,522       100.0 %     35,312       100.0 %
                                                                                 
 
A majority of our time-and-expense contracts are generated by our enterprise application services business. In comparison, a majority of our fixed-price contracts are generated by our financial industry IT services business. Net revenues from fixed-price contracts, as a percentage of total net revenues, increased significantly from 2007 to 2008. This trend reflected a combination of:
 
  •  the acquisitions of VLife, Yinfeng and Harmonation, all of which primarily entered into fixed-price contracts with their customers, in 2008 for our financial industry IT services business;
 
  •  a significant increase in fixed-price contracts in our enterprise application services business, which reflected, among other things, an increase in the business volume of Dalian Yuandong and the acquisition of Red River Valley, both of which primarily entered into fixed-price contracts with their customers; and
 
  •  a proportional increase in fixed-price contracts in our enterprise application services business primarily as a result of the growth in the number of customers requesting fixed-price contracts during the recent global economic recession.
 
The proportion of our net revenues derived from time-and-expense contracts vis-à-vis fixed-price contracts remained relatively stable from 2008 to 2009. The increase in net revenues from time-and-expense contracts as a percentage of our net revenues from the three months ended March 31, 2009 to the three months ended March 31, 2010 primarily reflected, among other things, the organic growth of our enterprise application services business which primarily utilizes time-and-expense contracts. See also seasonal trends discussions in “— Selected Quarterly Results of Operations.”
 
Net Revenues by Customer Concentration
 
The following table sets forth a distribution of our largest customers by revenue contribution and as a percentage of net revenues for the years indicated.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
Single largest
    17,722       34.5 %     28,646       31.6 %     37,315       31.6 %     6,812       33.2 %     13,032       36.9 %
Five largest
    31,145       60.6 %     43,975       48.4 %     57,869       49.0 %     11,333       55.2 %     19,081       54.0 %
Ten largest
    39,082       76.1 %     58,668       64.6 %     74,325       63.0 %     13,904       67.8 %     22,944       65.0 %
 
Our five largest customers for the three months ended March 31, 2010 were IBM, Shanghai Mingfang Network Co., Ltd., Hitachi, Sinopec (through PCITC) and Lenovo. Our five largest customers


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in 2009 were IBM, Hitachi, NRI, Bank of China and Accenture. Our five largest customers in 2008 were IBM, Shin Kong Life, NRI, Accenture and Bank of China. Our five largest customers in 2007 were IBM, Sinopec (through PCITC), Lenovo, NRI and Hitachi. IBM, with which our business relationship began in 2000, was our largest customer in each of 2007, 2008 and 2009 and for the three months ended March 2010. Our long-standing relationship with IBM has fostered new initiatives between our company and IBM, including the development of China’s only service delivery center focused on enterprise application services.
 
Net Revenues by Industry
 
The following table sets forth, for the years indicated, our net revenues by the industry in which our end customers operate.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
Financial services
    8,073       15.7 %     27,413       30.2 %     41,276       35.0 %     6,647       32.4 %     10,547       29.9 %
Resources and energy
    11,735       22.8       16,318       18.0       28,256       23.9       4,659       22.7       8,308       23.5  
Manufacturing and automobile
    10,211       19.9       13,677       15.1       20,139       17.1       2,993       14.6       5,935       16.8  
Technology
    11,895       23.2       13,315       14.7       12,153       10.3       2,204       10.7       4,548       12.9  
Telecommunication, media and education
    2,516       4.9       3,404       3.8       4,346       3.7       1,072       5.2       1,951       5.5  
Construction and steel
    1,136       2.2       8,071       8.9       3,949       3.3       925       4.5       1,647       4.7  
Retail, consumer and transportation
    4,719       9.2       6,769       7.5       6,558       5.6       1,694       8.3       1,340       3.8  
Others
    1,095       2.1       1,805       1.8       1,326       1.1       328       1.6       1,036       2.9  
                                                                                 
Total net revenues
    51,380       100.0 %     90,772       100.0 %     118,003       100.0 %     20,522       100.0 %     35,312       100.0 %
                                                                                 
 
We have significant experience and expertise in a broad range of industries, including financial services, resources and energy, manufacturing and automobile, technology, as well as telecommunication, media and education. Our net revenues from financial services as a percentage of total net revenues has increased significantly in recent years, primarily reflecting our acquisitions of VLife, Yinfeng and Harmonation in 2008 as well as Agree in 2009. See also seasonal trends discussion in “— Selected Quarterly Results of Operations.” The increase in net revenues from resources and energy reflected the increase in business volume from Sinopec (through PCITC), PetroChina (through IBM) and State Grid, a key account customer that we gained in 2009.
 
Net Revenues by Customer Location
 
The following table sets forth our net revenues by the geographical location of our customers for the years indicated. For purpose of this table, we have determined the geographical location of a customer based on the place of incorporation of the contractual counterparty.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
PRC
    35,192       68.5 %     62,457       68.8 %     88,790       75.2 %     13,705       66.8 %     28,025       79.4 %
Japan
    10,418       20.3       11,520       12.7       11,642       9.9       2,653       12.9       3,287       9.3  
Taiwan
    2,292       4.5       14,725       16.2       16,777       14.2       3,935       19.2       3,013       8.5  
Others
    3,478       6.7       2,070       2.3       794       0.7       229       1.1       987       2.8  
                                                                                 
Total net revenues
    51,380       100.0 %     90,772       100.0 %     118,003       100.0 %     20,522       100.0 %     35,312       100.0 %
                                                                                 
 
A significant majority of our services are provided to IT service providers and end customers in China. Since 2008, we have increased our focus on expanding our financial industry IT services business, as reflected in the acquisitions we made in China and Taiwan during this period. In particular, the percentage of net revenues derived from the PRC increased significantly for the three


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months ended March 31, 2010 from the same period in 2009, primarily reflecting the consolidation of operating results of Agree and Tansun, two acquisitions made in the financial industry IT services business in the second half of 2009. Net revenues from Japan have generally remained stable despite the adverse impact of the global recession on our customers in Japan serviced by Dalian Yuandong.
 
For a discussion on our revenues in foreign currencies, see “— Quantitative and Qualitative Disclosures about Market Risks — Foreign Exchange Risk.”
 
Cost of Revenues
 
Our cost of revenues mainly consists of outsourcing costs, compensation and benefit expenses (including share-based compensation expenses) of our IT professionals, travel expenses and material costs. The following table sets forth the components of our cost of revenues for the years indicated.
 
                                                                                 
    For the Year Ended December 31,   For the Three Months Ended March 31,
    2007   2008   2009   2009   2010
    Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total   Amount   % of Total
    (U.S. dollars in thousands, except percentages)
 
Outsourcing costs
    11,269       31.6 %     17,854       27.8 %     29,593       36.1 %     3,964       26.9 %     13,470       50.8 %
Compensation and benefit expenses
    15,523       43.6       20,134       31.4       29,364       35.8       5,856       39.7       8,371       31.5  
Travel expenses
    4,997       14.0       16,638       25.9       12,584       15.4       3,172       21.5       2,568       9.7  
Material costs
    2,278       6.4       8,640       13.5       7,122       8.7       1,085       7.4       1,020       3.8  
Others
    1,553       4.4       921       1.4       3,313       4.0       668       4.5       1,111       4.2  
                                                                                 
Total cost of revenues
    35,620       100.0 %     64,187       100.0 %     81,976       100.0 %     14,745       100.0 %     26,540       100.0 %
                                                                                 
 
Outsourcing costs represent compensation for independent consultants selected from our pool of qualified professionals in our proprietary database as well as other subcontracted service providers. To supplement our resources, we generally engage these qualified independent consultants and other subcontracted service providers in order to control fixed cost, fulfill seasonal requirements and bolster our skill sets. Prior to the recent financial crisis in 2008 and 2009, we had increased the use of outsourcing services to meet the increasing demand of our services. Since the financial crisis, we have continued to increase the use of outsourcing services, reflecting our caution in hiring permanent employees during periods of economic uncertainty. In the three months ended March 31, 2010, we have gradually increased our recruitment of permanent employees following the general recovery of the global economy. In addition, the percentage of outsourcing cost increased significantly for the three months ended March 31, 2010 from the same period in 2009, primarily reflecting the use of outsourcing services at a significantly higher level to supplement our resources in light of a higher than anticipated demand for our services, coupled with our continued cautious view in hiring permanent employees. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, we incurred outsourcing costs of US$11.3 million, US$17.9 million, US$29.6 million and US$13.5 million, respectively.
 
Compensation and benefit expenses represent those relating to our IT professionals. In 2007, 2008, 2009 and for the three months ended March 31, 2010, our compensation and benefit expenses were US$15.5 million, US$20.1 million, US$29.4 million and US$8.4 million, respectively.
 
We incur travel expenses primarily due to our IT professionals’ traveling to perform onsite work for our customers. In 2007, 2008, 2009 and for the three months ended March 31, 2010, our travel expenses were US$5.0 million, US$16.6 million, US$12.6 million and US$2.6 million, respectively. Our travel expenses increased from 2007 to 2008 primarily due to (i) additional travel resulting from the growth of our business; (ii) increased number of projects in remote locations; and (iii) a change in travel expense reimbursement arrangements between some of our customers, including IBM and Sinopec (through PCITC), and us. The decrease in travel expenses from 2008 to 2009 primarily reflected the increased use of outsourcing services during the recent financial crisis where the travel expenses incurred by such independent consultants and other subcontracted service providers are borne by themselves or by respective outsourcing service providers. The decrease in travel expenses


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from the three months ended March 31, 2009 to the three months ended March 31, 2010 primarily reflected increased use of outsourcing services.
 
We incur material costs relating to purchasing and installing hardware and software for our customers. In 2007, 2008, 2009 and for the three months ended March 31, 2010, our material costs totaled US$2.3 million, US$8.6 million, US$7.1 million and US$1.0 million, respectively.
 
Others include the amortization of intangible assets of our acquired entities, primarily contract backlogs and completed technology. Our cost of revenues in 2007, 2008, 2009 and for the three months ended March 31, 2010 included US$8,000, US$0.4 million, US$0.4 million and US$0.5 million respectively, in amortization expenses related to intangible assets of our acquired entities.
 
Operating Expenses
 
Selling and Marketing Expenses
 
Selling and marketing expenses consist primarily of compensation and benefit expenses relating to our business development and marketing personnel, including share-based compensation expenses, travel expenses, selling and marketing-related office expenses and amortization expenses. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, our selling and marketing expenses totaled US$1.8 million, US$3.8 million, US$6.2 million and US$2.4 million, respectively, representing 3.5%, 4.2%, 5.3% and 6.7%, respectively, of our net revenues in these periods.
 
Amortization expenses as a component of selling and marketing expenses include amortization of intangible assets of our acquired entities. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, the intangible assets subject to amortization primarily consisted of customer relationships. Our selling and marketing expenses in 2007, 2008, 2009 and for the three months ended March 31, 2010 included US$0.9 million, US$2.4 million, US$3.2 million and US$1.2 million, respectively, in amortization expenses related to the intangible assets of our acquired entities.
 
We currently estimate that we will incur US$6.3 million, US$4.4 million, US$3.1 million and US$1.8 million in amortization expenses in 2010, 2011, 2012 and 2013, respectively.
 
We expect our selling and marketing expenses to increase as we continue our business expansion.
 
General and Administrative Expenses
 
General and administrative expenses consist primarily of compensation and benefit expenses relating to personnel other than IT professionals and our business development team, including share-based compensation expenses, office expenses, depreciation expenses, travel expenses, rental expenses and overhead expenses. General and administrative expenses also include legal and other professional fees and other miscellaneous administrative costs. Depreciation expenses as a component of general and administrative expenses excluded those included in the cost of revenues and selling and marketing expenses. In 2007, 2008 and 2009 and for the three months ended March 31, 2010, our general and administrative expenses totaled US$5.7 million, US$11.6 million, US$12.6 million and US$4.3 million, respectively, representing 11.1%, 12.8%, 10.7% and 12.0%, respectively, of our net revenues in these periods.
 
Research and Development Costs
 
Research and development costs primarily consist of compensation and benefit expenses relating to our research and development professionals. Historically, these costs primarily related to the research and development efforts at VLife and Harmonation, both of which we acquired in 2008. In 2008 and 2009 and for the three months ended March 31, 2010, our research and development costs totaled US$1.7 million, US$1.5 million and US$0.4 million, respectively. Our research and development costs were not material in 2007.


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Postponed Initial Public Offering Costs
 
Our efforts to conduct an initial public offering began in 2007, but were postponed in 2008 due to market conditions. As a result, we incurred US$2.5 million in postponed initial public offering costs in 2008.
 
Change in fair value of contingent consideration for acquisitions of Agree and Tansun
 
In connection with the acquisitions of Agree and Tansun, we agreed to pay additional performance-based cash consideration between RMB63 million (approximately US$9.3 million) and RMB75 million (approximately US$11.0 million) for Agree, and up to RMB50 million (approximately US$7.4 million) for Tansun based on their earnings in 2010 and 2011, respectively. The contingent consideration was recorded at fair value at the acquisition date and subsequently adjusted on a marked-to-market basis. As of March 31, 2010, the fair value of the contingent consideration was increased by US$0.3 million to US$13.1 million from US$12.8 million as of December 31, 2009, with a corresponding charge in earnings, primarily reflecting an improved financial performance outlook of Tansun.
 
Share-based Compensation Expenses
 
On June 26, 2006, we adopted the 2006 Equity Incentive Plan, or the 2006 Plan, which allows us to grant options to our employees and directors to purchase up to 10,872,000 ordinary shares subject to vesting requirement. In March 2008, November 2008 and May 2010, we expanded the number of options that may be granted under the 2006 Plan by an additional 3,200,000, 5,426,012 and 4,000,000 ordinary shares, respectively, making the total number of options available for grant under the 2006 Plan up to 23,498,012 ordinary shares subject to vesting requirements.
 
In 2006, we granted a total of 6,610,020 share options at an exercise price of US$0.67 per share. In 2007, we granted a total of 3,960,000 share options at an exercise price of US$1.17 per share. In 2008, we granted a total of 3,504,600 share options on two occasions, consisting of (i) 3,500,600 share options at an exercise price of US$1.50 per share; and (ii) 4,000 share options at an exercise price of US$2.5 per share. In addition, options to purchase 5,000 ordinary shares under the 2006 Plan were forfeited in 2008. In 2009, we granted a total of 5,042,200 share options, consisting of (i) 3,162,200 share options at an exercise price of US$1.50 per share; and (ii) 1,880,000 share options at an exercise price of US$1.29 per share. In February 2010, we granted a total of 140,000 share options at an exercise price of US$1.47 per share. In May 2010, we granted a total of 600,000 share options at an exercise price of US$1.29 per share.
 
The following table sets forth the share-based compensation expenses recognized as part of cost of revenues, selling and marketing expenses, and general and administrative expenses, respectively, during the years presented.
 
                                         
    For the Year Ended
  For the Three Months
    December 31,   Ended March 31,
    2007   2008   2009   2009   2010
    (U.S. dollars in thousands)
 
Cost of revenues
    89       130       147       33       40  
Selling and marketing expenses
    55       94       158       25       50  
General and administrative expenses
    355       852       938       242       321  
                                         
Total share-based compensation expenses
    499       1,076       1,243       300       411  
                                         
 
Government Subsidies
 
We receive government subsidies from the PRC government if we meet the conditions under certain incentive policies. In 2007, we received US$27,000 in government subsidies, relating to our


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attainment of Capability Maturity Model Integration, or CMMI, Level III. CMMI is a trademarked process improvement approach that provides organizations with the essential elements for effective process improvement. We did not receive any government subsidies in 2008. In 2009, we received US$56,000 in government subsidies for our recruitment of new graduates during the financial crisis.
 
Gain/(Loss) on Short-term Investment
 
As a result of our acquisition of VLife in April 2008, we acquired certain publicly-traded equity securities held by VLife. The fair value of these short-term investments is determined based on the quoted market prices of these securities.
 
Gain from Extinguishment of Liability
 
As part of our acquisition of Red River Valley in February 2008, we paid US$4.0 million and agreed to pay an additional US$8.0 million in cash over a period of two years to the then equity holders of Red River Valley in two installments after the acquisition. On July 1, 2008, as a result of renegotiation between us and these equity holders, the remaining consideration payable of US$8.0 million was waived for a total consideration of US$3.3 million, consisting of (i) US$1.2 million in cash; and (ii) 1,800,000 of our shares with a fair value of US$2.1 million. We recognized a one-time gain of US$3.9 million from extinguishment of liability in 2008, which represents the difference between (i) US$3.3 million in total consideration to be paid as a result of our renegotiation; and (ii) US$7.2 million, which represents our US$8.0 million in liability owed prior to the date of the revised agreement (i.e. July 1, 2008), discounted to the present value on the date of such extinguishment.
 
Income Taxes
 
The current and deferred components of income tax expense were as follows:
 
                         
    Year Ended December 31,
    2007   2008   2009
    (U.S. dollars in thousands)
 
Current
                       
PRC
    1,397       1,443       1,780  
Others
    172       807       1,199  
                         
Total current income taxes
    1,569       2,250       2,979  
                         
Deferred
                       
PRC
    (118 )     (476 )     (558 )
Others
    (77 )     (374 )     (180 )
                         
Total deferred income taxes
    (195 )     (850 )     (738 )
                         
Total income taxes
    1,374       1,400       2,241  
                         
 
Our effective tax rate (i.e., our charge for income tax as a percentage of our net income before tax) in 2007, 2008 and 2009 and three months ended March 31, 2010 was 15.8%, 13.0%, 14.7% and 21.6%.
 
British Virgin Islands
 
Under the current laws of the British Virgin Islands, our listed company and our subsidiaries that are incorporated in the British Virgin Islands, including Triumph Consulting & Services Co. Ltd. and Konwell Technologies Ltd., are not subject to taxation on their income or capital gains. However, there is a risk that we may be treated as resident in the PRC for tax purposes. See “Risk Factors — Risk Related to Doing Business in China — Our global income and the dividends we may receive from our


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PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”
 
PRC
 
Our PRC entities are subject to PRC Enterprise Income Tax, or EIT, on the taxable income in accordance with the relevant PRC income tax laws. In 2007, the EIT rate for companies operating in the PRC was 33%.
 
Prior to January 1, 2008, subsidiaries which qualified as “high and new technology enterprises,” or HNTE, under EIT were Camelot Beijing, Beijing Heng En, Bayshore and Faceita. They were entitled to a preferential tax rate of 15% with three-year exemption followed by a reduced tax rate of 7.5% for the subsequent three years. In 2007, Camelot Beijing, Beijing Heng En, Bayshore, and Faceita were taxed at 15%, 15%, 7.5% and 7.5% respectively.
 
Subsidiaries which qualified as “software enterprise” located in “special economic zones” were Shanghai Camelot and Asialink, which were taxed at 7.5% and 15%, respectively, in 2007.
 
Dalian Yuandong, as both a “foreign investment enterprise” and a HNTE, was subject to a 10% tax rate in 2007.
 
On March 16, 2007, the National People’s Congress adopted the Enterprise Income Tax Law, or the New EIT Law, which became effective on January 1, 2008. The New EIT Law applies a uniform 25% enterprise income tax rate to both foreign invested enterprises and domestic enterprises.
 
Under the New EIT Law, an enterprise which qualifies as a “high and new technology enterprise,” or a new HNTE, is entitled to a tax rate of 15%. Camelot Beijing, Red River Valley, Yinfeng, and Zhuhai Agree Technology Co., Ltd. obtained the new HNTE status in 2008. Bayshore, Faceita and Beijing Tansun Software Technology Co., Ltd. obtained the new HNTE status in 2009.
 
Jiaxing Camelot qualified as a “manufacturing foreign-invested enterprise” incorporated prior to the effectiveness of the New EIT Law and therefore was entitled to a two-year EIT exemption from the earlier of its first tax-profitable year and 2008 followed by a 50% reduction in tax rate for the succeeding three years. Accordingly, Jiaxing Camelot was entitled to EIT exemption for 2008 and 2009 and a preferential tax rate of 12.5% for 2010, 2011 and 2012.
 
In addition, Shanghai Camelot, Asialink and Dalian Yuandong were continually entitled to preferential tax rates based on their qualifications obtained prior to the effectiveness of the New EIT Law.
 
The preferential tax rates different from the PRC statutory rates, which were used to calculate the tax provision based on our interpretation of the New EIT Law as of March 31, 2010 (see Note 22 “Subsequent Events” to the Consolidated Financial Statements for the year ended December 31, 2009 for tax rate changes), are presented in the following table.
 
                                                                         
Subsidiaries
  0%   7.5%   9%   10%   12.5%   15%   18%   20%   22%
 
Camelot Beijing(1)
                                  2007 - 2010                    
Red River Valley(1)
          2008                         2009 - 2010                    
Yinfeng(1)
                                  2008 - 2010                    
Beijing Heng En
                                  2007                    
Bayshore
          2007                         2009 - 2011                    
Shanghai Camelot
          2007       2008       2009                               2010  
Asialink
                                  2007       2008       2009       2010  
Dalian Yuandong
                      2007 - 2009                                
Faceita
          2007                         2009 - 2011                    
Jiaxing Camelot
    2008-2009                         2010-2012                          
Zhuhai Agree Technology Co., Ltd. 
                                  2008 - 2010                    
Beijing Tansun Software Technology Co., Ltd. 
                                  2009 - 2011                    


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(1) The new HNTE status obtained by Camelot Beijing, Red River Valley, Yinfeng and Zhuhai Agree Technology Co., Ltd. in 2008, and Bayshore, Faceita and Beijing Tansun Software Technology Co., Ltd. in 2009 under the New EIT Law is valid for three years and qualifying entities can then apply to renew for an additional three years provided their business operations continue to qualify for the new HNTE status. We believe it is highly likely that our qualifying entities will continue to obtain the renewal in the future. Accordingly, in calculating deferred tax assets and liabilities, we have assumed our qualifying entities will continue to renew the new HNTE status at the conclusion of the initial three year period. If our qualifying entities failed to obtain such renewals, the net deferred tax liability balance would increase by US$1,906,000 as of March 31, 2010, which would be an increase to the income tax expenses.
 
On April 21, 2010, the State Administration of Taxation issued Circular 157 Further Clarification on Implementation of Preferential EIT Rate during Transition Periods, or Circular 157. Circular 157 provides additional guidance on the interaction of certain preferential tax rates under the transitional rules of the New EIT Law. Prior to Circular 157, we interpreted the law to mean that if an entity was in a period where it was entitled to a 50% reduction in the tax rate and was also entitled to a 15% rate of tax due to “high and new technology enterprises” status under the New EIT Law, then it was entitled to pay tax at the rate of 7.5%. Circular 157 appears to have the effect that such an entity is entitled to pay tax at either 15% or 50% of the standard PRC tax rate. The effect of Circular 157 is retrospective and would apply to us in both 2008 and 2009.
 
As a consequence of Circular 157, the preferential tax rate enjoyed by Red River Valley which qualified as a “high and new technology enterprise” during its 50% reduction period (2008) was 12.5% rather than 7.5% which is the rate we had used prior to the issuance of Circular 157. Because we believe that Circular 157 is similar to a change in tax law, the cumulative effect of which should be reflected in the period of the change. As a result, we will recognize an additional tax liability in respect of the year ended December 31, 2008 of US$103,316 in the three months ended June 30, 2010.
 
As part of the New EIT Law, no income tax will be withheld on the distribution of earnings of foreign invested enterprises where the relevant earnings were generated before January 1, 2008 but distributed in 2008 and after. However, the income tax withholding rate will be the lower of 10% or the applicable treaty rate on earnings generated after December 31, 2007. See “Risk Factors — Risks Related to Doing Business in China— Our global income and the dividends we may receive from our PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”
 
Hong Kong
 
King’s was established in Hong Kong. In 2007, it was subject to Hong Kong profit tax at 17.5%. Beginning 2008, the Hong Kong profit tax rate has been changed to 16.5%.
 
Japan
 
Entoh and Camelot Japan were established in Japan and are subject to Japanese income taxes at 43%.
 
Taiwan
 
Taiwan Camelot, Hwawei, VLife, Harmonation, and Ruiyin, which was dissolved in November 2009, are subject to Taiwan income taxes at 25% for 2007, 2008, and 2009.
 
According to the new income tax law enacted by Taiwan tax authorities in May 2009, Taiwan income tax rate was reduced to 20% effective on January 1, 2010. The deferred taxes as of December 31, 2009 were determined based on the tax rate of 20%. In May 2010, Taiwan tax authorities announced the further reduction of income tax rate from 20% to 17% effective on January 1, 2010. This tax rate change is a change in tax law, and the cumulative effect should be reflected in the period of change. As a result, we will adjust our net deferred tax liability as of March 31, 2010 by US$100,113 in the quarter ended June 30, 2010 and record a tax reduction in respect of the quarter ended March 31, 2010 of US$18,000, resulting in a total reduction of tax charge of US$118,113.


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Net Income Attributable to Non-controlling Interest
 
Net income attributable to non-controlling interest primarily represents the profit or loss associated with (i) the remaining 30% equity interest that we do not currently own in Camelot Yantai, which was established in January 2008; and (ii) the remaining 14.53% equity interest we do not currently own in Harmonation, which we acquired in July 2008. We generated a net income attributable to non-controlling interest of US$66,000 in 2008 and US$71,000 in 2009.
 
Critical Accounting Policies
 
The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net sales and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our management has discussed the development, selection and disclosure of these estimates with our board of directors. Actual results may differ from these estimates under different assumptions or conditions.
 
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies are the most sensitive and are those that require the more significant estimates and assumptions used in the preparation of our consolidated financial statements. You should read the following descriptions of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included with this prospectus.
 
Revenue Recognition
 
We offer enterprise application services and financial industry IT services for which revenues are generated from contracts either on a time-and-expense basis or fixed-price basis.
 
Revenues are considered realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; price is fixed or determinable; and collectibility is reasonably assured.
 
Revenues from time-and-expense contracts are recognized as the related services are rendered. Under time-and-expense contracts, we are reimbursed for actual hours incurred at negotiated hourly billing rates. Customers may terminate the contracts at any time before the work is completed but are obligated to pay the actual service hours incurred at the contract billing rate. Revenue from this type of contract is recognized as the billable services are rendered. The rights to software developed by us on behalf of our customers belong to the customers.
 
Reimbursable out-of-pocket expenses are recognized as revenues when billed. The related costs are recognized as cost of revenues when incurred.
 
Revenues from service-only fixed-price contracts are generally recognized using the proportional performance method and are determined based on the proportion of actual service hours incurred to the budgeted service hours. All of our service offerings are similar in nature and we have a long history of providing these services resulting in our ability to reasonably estimate the service hours expected to be incurred on each project.
 
To date, we have not incurred a material loss on any of our contracts. However, as a matter of policy, provisions for estimated losses on such engagements will be made during the period in which a loss becomes probable and can be reasonably estimated.


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Under certain contracts, we are subject to payment penalties if we fail to complete the projects within a specified time. To date, we have not incurred a material penalty on any of our contracts. However, as a matter of policy, we consider penalty provisions under a contract when estimating the total revenue generated under such contract and evaluates such provisions throughout the life of the contract.
 
In addition to service-only contracts, we also enter into multiple-element fixed-price arrangements, in which the deliverables may include licenses of self-developed core software and third-party software, third-party hardware, related project services such as customization, modification, implementation and integration, and support and maintenance services which include bug fixes, technical support via telephone and site visit, and unspecified upgrades on a when-and-if-available basis.
 
In an arrangement with a software deliverable, we have considered whether the software is more than incidental to the arrangement as a whole. As the software deliverable is essential to the functionality of other deliverables as well as the system as a whole, we believe software deliverables in our multiple-element arrangements are more than incidental, and therefore we believe authoritative accounting literatures in relation to software revenue recognition apply. We treat the non-software deliverables (i.e., third-party hardware) as software related elements because the software deliverable is essential to the functionality of the non-software deliverables and the acceptance of the non-software deliverables by customers are subject to the acceptance of software deliverables.
 
Because of our obligation to provide support and maintenance services, we have also considered whether we have adequate evidence that would allow us to bifurcate the revenues attributable to the support and maintenance services from the revenues attributable to other products and project services. In most cases, we do not have sufficient evidence of the fair value of the support and maintenance services. However, for some arrangements of Harmonation, we believe we have sufficient evidence of the fair value of the support and maintenance services as the support and maintenance services are sold separately on a regular basis. For these arrangements, under the residual method, the amount of consideration allocated to deliverables other than the support and maintenance services equals the total arrangement consideration less the fair value of the support and maintenance services, which is recognized as revenue using percentage-of-completion method over the project services period. The percentage of completion is determined based on the proportion of actual service hours incurred to the budgeted service hours. When revenue is deferred, the related cost including cost of third-party hardware and software is also deferred. The arrangement consideration allocated to the support and maintenance services is recognized as revenue ratably over the support and maintenance services period, which is usually one to two years.
 
When sufficient evidence of fair value of the support and maintenance services does not exist, the entire arrangement is accounted for as one accounting unit resulting in revenue being recognized on a straight line basis over the support and maintenance services period once the support and maintenance services are the only undelivered element. Accordingly, the accumulated contract cost is deferred and recognized as cost of revenue ratably over the same period as revenue is recognized.
 
A number of fixed-price contracts can be terminated without cause. However, we are entitled to collect revenue in relation to services rendered up to the point of termination.
 
On the basis of our revenue recognition, we classify accounts receivable into billed accounts receivable and unbilled accounts receivable. Upon recognizing revenue, the revenue amount is immediately recognized as an unbilled accounts receivable on our balance sheet. For our fixed-price contracts, we send invoices to our customers after the payment milestones specified under the contracts are completed. Upon sending out the invoice, we recognize the underlying revenue amount as billed receivable. The standard contracts of our large customers generally provide them with a credit period ranging from 45 days to 60 days, beginning from the date of the invoice. IBM, which historically has been our largest customer, has a credit period of 60 days.
 
We do not make general allowances for doubtful accounts. We make a specific allowance if there is strong evidence showing that a certain account receivable, billed or unbilled, is likely to be


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irrecoverable. We evaluate the recoverability of our accounts receivable based on a number of factors, including an aging analysis of the account receivable balances, historical bad debt rates, repayment patterns and customer creditworthiness.
 
Goodwill and Intangible Assets
 
Goodwill represents the cost of an acquired business in excess of the fair value of identifiable tangible and intangible net assets purchased. We generally seek the assistance of independent valuation firm in determining the fair value of the identifiable tangible and intangible net assets of the acquired business. We assign all the assets and liabilities of an acquired business, including goodwill, to reporting units.
 
There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of the expected future net cash flows associated with a particular intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the amount and timing of projected future cash flows; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s economic life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.
 
Goodwill is tested for impairment at least on December 31 of each year. Impairment is tested using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. We currently have three reporting units: China enterprise application services, China financial industry IT services, and Taiwan financial industry IT services.
 
If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being the discounted cash flow method.
 
The following table sets forth the estimated fair values, carrying values of and goodwill allocated to our reporting units as of December 31, 2009:
 
                         
    China Financial
  Taiwan Financial
  China Enterprise
    Industry IT
  Industry IT
  Application
Reporting Unit
  Services   Services   Services
    (U.S. dollars in thousands, except percentages)
 
Estimated fair value
    64,070       17,284       137,934  
Carrying value
    59,711       12,826       64,963  
Percentage by which the fair value exceed the carrying value
    7%       35%       112%  
The amount of goodwill allocated to the reporting unit
    23,444       1,837       14,602  
Discount rates as a measure of risk and uncertainty associated with the key assumptions of projected cash flow of our reporting units
    21%       19%       19%  


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In determining the fair values of our reporting units as of December 31, 2009, we relied in part on a valuation report prepared by an independent valuer based on data we provided. The valuation report provided us with guidelines in determining the fair values, but the determination was made by our management.
 
Since the size and scale of business of an individual reporting unit are smaller than those of publicly traded companies in IT outsourcing industry, we considered the income approach to be more reliable than the market approach in determining the fair values of our reporting units. In view of the above, we used the income approach/discounted cash flow method as the primary approach and market approach as a cross-check to derive the fair values of our reporting units.
 
We applied the discounted cash flow, or DCF, analysis based on our projected cash flow using management’s best estimate as of December 31, 2009. The projected cash flow estimate included, among other things, an analysis of projected revenue growth, gross margins, effective tax rates, capital expenditures and working capital requirements. The income approach involves applying appropriate discount rates, based on earnings forecasts, to estimated cash flows. The key assumptions of our cash flow forecasts we used in deriving the fair values of our reporting units were consistent with the assumptions that we used in developing our business plan, which included:
 
  •  Net revenues of China financial industry IT services will grow at a CAGR of 12% for 2010 through 2014. Net revenues of Taiwan financial industry IT services and China enterprise application services will grow at CAGR of 12% and 20% for 2010 through 2016, respectively. The revenue growth rates of the reporting units are based on our best estimation of the industry outlook, business plan, integration strategy and expected synergy effect among companies of the reporting units.
 
  •  Cost of revenues as a percentage of net revenues of China financial industry IT services will increase from 48% in 2010 to 52% in 2014. Cost of revenues as a percentage of net revenues of Taiwan financial industry IT services will maintain at 59%-60% for 2010 through 2016. Cost of revenues as a percentage of net revenues of China enterprise application services will maintain at 67%-69% for 2010 through 2016.
 
  •  Operating expenses as a percentage of net revenues were expected to decrease for 2010 through 2014 as we anticipate that corporate overhead and administrative expense will not increase as fast as the revenue growth rate.
 
  •  Working capital requirement was estimated by our management to be 29% of net revenues, based on analysis of our historical financial ratio.
 
  •  The long term growth rate of China financial industry IT services after 2014 was assumed to be 3% per year. The long term growth rate of Taiwan financial industry IT services and China enterprise application services after 2016 was assumed to be 3% per year.
 
  •  There will be no material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key personnel and technical staff to support our ongoing operations.
 
  •  There was no material deviation in industry trends and market conditions from economic forecasts.
 
These assumptions are inherently uncertain and subjective. The discount rates reflect the risks the management perceived as being associated with achieving the forecasts and are based on the estimated cost of capital of our reporting units, which was derived by using the capital asset pricing model, after taking into account systemic risks and non-systematic risks. The capital asset pricing model is a model commonly used by market participants for determining the fair values of assets that adds an assumed risk premium rate of return to an assumed risk-free rate of return. Using this method, we determined the discount rates of 21%, 19% and 19% to be appropriate for determining the fair values of China financial industry IT services, Taiwan financial industry IT services and China enterprise application services reporting units, respectively. We considered the selected discount rates


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to properly reflect the uncertainty associated with the key assumptions of projected cash flows of our reporting units as of December 31, 2009.
 
We also applied a discount for lack of marketability, or DLOM, to reflect the fact that, as of December 31, 2009, the reporting units were parts of a closely-held company. To determine DLOM, we and the independent valuer used the Black-Scholes option pricing model. Pursuant to the Black-Scholes option pricing model, we used the cost of a put option, which can be used to hedge the price change before a privately held share can be sold, as the basis to determine DLOM. Based on the foregoing analysis, we applied a DLOM of 15% to determine the fair values of our reporting units as of December 31, 2009.
 
Intangible assets with determinable useful lives are amortized either on a straight-line basis or using an accelerated method in the case of customer relationships. Intangible assets that are determined to not have determinable useful lives are not amortized but are tested for impairment at least annually.
 
We evaluate intangible assets with determinable useful life for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets.
 
Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made in determining an estimate of fair value can materially impact our results of operations. The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any changes in key assumptions, including unanticipated events and circumstances, may affect the accuracy or validity of such estimates and could potentially result in an impairment charge.
 
Fair value of our common stock
 
We are a private company with no quoted market prices for our ordinary shares. We have therefore needed to make estimates of the fair value of our ordinary shares at various dates for the purpose of:
 
(1) Determining the fair value of our shares at the date of acquisition when we have acquired another entity and the consideration given includes our ordinary shares.
 
(2) Determining the fair value of our ordinary shares at the date of the grant of a stock based compensation award to our employees as one of the inputs into determining the grant date fair value of the award.
 
The following table sets forth the fair value of our ordinary share estimated at different times.
 
                                 
Date
  Class of Shares   Fair Value   Purpose of Valuation   DLOM   Discount Rate
 
                             
January 1, 2006
  Ordinary Shares   US$ 0.61     Acquisition of Dailan Yuandong     28%       28%  
                             
June 30, 2006
  Ordinary Shares   US$ 0.55     Employee share option grant     13%       27.5%  
                             
June 30, 2007
  Ordinary Shares   US$ 0.86     Employee share option grant     10%       25%  
                             
October 15, 2007
  Ordinary Shares   US$ 1.01     Employee share option grant     10%       23%  


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Date
  Class of Shares   Fair Value   Purpose of Valuation   DLOM   Discount Rate
 
                             
April 1, 2008
  Ordinary Shares   US$ 1.22     Acquisition of VLife and Yinfeng and employee share option grant     14%       19%  
                             
July 1, 2008
  Ordinary Shares   US$ 1.14     Acquisition of Harmonation and extinguishment of liability with Red River Valley     15%       19%  
                             
October 31, 2008
  Ordinary Shares   US$ 1.11     Employee share option grant     15%       19%  
                             
July 1, 2009
  Ordinary Shares   US$ 1.25     Employee share option grant and acquisition of Agree     15%       19%  
                             
November 2, 2009
  Ordinary Shares   US$ 1.27     Employee share option grant     15%       19%  
                             
December 30, 2009
  Ordinary Shares   US$ 1.47     Acquisition of Tansun     15%       18%  
                             
February 28, 2010
  Ordinary Shares   US$ 3.03     Employee share option grant     5%       14%  
                             
May 18, 2010
  Ordinary Shares   US$            (1)   Employee share option grant     N/A       N/A  

 
 
(1) The fair value of our ordinary shares on May 18, 2010 was determined based on the mid-point of our estimated price range disclosed on the cover of this prospectus.
 
When estimating the fair value of the ordinary shares, our management has considered a number of factors, including the result of a third party appraisal and equity transactions of our company, while taking into account standard valuation methods and the achievement of certain events.
 
The fair value of the ordinary shares, other than as at May 18, 2010, was determined with the assistance of American Appraisal China Limited, or AA, an independent third party valuation firm. The valuation reports from AA have been used as part of our analysis in reaching our conclusion on share values. We reviewed the valuation methodologies used by AA, who took into consideration of the guidance prescribed by the AICPA Audit and Accounting Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the Practice Aid, and believe the methodologies used are appropriate and the valuation results are representative of the fair value of our ordinary shares.
 
AA used a combination of (i) the discounted cash flow, or DCF, method of the income approach and (ii) the market multiple approach to assess the fair value of ordinary shares in 2006, 2007, 2008, 2009 and 2010. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.
 
The major assumptions used in calculating the fair value of ordinary shares include:
 
  •  Relative importance of DCF and market multiple approach:  For the valuations in 2006, 2007 and April 2008, we assigned 50% weight to the DCF approach and 50% weight to market multiples as we considered the results derived from these approaches at these valuation dates were equally representative. Since July 2008, the credit crunch caused a sharp decline in

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  market capitalization of the publicly traded comparable companies while our operations and long term cash flow forecast had not changed significantly over the same period. In view of this, we considered the income approach should be more reliable than the market approach in determining the fair values of our company at that time, and assigned 85% weight to the income approach and 15% weight to the market approach for the valuations performed in July 2008 to February 2010.

 
  •  Weighted average cost of capital, or WACC:  WACCs of 28%, 27.5%, 25%, 23%, 19%, 19%, 19%, 19%, 19%, 18% and 14% were used for dates as of January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009 and February 28, 2010, respectively. The WACCs were determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and company- specific factors. The decrease in WACCs from 2006 to 2010 was due to the combined results of (i) the continuous growth of our business and company size, realization of synergistic effects through the acquisitions of Triumph, Bayshore, Dalian Yuandong, Hwawei, Red River Valley, Yingfeng, VLife, Harmonation, Agree and Tansun and (ii) the proximity to this offering. Decrease in WACC used for the valuation resulted in an increase in the determined fair value of the ordinary shares.
 
  •  Comparable companies:  In deriving the WACCs, which are used as the discount rates under the income approach, and market multiples, certain publicly traded companies in the software outsourcing industry were selected for reference as our guideline companies.
 
  •  Capital market valuation multiples:  AA obtained and assessed updated capital market data of the selected comparable companies and used multiples of enterprise value to revenue, or EV/Revenue, and enterprise value to EBITDA, or EV/EBITDA, for its valuations. EV/Revenue multiples adopted in the valuation were 3.3, 3.0, 3.2, 2.7, 2.0 2.5, 1.5, 1.4, 1.9, 1.7 and 2.6, respectively, for January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009, and February 28, 2010. EV/EBITDA multiples adopted in the valuation were 13.9, 12.4, 13.4, 12.0, 10.2 14.0, 8.5, 7.3, 10.2, 13.2 and 12.9, respectively, for January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009 and February 28, 2010. The changes in the multiples used for each valuation date are the combined effects of (i) change in the valuation date and thus the period considered in calculating the multiples and (ii) changes in the trading prices and thus the multiples of the comparable companies as implied by the trading prices. Change in the figure of multiples used combined with an increase in our reported financial measures increased the determined fair value of the ordinary shares.
 
  •  Discount for lack of marketability, or DLOM:  AA quantified DLOM using the Black-Scholes option pricing model. Under this option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the DLOM. This option pricing method is one of the methods commonly used in estimating DLOM as it can take into consideration factors like timing of a liquidity event (e.g., an IPO) and estimated volatility of our shares. The farther the valuation date is from an expected liquidity event, the higher the put option value and thus the higher the implied DLOM. DLOMs of range from 10% to 28% were used in our valuations as of January 1, 2006, June 30, 2006, June 30, 2007, October 15, 2007, April 1, 2008, July 1, 2008, October 31, 2008, July 1, 2009, November 2, 2009, December 30, 2009, and February 28, 2010. The lower DLOM is used for the valuation, the higher is the determined fair value of the ordinary shares. In the third quarter of 2007, we started the preparation for our initial public offering and performed valuations to appraise the fair values of our ordinary shares in 2006 and 2007 on a retrospective basis for compliance with U.S. GAAP. Because of the proximity of the expected time of the offering, DLOM decreased from 28% for the valuation as of January 1, 2006 to 10% for the valuation as of October 15, 2007. In 2008, the global financial crisis increased the


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  uncertainty and volatility of U.S. stock market and the increase in estimated volatility factor of our ordinary shares, together with the increase in expected time leading to liquidity event (i.e. IPO), increased the DLOM from 10% for the valuation as of October 15, 2007 to 15% for the valuation in July 2008 and 2009. As we successfully submitted our initial confidential filing in February 2010, we expected that the time leading to liquidity event (i.e., IPO) would decrease and the liquidity of our ordinary shares would increase. As a result, we lowered the DLOM from 15% as of December 31, 2009 to 5% as of February 28, 2010.

 
The income approach involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenues and earning growth rates, as well as major milestones that we have achieved, contributed significantly to the increase in the fair value of our ordinary shares from 2006 to February, 2010. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair values are consistent with our business plan. These assumptions include: no material changes in the existing political, legal and economic conditions in China; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain. The risk associated with achieving our forecasts were assessed in selecting the appropriate discount rates, which ranged from 14% to 28%.
 
Under the market approach, EV/revenue and EV/EBITDA multiples of comparable companies were calculated and analyzed. The trading multiples of the comparable companies vary but in general, the companies with higher projected growth, higher profit margin and lower business risk (manifested as lower required cost of capital and larger market capitalization) would have a higher multiple. AA compared each individual company to us and derived the adjusted multiples applicable to us based on the above factors. AA took the median of the adjusted multiples, multiplied that by the historical and forecast revenue and EBITDA of our company to come up with an enterprise value on a minority and freely tradable basis. To reflect the fact that we were a private company, a DLOM discount for lack of marketability has also been considered.
 
AA used the option-pricing method to allocate enterprise value to preferred and ordinary shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” or the Practice Aid. The method treats common stock and preferred stock as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the preferred stock.
 
The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board of directors and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our shares to range from 25.1% to 66.6% based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, the allocations between preferred and ordinary shares would have been different.
 
The determined fair value of the ordinary shares increased from US$0.55 per share as of June 30, 2006 to US$0.86 per share as of June 30, 2007. We believe the increase in the fair value of ordinary shares in this period is primarily attributable to the following factors:
 
  •  the overall economic growth in our principal geographic markets led to an increased market demand for our IT services;
 
  •  we completed the acquisition of Hwawei on January 1, 2007, which expanded our service lines to Taiwan financial IT services market; and
 
  •  In April 2007, CVCI Funds’ exercise of their option to subscribe additional Series A preferred shares indicated that the uncertainty and risk perceived by investors in achieving our business plan was reduced. Accordingly, the discount rates, which reflect the market participant’s


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  required rate of return, was lowered from 27.5% for the valuation on June 30, 2006 to 25% for the valuation on June 30, 2007. This resulted in an increase in our overall equity value and hence an increase in the estimated fair value of our ordinary shares.

 
The fair value of the ordinary shares increased from US$0.86 per share as of June 30, 2007 to US$1.01 per share as of October 15, 2007. We believe the increase in the fair value of the ordinary shares during this period was primarily attributable to the discount rate applied for discounted cashflow analysis decreased from 25% to 23% because of the combined results of (i) the continuous growth of our business and company size, realization of synergistic effects through the integration of business of companies acquired in 2006 and first half of 2007; and (ii) the proximity of this offering as we started the preparation of the filing for this offering during this period.
 
The fair value of the ordinary shares decreased from US$1.22 per share as of April 1, 2008 to US$1.14 per share as of July 1, 2008 and US$1.11 per share as of October 31, 2008. We believe the decrease in the fair value of the ordinary shares during this period was the net effect of the following factors:
 
  •  We anticipated that, as a result of global financial crisis, our customers may reduce or technology spending, which in turn reduce the demand for our services and slow down our revenue growth rate. In view of the above, we lowered our forecasted revenue and earnings in 2008 and 2009 when preparing financial projection for valuation as of July 1, 2008 and October 31, 2008 to account for the change in market condition; and
 
  •  The impact of global financial crisis on our business was partially offset by the estimated synergetic effect brought by the acquisition of Harmonation in July 2008. We believed that this acquisition will create additional synergetic effect because the integration of the businesses of Harmonation, VLife and Hwawei will further strengthen our market position in Taiwan FIS market and increase our service offering.
 
The fair value of the ordinary shares increased from US$1.11 per share as of October 31, 2008 to US$1.25 per share as of July 1, 2009. We believe the increase in the fair value of the ordinary shares during this period was attributable to the following:
 
  •  We completed the acquisition of Agree on July 1, 2009, which strengthened our capabilities of our financial IT services; and
 
  •  We anticipated that the demand for our technology outsourcing services would gradually increase in connection with the recovery of the global economic conditions. In view of this, we increased the long term forecasted revenue and net income, when preparing our cashflow forecasts as of July 1, 2009.
 
The fair value of the ordinary shares increased from US$1.25 per share as of July 1, 2009 and US$1.27 as of November 2, 2009 to US$1.47 per share as of December 30, 2009. We believe the increase in the fair value of the ordinary shares during this period was attributable to the following:
 
  •  In December 2009, we successfully completed the acquisition of Tansun. We believe that the acquisition of Tansun would further strengthen our capabilities in providing IT service to the financial services industry, and reduce the risks associated with achieving our business plan and cashflow forecast. In view of the above, we lowered the non-systematic risk premium and hence the discount rate used for the valuation of our ordinary shares from 19% as of July 1, 2009 to 18% as of December 30, 2009.
 
The fair value of our ordinary shares increased from US$1.47 as of December 30, 2009 to US$3.03 as of February 28, 2010. The valuation as of February 28, 2010 was completed in May


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2010. We believe the increase in the fair value of our ordinary shares in this period is largely attributable to the following factors:
 
Increase in forecasted performance
 
We increased our estimates for the growth in the performance of our business in terms of both total net revenues and income from operations from our previous estimates made as of December 31, 2009. In particular, we increased our forecasted revenue for 2010 and 2011 by approximately 10%, respectively.
 
Our total net revenues and income from operations in the three months ended March 31, 2010 increased by 72.1% and 90.4%, respectively, as compared to the three months ended March 31, 2009, reflecting the underlying growth in our business. As a result, income from operations as a percentage of revenue in the first quarter of 2010 improved to 4.0%, as compared to 3.6% in the three months ended March 31, 2009. Although our total net revenues declined in three months ended March 31, 2010 compared to the three months ended December 31, 2009, this occurrence reflected the seasonality of our business, and in particular, the impact of the Chinese New Year. See “— Selected Quarterly Results of Operations.”
 
Our revised forecast took into consideration our actual performance in the three months ended March 31, 2010 and other events and factors that were unknown to us in December 2009, including the following:
 
  •  The growth of China’s IT service industry grew at a higher rate in the three months ended March 31, 2010 than we anticipated by the end of 2009 as increased competition among Chinese businesses led to (i) an increase in IT service spending as part of overall IT spending; and (ii) continued consolidation of a relatively fragmented IT service industry.
 
  •  Instances of the successful implementation of our integration plans for our acquired businesses strengthened our confidence in, and increased our estimates for, future revenues through capitalizing on cross-selling opportunities across various customers, industries and geographic regions. For example, when preparing our forecast in December 2009, we only had (i) a preliminary integration plan for Tansun (which included cross-selling efforts among Tansun and our other business units) and (ii) initial discussions with Tansun’s management team on the budget for 2010. As such, the impact of these cross-selling efforts and the determination of the 2010 budget were not factored into the forecast in December 2009 due to the uncertainties in the implementation of Tansun’s integration plan given that the acquisition of Tansun was only completed at the end of December 2009. Since the beginning of 2010, however, we have begun to realize revenue synergies sooner than we had anticipated at the end of 2009. As an example, Bayshore successfully referred clients to, and facilitated customers’ communication with, Tansun, which resulted in Tansun winning a testing service contract from one of the state-owned banks in China in the three months ended March 31, 2010. This result was not anticipated by the end of 2009. Winning this service contract served as an indicator for the successful implementation of our integration plan.
 
  •  In the three months ended March 31, 2010, we identified additional synergies from business unit integration efforts, such as office consolidation and centralization of solution development work.
 
  •  In the three months ended March 31, 2010, we also gained a number of key new clients in our EAS business, which was not anticipated in December 2009. These clients include (i) the SOFTBANK Group Development Center, through which our work with SOFTBANK Group in the development of communication technologies is performed; (ii) Pacific Andes International Holdings Ltd, which engaged us as its SAP global implementation services provider and has become one of the top clients of our EAS business; and (iii) Ernst & Young, which engaged us


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  as a SAP services provider and has become one of our strategic alliance partners. Revenues from these new clients were not included in our forecast in December 2009.

 
  •  Commercial banks in China generally review their annual IT budgets during the first quarter of each year. After this review by the commercial banks in China in the three months ended March 31, 2010, the IT spending budget from the banking sector for the full year 2010 exhibited a growth which was higher than our expectations at the end of 2009.
 
  •  During the three months ended March 31, 2010, our FIS business units obtained additional customer feedback in respect of their new solution requirements and their receptiveness to a number of our enhanced products, including products on stress testing on market risks, auditing, and branch transformation. None of these factors was anticipated and therefore included in the December 2009 forecast, and forms a backdrop for the upward revision to our forecast.
 
Proximity to our IPO
 
We confidentially submitted to the SEC our registration statement relating to this offering in February 2010, and we estimated our IPO date to be in the second quarter of 2010, resulting in a decrease of expected time leading to a liquidity event. The proximity in time of this offering to the date of the valuation increased the liquidity of our shares and hence lowered DLOM from 15% as of December 2009 to 5% as of February 2010.
 
Change in discount rate
 
The change in our financial forecast and the proximity in time to an IPO increased the estimated market capitalization of our company. The increase in our company size, in turn, lowered the small company risk premium, which is one of the components used in estimating a market participant’s required rate of return to invest in our shares, by approximately 3.5%. With consideration of the improvement of our performance and indications of the success of our integration plan, the non-systematic risk factor, another component used in estimating a market participant’s required rate of return for investing in our shares, was reduced by 1%, reflecting the decrease in the perceived risk in achieving our financial forecasts. The combination of the reduced small company risk premium and non-systematic risk factor, which was partially offset by an increase in risk free rate during the period, lowered the overall discount rate applied for valuing our ordinary shares from 18% as of December 2009 to 14% as of February 2010.
 
The effects of the change in financial forecast, proximity in time to our IPO and the discount rate on the valuation are inter-related and it is difficult to precisely quantify the impact of these factors on the change in fair value of our ordinary shares. However, we estimate that the decrease in discount rate, change in financial forecast and decrease in DLOM accounted for approximately 40-50%, 30-40% and 10-20%, respectively, of the change in the fair value of our ordinary shares.
 
We have considered the guidance prescribed by the Practice Aid in determining the fair value of our ordinary shares as of various dates before the offering. A detailed description of the valuation method used and the factors contributing to the changes in the fair value of our ordinary shares through to February 2010 is set out above. Paragraph 113 of the Practice Aid states that “the ultimate IPO price itself also is generally not likely to be a reasonable estimate of the fair value for pre-IPO equity transactions of the enterprise.” We, therefore, believe the ultimate IPO price itself is generally not likely to be a reasonable estimate of the fair value of our ordinary shares as of various dates before this offering.


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Nevertheless, we believe that the implied increase in fair value of our ordinary shares from $3.03 per ordinary share on February 28, 2010 to the midpoint of the estimated price range shown on the front of this prospectus is primarily attributable to the following factors:
 
  •  the price range was estimated assuming this offering would be successfully completed, which would result in increased liquidity and marketability of our ordinary shares; and
 
  •  the offering will provide us with additional capital, enhance our ability to access capital markets to grow our business, and raise our overall business profile.
 
We therefore used the midpoint of our estimate of the preliminary IPO price range in estimating the fair value of our common stock to determine the fair value at grant date of the stock option awards made on May 18, 2010.
 
Share-based Compensation
 
Our share-based payment transactions with employees are measured based on the grant date fair value of the equity instrument we issued and recognized as compensation expense over the requisite service period based on the graded vesting schedule, with a corresponding impact reflected in additional paid-in capital.
 
The following table sets forth certain information regarding the stock options granted.
 
                                     
            Weighted Average
       
    No. of
      Fair Value
  Intrinsic Value
   
    Options
  Exercise Price
  per Option at
  per Option at
  Type of
Grant Date
  Grant   per Option   the Grant Dates   the Grant Dates   Valuation
 
June 30, 2006
    6,610,020     US$ 0.67     US$ 0.24     US$ 0.00     Retrospective
June 30, 2007
    2,250,000     US$ 1.17     US$ 0.28     US$ 0.00     Retrospective
October 15, 2007
    1,710,000     US$ 1.17     US$ 0.38     US$ 0.00     Retrospective
April 1, 2008
    3,500,600     US$ 1.50     US$ 0.24     US$ 0.00     Retrospective
October 31, 2008
    4,000     US$ 2.50     US$ 0.10     US$ 0.00     Retrospective
July 1, 2009
    3,162,200     US$ 1.50     US$ 0.53     US$ 0.00     Retrospective
November 2, 2009
    1,880,000     US$ 1.29     US$ 0.55     US$ 0.00     Retrospective
February 28, 2010
    140,000     US$ 1.47     US$ 1.89     US$ 1.57     Contemporaneous
May 18, 2010
    600,000     US$ 1.29     US$     US$     Contemporaneous
 
At the time of the grants, the exercise price was determined by the board of directors with inputs by management based on various objective and subjective factors.
 
The fair value of an option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions:
 
                                 
    2007   2008   2009   2010
 
Weighted average risk-free interest rate
    5.05 %     3.64 %     4.04 %     2.85 %
Weighted average expected term (number of years)
    5.2       2.6       5.8       4.6  
Weighted average expected volatility
    38.1 %     38.8 %     42.7 %     40.6 %
Weighted average expected dividend yield
                       
 
The risk-free rate for periods within the expected life of the option is based on the implied yield rates of U.S. dollar denominated bond issued by the Chinese government as of the valuation dates. The expected life of options represents the period of time the granted options are expected to be outstanding. As we did not grant options prior to June 30, 2006 and no options have been exercised, no sufficient historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated based on a consideration of factors including contractual term, vesting period and empirical study on exercise behavior of employee stock option. Our employees who received our stocks options are assumed to exhibit similar behavior. As we expected to grow our business with internally generated cash, we did not expect to pay dividends in the foreseeable future.


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Because we do not maintain an internal market for our shares, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business.
 
We recorded share-based compensation of US$0.5 million, US$1.1 million, US$1.2 million and US$0.4 million for options granted to employees for the years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2010, respectively, according to the graded vesting schedule on a straight-line basis with the amount of compensation expenses recognized in any period not less than the portion of the grant date fair value of the options vested during that period. As of March 31, 2010, we had a total of US$3.0 million in unrecognized compensation expense related to unvested share options. The expense is expected to be recognized over 2.75 years according to the graded vesting schedule.
 
Income Taxes
 
Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more than likely that a portion of or all of the deferred tax assets will not be realized.
 
Significant management judgment is required in determining our provisions for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The valuation allowance is based on our estimates of taxable income as determined by the jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.
 
U.S. GAAP requires that the impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during that period. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be. We did not recognize any significant unrecognized tax benefits during the periods presented in this prospectus.
 
As a consequence of Circular 157, the preferential tax rate enjoyed by Red River Valley which qualified as a “high and new technology enterprise” during its 50% reduction period (2008) was 12.5% rather than 7.5% which is the rate we had used prior to the issuance of Circular 157. Because we believe that Circular 157 is similar to a change in tax law, the cumulative effect of which should be reflected in the period of the change. As a result, we will recognize an additional tax liability in respect of the year ended December 31, 2008 of US$103,316 in the three months ended June 30, 2010.
 
Uncertainties exist with respect to how the PRC’s new Enterprise Income Tax Law applies to our overall operations, and more specifically, with regard to our tax residency status. The Enterprise Income Tax Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their place of effective management or control is within the PRC. The implementation rules to the Enterprise Income Tax Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, among others, occur within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC should be treated as residents for the Enterprise Income Tax Law’s purposes. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operation. See “Risk Factors — Risks Related to Doing Business


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in China — Our global income and the dividends we may receive from our PRC subsidiaries may be subject to PRC tax under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operation.”
 
Internal Control over Financial Reporting
 
We and our independent registered public accounting firm, in connection with the preparation and external audit of our consolidated financial statements as of December 31, 2009, identified certain material weaknesses and a significant control deficiency in our internal control over financial reporting. We have not undertaken a comprehensive assessment, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional material weakness and significant deficiencies may have been identified. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis, and a “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
 
The material weaknesses identified were: (i) lack of a comprehensive accounting policies and procedures manual in accordance with U.S. GAAP accessible to accounting personnel to ensure that accounting policies and procedures are followed; and (ii) lack of dedicated resources to take responsibility for the finance and accounting functions and the preparation of financial statements in compliance with U.S. GAAP. The significant deficiency identified was a lack of a qualified internal tax team that can address our income tax accounting and compliance matters from a U.S. GAAP perspective.
 
In order to improve our internal control over financial reporting, some steps that we have already taken include, but are not limited to, the hiring of: (i) a chief financial officer with publicly listed company and securities regulation experience; (ii) a controller with U.S. publicly listed company experience; and (iii) an internal auditor with “Big Four” auditing firm background and U.S. publicly listed company experience. In addition, we continue to seek out and hire personnel with U.S. GAAP and financial reporting experience and plan to take additional remedial steps. However, the implementation of these measures may not fully address the material weaknesses, the significant deficiency and other control deficiencies in our internal control over financial reporting that might have been identified, had we performed a formal assessment of our internal controls over financial reporting, and we cannot yet conclude that they have been fully remedied. The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments. See “Risk Factors — Risks Related to Our Business and Our Industry — In the course of preparing our consolidated financial statements, certain material weaknesses, a significant deficiency and other control deficiencies in our internal control over financial reporting were identified. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our ADSs may be adversely affected.”


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Selected Quarterly Results of Operations
 
The following table presents our selected unaudited quarterly results of operations for the eight quarterly periods ended March 31, 2010. This information should be read together with our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared the unaudited condensed consolidated financial statements for the three months ended March 31, 2010 on the same basis as our audited consolidated financial statements. The unaudited condensed consolidated financial statements for the three months ended March 31, 2010 and the unaudited consolidated financial information for the seven quarterly periods ended December 31, 2009 include all adjustments that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. The quarter-to-quarter comparison of operating results should not be relied upon as being indicative of the results that may be expected for any future quarters or periods.
 
                                                                 
    For the Three Months Ended
    June 30,
  September 30,
  December 31,
  March 31,
  June 30,
  September 30,
  December 31,
  March 31,
    2008   2008   2008   2009   2009   2009   2009   2010
    (U.S. dollars in thousands)
 
Net revenues
    21,012       27,146       27,607       20,522       23,148       34,143       40,190       35,312  
Cost of revenues(1)(2)
    (13,013 )     (18,592 )     (20,963 )     (14,745 )     (15,675 )     (22,899 )     (28,657 )     (26,540 )
                                                                 
Gross profit
    7,999       8,554       6,644       5,777       7,473       11,244       11,533       8,772  
Selling and marketing expenses(1)(2)
    (1,029 )     (1,116 )     (1,040 )     (1,100 )     (1,139 )     (2,000 )     (1,960 )     (2,370 )
General and administrative expenses(1)
    (3,654 )     (3,245 )     (2,985 )     (3,299 )     (2,879 )     (2,824 )     (3,625 )     (4,255 )
Research and development costs
    (477 )     (573 )     (628 )     (635 )     (719 )     (57 )     (85 )     (426 )
Postponed initial public offering costs
                (2,457 )                              
Changes in fair value of contingent consideration for acquisitions of Agree and Tansun
                                        (549 )     (306 )
                                                                 
Total operating expenses
    (5,160 )     (4,934 )     (7,110 )     (5,034 )     (4,737 )     (4,881 )     (6,219 )     (7,357 )
Government subsidies
                            42       6       8        
                                                                 
Income/(loss) from operations
    2,839       3,620       (466 )     743       2,778       6,369       5,322       1,415  
Interest expense
    (135 )     (41 )     (43 )     (14 )     (8 )     (28 )     (46 )     (123 )
Interest income
    56       31       46       16       32       40       30       44  
Dividend income from short-term investment
          11                                      
(Loss)/gain on short-term investment
    (44 )     (54 )     (17 )           44                    
Gain from extinguishment of liability
          3,926