20-F 1 cisi_20f.htm FORM 20-F cisi_20f.htm
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
 
FORM 20-F
_______________
 
(Mark One)
 
o
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
OR
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011
   
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
   
OR
o
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT                     
FOR THE TRANSACTION PERIOD FORM              TO             
 
COMMISSION FILE NUMBER 001-34797
 
Camelot Information Systems Inc.
 

(Exact name of Registrant as specified in its charter)
 
The British Virgin Islands
(Jurisdiction of Incorporation or Organization)

Beijing Publishing House
A6 North Third Ring Road
Xicheng District, Beijing 100120
The People’s Republic of China
(Address of Principal Executive Offices)
 
 Mr. Franklin King
Interim Chief Financial Officer
Camelot Information Systems Inc.
Beijing Publishing House
A6 North Third Ring Road
Xicheng District, Beijing 100120
The People’s Republic of China
Tel: +86-10-82019000
Fax: +86-10-82019100
Email: investors@camelotchina.com
(Name, Telephone, E-mail and/or Facsimile and Address of Company Contact Person) 
 


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

Title of Each Class
 
Name of  Exchange On Which Registered
American depositary shares, each representing four
 
New York Stock Exchange


 
 

 


ordinary share, with no par value per share
   
     
Ordinary shares, with no par value per share *
 
New York Stock Exchange
 
* Not for trading, but only in connection with the listing on New York Stock Exchange of the American depositary shares.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:

          None          
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 
          None          
(Title of Class)

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
 
Ordinary shares, with no par value
 
177,621,367

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes o    No x  
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.          Yes  ¨    No  x
 
Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).               Yes ¨ No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨    Accelerated filer  x   Non-accelerated filer   ¨  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing (Check one):
U.S. GAAP  x
International Financial Reporting Standards as issued by the International Accounting Standards Board  ¨
Other  ¨
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17  ¨  Item 18 ¨
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).               Yes  ¨    No  x

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

 
 

 



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No  ¨
 
 

 
 

 
 
Table of Contents
 

   
Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
1
CERTAIN TERMS AND CONVENTIONS
 
2
PART I
     
3
ITEM 1.
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
3
ITEM 2.
 
OFFER STATISTICS AND EXPECTED TIMETABLE
 
3
ITEM 3.
 
KEY INFORMATION
 
3
               A.
 
SELECTED FINANCIAL DATA
 
3
               B.
 
CAPITALIZATION AND INDEBTEDNESS
 
6
               C.
 
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
6
               D.
 
RISK FACTORS
 
6
ITEM 4.
 
INFORMATION ON THE COMPANY
 
27
               A.
 
HISTORY AND DEVELOPMENT OF THE COMPANY
 
27
               B.
 
BUSINESS OVERVIEW
 
28
               C.
 
ORGANIZATIONAL STRUCTURE
 
38
               D.
 
PROPERTY, PLANTS AND EQUIPMENT
 
39
ITEM 4A.
 
UNRESOLVED STAFF COMMENTS
 
40
ITEM 5.
 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
40
               A.
 
OPERATING RESULTS
 
40
               B.
 
LIQUIDITY AND CAPITAL RESOURCES
 
63
               C.
 
RESEARCH AND DEVELOPMENT
 
66
               D.
 
TREND INFORMATION
 
66
               E.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
66
               F.
 
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 
66
               G.
 
SAFE HARBOR
 
67
ITEM 6.
 
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
67
               A.
 
DIRECTORS AND SENIOR MANAGEMENT
 
67
               B.
 
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
 
69
               C.
 
BOARD PRACTICES
 
71
               D.
 
EMPLOYEES
 
72
               E.
 
SHARE OWNERSHIP
 
73
ITEM 7.
 
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
74
               A.
 
MAJOR SHAREHOLDERS
 
74
               B.
 
RELATED PARTY TRANSACTIONS
 
74
               C.
 
INTERESTS OF EXPERTS AND COUNSEL
 
75
ITEM 8.
 
FINANCIAL INFORMATION
 
75
               A.
 
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
 
75
               B.
 
SIGNIFICANT CHANGES
 
75
ITEM 9.
 
THE OFFER AND LISTING
 
75
               A.
 
OFFER AND LISTING DETAILS
 
75
               B.
 
PLAN OF DISTRIBUTION
 
75
               C.
 
MARKETS
 
76
               D.
 
SELLING SHAREHOLDERS
 
76
               E.
 
DILUTION
 
76
               F.
 
EXPENSES OF THE ISSUE
 
76
ITEM 10.
 
ADDITIONAL INFORMATION
 
76
               A.
 
SHARE CAPITAL
 
76
               B.
 
MEMORANDUM AND ARTICLES OF ASSOCIATION
 
76
               C.
 
MATERIAL CONTRACTS
 
81
               D.
 
EXCHANGE CONTROLS
 
81
               E.
 
TAXATION
 
81
               F.
 
DIVIDENDS AND PAYING AGENTS
 
85
               G.
 
STATEMENT BY EXPERTS
 
85
               H.
 
DOCUMENTS ON DISPLAY
 
86
               I.
 
SUBSIDIARY INFORMATION
 
86
ITEM 11.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
86
 
 
 
i

 
 
ITEM 12.
 
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
87
               A.
 
DEBT SECURITIES
 
87
               B.
 
WARRANTS AND RIGHTS
 
87
               C.
 
OTHER SECURITIES
 
87
               D.
 
AMERICAN DEPOSITARY SHARES
 
87
PART II
     
89
ITEM 13.
 
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
89
ITEM 14.
 
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
89
ITEM 15.
 
CONTROLS AND PROCEDURES
 
89
ITEM 16.
 
RESERVED
 
91
Item 16A.
 
AUDIT COMMITTEE FINANCIAL EXPERT
 
91
Item 16B.
 
CODE OF ETHICS
 
91
Item 16C.
 
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
91
Item 16D.
 
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
92
Item 16E.
 
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
92
Item 16F.
 
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
 
93
Item 16G.
 
CORPORATE GOVERNANCE
 
93
Item 16H.
 
MINE SAFETY DISCLOSURE
 
94
PART III
     
95
ITEM 17.
 
FINANCIAL STATEMENTS
 
95
ITEM 18.
 
FINANCIAL STATEMENTS
 
95
ITEM 19.
 
EXHIBITS
 
95

 
ii

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
 
This annual report contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
 
You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
 
 
·
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;
     
 
·
trends and competition in the IT services industry; and
     
 
·
general economic and business conditions, particularly in China.
 
We would like to caution you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information — D. Risk Factors” and other information in this annual report and the documents that we refer to herein. Those risks are not exhaustive. We operate in a rapidly evolving environment. New risk factors emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law.
 
 
 
1

 
 
CERTAIN TERMS AND CONVENTIONS
 
 
Unless otherwise indicated, references in this annual report to:
 
 
·
 “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;
     
 
·
“RMB” or “Renminbi” refers to the legal currency of the PRC;
     
 
·
 “U.S. GAAP” or “GAAP” means accounting principles generally accepted in the United States of America; and
     
 
·
“Greater China” refers to the PRC, Taiwan, the special administrative regions of Hong Kong and Macau.
 
Our financial statements are expressed in U.S. dollars, which is our reporting currency. The functional currency of our company 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, the legal currency of China. Our financial records contain amounts denominated in Japanese Yen, Hong Kong dollars and New Taiwan dollars, and as a result, this report may contain translations of certain Renminbi, Japanese Yen, New Taiwan dollars and Hong Kong dollars 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 April 20, 2012, the noon buying rates were RMB6.3080 to US$1.00, NT$29.45 to US$1.00, JPY81.60 to US$1.00 and HK$7.7613 to US$1.00. For more information, see “Item 3— Key Information— A. Selected Financial Data—Exchange Rate Information.”
 
 
 
2

 
 
PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
ITEM 3.
KEY INFORMATION
 
 
 
A.
SELECTED FINANCIAL DATA
 
The following selected consolidated statements of operations data for the years ended 2009, 2010 and 2011 and the consolidated balance sheet data as of December 31,  2010 and 2011 have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and are derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statement of operations data for the year ended December 31, 2007 and 2008, and selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 have been prepared in accordance with U.S. GAAP and are derived from our audited consolidated financial statements that are not included in this annual report on Form 20-F. Historical results are not necessarily indicative of results to be expected in any future period.
 
You should read the following selected consolidated financial and operating data in conjunction with our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects”included elsewhere in this annual report.
 
   
For the Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(U.S. dollars in thousands, except share and per share data)
 
Consolidated statements of operations data:
                             
Net revenues
    51,380       90,772       118,003       192,863       227,120  
Cost of revenues(1)(2) 
    (35,620 )     (64,187 )     (81,976 )     (130,862 )     (167,520 )
Gross profit
    15,760       26,585       36,027       62,001       59,600  
Selling and marketing expenses(1)(2) 
    (1,796 )     (3,818 )     (6,199 )     (11,138 )     (20,263 )
General and administrative expenses(1) 
    (5,700 )     (11,613 )     (12,627 )     (21,605 )     (45,065 )
Research and development costs
          (1,705 )     (1,496 )     (2,741 )     (5,956 )
Postponed initial public offering costs
          (2,457 )                  
Impairment of Intangible Assets
                            (8,552 )
Impairment of Goodwill
                            (21,457 )
Changes in fair value of contingent consideration for acquisitions of Agree, Tansun and Dimension
                (549 )     (3,880 )     (1,669 )
Total operating expenses
    (7,496 )     (19,593 )     (20,871 )     (39,364 )     (102,962 )
Government subsidies
    27             56       123       255  
Income (Loss) from operations
    8,291       6,992       15,212       22,760       (43,107 )
Interest expense
    (6 )     (310 )     (96 )     (475 )     (935 )
Interest income
    396       244       118       498       1,194  
Dividend income from short term investment
          11                    
Gain/(loss) on short-term investment
          (115 )     44              
Gain from extinguishment of liability
          3,926                    
Income (Loss) before provisions for income taxes
    8,681       10,748       15,278       22,783       (42,848 )
Provisions for income taxes
    (1,374 )     (1,400 )     (2,241 )     (4,100 )     1,791  
Equity in earnings/(loss) of an affiliate, net of income taxes
    6                          
Net income (Loss)
    7,313       9,348       13,037       18,683       (41,057 )
Less: Net (loss)/income attributable to non- controlling interest
          (66 )     (71 )     (86 )     233  
Net income (loss) attributable to Camelot Information Systems Inc(3)
    7,313       9,282       12,966       18,597       (40,824 )
 
 
 
 
3

 
 
 

Net income per share attributable to shareholders of Camelot Information Systems Inc.
                             
Basic-ordinary shares
    0.06       0.07       0.10       0.12       (0.23 )
Diluted-ordinary shares
    0.06       0.07       0.10       0.11       (0.23 )
Net income(loss) per ADS attributable to shareholders of Camelot Information Systems Inc.
                                       
    Basic-ADSs
    0.26       0.30       0.40       0.48       (0.91 )
Diluted-ADSs
    0.26       0.29       0.39       0.45       (0.91 )
                                         
Weighted average shares used in calculating net income per share
                                       
Basic-ordinary shares
    73,691,478       77,394,257       82,035,859       128,663,415       179,954,056  
Diluted-ordinary shares
    114,516,885       127,587,315       133,017,168       165,258,030       179,954,056  
Weighted average shares used in calculating net income per ADSs
                                       
 Basic-ADSs
    18,422,870       19,348,564       20,508,965       32,165,854       44,998,514  
 Diluted-ADSs
    28,629,221       31,896,829       33,254,292       41,314,508       44,998,514  
___________
Notes:
 
(1) Includes the following amounts of share-based compensation expenses for the years indicated

   
For the Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(U.S. dollars in thousands)
 
Cost of revenues
    89       130       147       136       1,463  
Selling and marketing
    55       94       158       354       7,427  
General and administrative
    355       852       938       2,434       10,476  
Total share-based compensation expenses
    499       1,076       1,243       2,924       19,366  

(2) Includes the following amounts of amortization expense related to intangible assets acquired for business combination for the years indicated

   
For the Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(U.S. dollars in thousands)
 
Cost of revenues
    8       360       440       1,776       1,594  
Selling and marketing expenses
    946       2,372       3,224       4,332       3,213  
General and administrative expenses
    -       -       -       -       278  
Total acquisition-related intangible amortization expenses
    954       2,732       3,664       6,108       5,085  

(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, changes in fair value of contingent consideration, and impairment of intangible assets and  goodwill. The non-GAAP financial measure is provided as additional information 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 adjusted net income attributable to Camelot Information Systems Inc. to the U.S. GAAP net income attributable to Camelot Information Systems Inc.
 
 
 
4

 

   
For the Year Ended December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(U.S. dollars in thousands)
 
Net income (loss) attributable to Camelot Information Systems Inc. (U.S. GAAP)
    7,313       9,282       12,966       18,597       (40,824 )
Share-based compensation
    499       1,076       1,243       2,924       19,366  
Acquisition-related intangible amortization
    954       2,732       3,664       6,108       5,085  
Gain from extinguishment of liability
    -       (3,926 )     -       -       -  
Postponed initial public offering costs
    -       2,457       -       -       -  
Impairment of Intangible Assets
    -       -       -       -       8,552  
Impairment of Goodwill
    -       -       -       -       21,457  
Changes in fair value of contingent consideration
    -       -       549       3,880       1,669  
Total non-GAAP adjustments
    1,453       2,339       5,456       12,912       56,129  
Net income attributable to Camelot Information Systems Inc. (non-GAAP)
    8,766       11,621       18,422       31,509       15,305  
 
The following table sets forth our selected consolidated statements of balance sheet data as of December 31, 2007, 2008, 2009, 2010 and 2011.
 
   
As of December 31,
 
   
2007
   
2008
   
2009
   
2010
   
2011
 
   
(U.S. dollars in thousands)
 
Consolidated balance sheet data:
                             
Cash and cash equivalents
    18,851       22,916       33,820       140,356       57,128  
Term deposit
    337       -       299       160       45,318  
Total assets
    72,352       118,905       191,267       341,465       315,396  
Total liabilities
    12,162       32,412       75,310       88,188       83,308  
Total equity
    60,190       86,493       115,957       253,277       232,088  
Total liabilities and equity
    72,352       118,905       191,267       341,465       315,396  
 
Exchange Rate Information
 
Our business is primarily conducted in China and a substantial portion of our revenues are denominated in Renminbi. A majority of our net revenues and a significant majority of our expenses are denominated in Renminbi, the legal currency of China. Our financial records contain amounts denominated in Japanese Yen, Hong Kong dollars and New Taiwan dollars, and as a result this report may contain 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. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this annual report, all translations from Renminbi to U.S. dollars in this annual report were made at a rate of RMB6.2939 to US$1.00, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board in effect as of December 30, 2011, the last day of 2011 for which exchange rate data was available. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On April 20, 2012, the noon buying rate was RMB6.3080 to US$1.00.
 
The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you.

   
Noon Buying Rate
 
Period
 
Period End
   
Average(l)
   
Low
   
High
 
   
(RMBper$1.00)
 
                         
2007
    7.2946       7.5806       7.2946       7.8127  
2008
    6.8225       6.9193       6.7800       7.2946  
2009
    6.8259       6.8295       6.8176       6.8470  
2010
    6.6000       6.7603       6.6000       6.8330  
2011
    6.2939       6.4475       6.2939       6.6364  

 
 
5

 
 

      October
    6.3547       6.3710       6.3534       6.3825  
      November
    6.3765       6.3564       6.3400       6.3839  
December
    6.2939       6.3482       6.2939       6.3733  
2012
                               
January
    6.3080       6.3172       6.2940       6.3330  
February
    6.2935       6.2997       6.2935       6.3120  
March
    6.2975       6.3125       6.2975       6.3315  
April (through April 20)
 
6.3080
   
6.3052
   
6.2975
   
6.3150
 
__________
Note:
 
(1)
Annual averages are calculated using the average of month-end rates of the relevant year. Monthly averages are issued by G.5 statistical release of Federal Reserve Board, except April of 2012, which is calculated by using the average of daily rates during the relent period.
 
 
 
B.
CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
 
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.
 
 
D.
RISK FACTORS
 
Risks Related to Our Business and Our Industry
 
We face securities class actions in the U.S. which may have material adverse effect on our business.
 
Several securities class action lawsuits have been filed in the United States District Court for the Southern District of New York on behalf of purchasers of our ADS between July 21, 2010 and August 17, 2011 (the "Class Period"), including those who acquired our ADSs pursuant to or traceable to our registration statements and prospectuses issued in connection with our initial public offering on July 21, 2010 and our secondary public offering on December 10, 2010 ("Offerings").  The complaint charges us, certain of our officers and directors, and the underwriters involved in our Offerings with violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint alleges that during the Class Period, we issued materially false and misleading statement regarding our business practices and financial results. The deadline of making motions for lead plaintiff was March 5, 2012 and as of the date of this report, no lead plaintiff has been appointed, to the best of our knowledge.

We believe the complaints that have been made aware of are lack of any merit, however, the confidence of our current or potential investors as well as our business reputation may be adversely affected. Further, we can not assure you that there are not any similar allegations against us in the future. Should we receive any unfavorable judgment against us out of these allegations, our results of operations and financial condition could be materially and adversely affected and our business reputation may also be damaged.
 
 
 
6

 

 
 We have identified three material weaknesses in our internal control over financial reporting and cannot assure you that such material weaknesses will be remedied or additional material weakness will not be identified in the future. Our failure to implement or maintain effective control over financial reporting could result in material misstatement in our financial statements which could require us to restate financial statement in the future, or cause us not to be able to provide timely financial information, which may cause investors to lose confidence in our reported financial information and have a negative effect on our stock price.
 
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company's internal control over financial reporting in its annual report, which contains management assessment of the effectiveness of the company's internal control over financial reporting. In addition, under such rules, our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting.
 
In connection with management's assessment of the effectiveness of our internal over financial reporting for the period covered by this annual report, our management has identified three material weaknesses in our internal control over financial reporting and has concluded that as of December 31, 2011, our disclosure controls and procedures and our internal control over financial reporting were not effective. Our independent registered public accounting firm has express an adverse opinion on the effectiveness of our internal control over financial reporting as of December 31, 2011. See "Item 15 — Controls and Procedures."
 
The material weaknesses identified were: (1) lack of sufficient skilled resources with U.S. GAAP knowledge for the purposes of financial reporting and lack of continuing professional training on U.S. GAAP and SEC regulations and rules for accounting personnel; (2) insufficient segregation of duties in relation to the (a) review and calculation of payroll expense and (b) initiation and approval of payments by a subsidiary;  and (3) lack of policies and procedures on selection of subcontractors, lack of documented approval of cash flows forecast by the board of directors, and insufficient IT security controls in relation to (a) system login, anti-virus scans, and system backup and (b) access, changes and version controls over certain spread sheets used in consolidation process.
 
Despite our efforts to ensure the integrity of our financial reporting process, we cannot assure you that the material weaknesses identified in our internal control over financial reporting would be successfully remediated. Further, we cannot assure you that additional weakness in our internal control over financial reporting will not be identified in the future. Any failure to maintain existing controls or implement new controls would result in additional material weakness and cause us fail to meet our periodic reporting obligations which in turn could cause our shares to be de-listed or suspended from trading on the NYSE. Further, any such failure could result in material misstatements and adversely affect the results of annual management evaluations regarding the effectiveness of our internal control over financial reporting. Any of the foregoing could cause investors to lose confidence in our reported financial information, leading to a decline in our share price or lawsuits being filed against us by our shareholders or otherwise harm our reputation.   In addition, we may require more resources and incur more costs than currently expected to remediate our identified material weaknesses or any additional material weakness that may be identified in the future, which may adversely affect our results of operations.
 
 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. 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. For instance, our previous chief executive officer of Agree, Mr. Wang Yuhui, and some of his team members resigned from our company during the second quarter 2011, which led to the disruption of our project deliveries and new contract signing. We believe that there is significant competition for skilled technology professionals both in China and worldwide. 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. We primarily compete with Chinese IT services firms. We may also compete with foreign IT service providers as well as domestic offshore IT services providers. 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.
 
 
 
7

 
 
 
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 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 2009, 2010 and 2011, approximately 31.6%, 33.7% and 34.1% of our net revenues were derived from our single largest client. In the same periods, approximately 49.0%, 48.2% and 53.4% of our net revenues were derived from our five largest customers. We expect revenues from these customers will continue to account for a significant portion of our revenues. 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 unit prices, due to the volume of delivery items with these customers, which may in turn materially and adversely affect our results of operations.
 
If our delivery center agreements with IBM are terminated or are not renewed for any reason, 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. In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four years, under which the right for IBM to purchase the delivery center at a price based on the cumulative revenues generated by and net book value of the delivery center has been removed. Our net revenues derived from this delivery center totaled US$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% 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 renewed technical services agreement contains a number of key commercial and legal provisions, including:
 
 
·
Termination.  The initial term is four 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

 
 
8

 
 
   
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.
 
·
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 term of the master SOW and for a period of 18 months following the termination of the master SOW.
 
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) 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. See “Item 3. Key Information— D. Risk Factors — 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 billed and unbilled accounts receivable have been relatively high. As of December 31, 2009, 2010 and 2011, our outstanding billed and unbilled accounts receivable were US$68.2 million, US$105.7 million and US$135.0 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 small portion of our revenues from customers in Taiwan and Japan.In 2009, 2010 and 2011, net revenues from the PRC, Taiwan and Japan in aggregate totaled US$117.2 million, US$190.5 million and US$225.2 million, respectively, representing 99.3%, 98.8% and 99.2% of our 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.
 
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 intend to continue to selectively acquire IT service companies to support our future growth. 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 certain long term assets and additional conflicts of interest. In
 
 
 
9

 
 
 
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.
 
Although we conduct due diligence in connection with our acquisitions, we may not be aware of all the risks associated with 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 may be 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, 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, 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.
 
A global financial and economic crisis, a severe or prolonged downturn slowdown in the global or Chinese economy, may adversely affect our business, results of operations and financial condition.
 
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including the escalation of the European sovereign debt crisis since 2011. It is unclear whether the European sovereign debt crisis will be contained and what effects it may have. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by the central banks and financial authorities of some of the world’s leading economies, including China’s. There have also been concerns over unrest in the Middle East and Africa, which have resulted in higher oil prices and significant market volatility, and over the possibility of a war involving Iran. There have also been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan. Economic conditions in China are sensitive to global economic conditions.
 
Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition, and continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. For example, our customers may decrease or delay the use of our services, while we may have difficulty expanding our customer base fast enough, or at all, to offset the impact of decreased use of our services by our existing customers. In addition, we could have difficulty collecting payments from our customers.
 
 
 
10

 

 
Compliance with new and changing corporate governance and public disclosure requirements adds uncertainty to our compliance policies and increases our costs of compliance.
 
Changing laws, regulations and standards relating to accounting, corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, NYSE rules, are creating uncertainty for companies like ours. These new or changed laws, regulations and standards may lack specificity and are subject to varying interpretations. Their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs of compliance as a result of ongoing revisions to such governance standards. In particular, compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting requires the commitment of significant financial and managerial resources and external auditor's independent assessment of the internal control over financial reporting. We and our independent registered public accounting firm identified certain material weaknesses. See Item 15. Controls and Procedures”.
 
Following the identification of these material weaknesses, we have taken measures and plan to continue to take measures to remedy these weaknesses. However, the implementation of these measures may not fully address these material weaknesses in our internal control over financial reporting, and therefore we may not be able to conclude that they have been fully remedied. Our failure to remedy these material weaknesses or our failure to discover and address any other 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.
 
Further, since 2009 and continuing into 2011, there has been an increased focus on corporate governance by the U.S. Congress and by the SEC in response to the recent credit and financial crisis in the United States. As a result of this increased focus, additional corporate governance standards have been promulgated with respect to companies whose securities are listed in the United States, including by way of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and more governance standards are expected to be imposed on companies whose securities are listed in the United States in the near future.
 
In addition, it may become more expensive or more difficult for us to obtain director and officer liability insurance. Further, our board members, chief executive officer, and chief financial officer could face an increased risk of personal liability in connection with their performance of duties and our SEC reporting obligations. As a result, we may face difficulties attracting and retaining qualified board members and executive officers, which could harm our business. If we fail to comply with new or changed laws or regulations, our business and reputation may be harmed.
 
Our financial performance and prospects could be affected by natural disasters or health epidemics.
 
Our business could be materially and adversely affected by natural disasters or the outbreak of health epidemics. In March 2011, a magnitude 9.0 earthquake followed by a tsunami struck northeast Japan devastating much of the affected areas and causing widespread damage and casualties. Historically, our sales to Japan accounted 9.9%, 7.7% and 9.3% of our revenue in each of  2009, 2010 and 2011. In addition, in May 2008, a magnitude 8.0 earthquake struck Sichuan Province and certain other parts of the PRC, causing severe damage and casualties.

Moreover, certain countries and regions, including the PRC, have encountered incidents of the H5N1 strain of bird flu, or avian flu, as well as severe acute respiratory syndrome, or SARS, over the past six years and, more recently in 2009, the outbreak of influenza A (H1N1).

We are unable to predict the effect, if any, that any future natural disasters and health and public security hazards may have on our business. Furthermore, such natural disasters and health and public security hazards may severely restrict the level of economic activity in affected areas, which may in turn materially and adversely affect our business and prospects.
 
 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. The loss of 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.  For instance, our third quarter 2011 financial results, particularly the Financial
 
 
 
11

 
 
 
Industry IT service business, had been adversely affected to a significant extent, mainly due to the departures of Mr. Wang Yuhui, our previous chief executive officer of Agree and  some of his team members during second quarter of 2011, which led to the disruption of our project deliveries and new contract signing. In November, 2011, Mr. Gordon Lau, resigned his position as our chief financial officer and certain of our board members have also been changed in the period from October to March 2012. Although Mr. Wang returned to our company in the third quarter 2011  and serves as the chief executive officer of Camelot Financial Information Technology Services Co., Ltd, one of our subsidiaries that focuses on the banking, financial services and insurance market in December 2011, we can't assure you that similar departure of director or the management personal will not happen again in the future and should it happen, our business, customer relationships or results of business may be badly affected to a significant extent.  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 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.
 
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.
 

 
12

 
 
 
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.
 
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 are 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,
 
 
 
13

 
 
 
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 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 1,757 as of December 31, 2008 to 4,017 as of December 31, 2011. 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.
 

 
14

 
 
 
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 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 currencies may materially and adversely affect 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. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollars between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band.  As a consequence, the Renminbi fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the PRC government has allowed the Renminbi to appreciate slowly against the U.S. dollar again. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future. There remains significant international pressure on the Chinese government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the Renminbi against the U.S. dollar. To the extent that we need to convert U.S. dollars into Renminbi for capital expenditures and working capital and other business purposes, 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 making payments for dividends on our ordinary shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount
 
 
 
15

 
 
 
available to us. We expect that a material 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. 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 “Item 3. Key Information — D. Risk Factors — 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 making 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 account for a material 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 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.
 
As of March 31, 2012, our largest shareholders included our founders, Mr. Yiming Ma and Ms. Heidi Chou, each of whom owns approximately 8.1% and 7.7% 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.
 
We have granted, and may continue to grant employee stock options under our equity incentive plan . In addition, we have repriced, and may continue to reprice our outstanding stock options granted to our employees, any of which may result in increased share-base compensation expenses.
 
We have adopted the equity incentive plan on June 26, 2006. As of March 31, 2012, options to purchase a total of 16,811,328 ordinary shares of our company were outstanding ("2006 Equity Incentive Plan ").  For the year 2009, 2010 and 2011, we recorded US$1.2 million, US$2.9 million and US$19.4 million, respectively, in share-based compensation expenses. As of December 31, 2011, we had US$4.2 million of unrecognized share-based compensation expenses relating to share options, which are expected to be recognized over a weighted average vesting period of 1.2 years. We believe the granting of share options is of significant importance to our ability to attract and retain key personnel and employees, and we may continue to grant share options to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our result of operations.
 
               On November 28, 2011, in order to retain key personnel under then-current market conditions, we reduced the exercise price of our outstanding options granted under our 2006 Equity Incentive Plan for all of the employees ("Share Repricing") and incurred US$14 million share-based compensation expenses due to that Share Repricing. As the trading price of our ADSs fluctuates, we can not assure you that we will not continue to reduce the exercise price of our outstanding options granted under the existing equity incentive plan or other equity incentive plans that may be
 
 
 
16

 
 
 
adopted in the future. Should we reduce the exercise price of the outstanding options, our share-base compensation expenses will be increased and our operating results will be adversely affected.
 
As a foreign private issuer, we are permitted to, and we  may 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 New York Stock Exchange 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 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. Although we are currently comply with NYSE requirements, we may rely on the foreign private issuer exemption to the extent that a majority of our board of directors are not consisting 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 prior to November 5, 2010 were not compliant with certain local registration and/or licensing requirements as well as other Hong Kong laws and regulations.
 
In 2006, we initially acquired our Hong Kong operations, or Our Previous HK Operations, 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 Previous HK Operations. Under applicable Hong Kong law, Camelot BVI and Triumph were deemed to have established a place of business and carried on a business in Hong Kong since their acquisitions of Our Previous HK 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 Previous HK Operations. However, neither Camelot BVI nor Triumph obtained such certificates nor did they undertake such registration. Accordingly, Our Previous HK Operations and, in turn, Camelot BVI and Triumph were 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$264,000 up to November 5, 2010. As of June 3, 2011, 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 Previous HK Operations were 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 Previous HK Operations were not compliant with certain provisions of the MPFSO for a duration of approximately 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 Previous 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 Previous HK 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 Previous HK Operations have made 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
 
 
 
17

 
 
 
operations may be subject, may include, but not be limited to, facing a maximum fine of HK$100,000 (US$13,000).
 
In June, 2010, we transferred all of our shares in Our Previous HK operations to third party individuals and as a result of such transfer, we no long have any shareholder rights, duties or liabilities in Our Previous HK operations. Since November 5, 2010, our business in Hong Kong has been conducted through Kings Consulting Services Ltd, or Kings, a company which is limited by shares and incorporated in Hong Kong and which is a wholly owned subsidiary of Camelot BVI. The business contracts between our customers and Our Previous HK Operations have already been transferred to Kings by way of signing the supplemental agreements with the relevant customers. All new business contracts with our customers which have been entered into after November 5, 2010 have been entered into with Kings.
 
Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.
 
Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems of our customers. Actual or perceived concerns that our system maybe vulnerable to such attacks or disruptions may deter consumer from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches, which could adversely affect our results of operations.
 
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 thirty 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.
 

 
18

 
 
 
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 making loans or additional capital contributions to our PRC operating subsidiaries.
 
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.
 
As an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries. However, any loans from our 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. Also, on August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into Renmibi by restricting how the converted Renminbi may be used. SAFE Circular 142 provides that the Renminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the Renminbi capital converted from foreign currency registered capital of a foreign-invested company. The use of such Renminbi capital may not be altered without SAFE approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. Violations of Circular 142 could result in severe monetary or other penalties.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, We cannot assure you that we will be able to complete the necessary government registrations or 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 or complete the necessary government registrations, our ability 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.
 
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,
 
 
 
19

 
 
 
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” 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. In addition, certain of our subsidiaries were entitled to preferential tax treatments due to other qualifications obtained from local governmental authorities such as "Manufacturing Foreign-Invested Enterprise" and "Software Enterprise".
 
Preferential tax treatments granted to our subsidiaries by the local governmental authorities are subject to review and may be adjusted or revoked at any time. The discontinuation of any preferential tax treatments currently available to us may 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.
 
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. In addition, the SAT issued a bulletin on August 3, 2011 to provide more guidance on the implementation of the above circular with an effective date to be September 1, 2011. The bulletin made clarification in the areas of resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to the Chinese controlled offshore incorporated enterprise. Although both the circular and the bulletin only apply to offshore enterprises controlled by PRC enterprises and not those by PRC individuals or foreigners, like our company,  the determination criteria set forth in the circular and administration clarification made in the bulletin may reflect the SAT's general position on how the "de facto management body" test should be applied in determining the tax residency status of offshore enterprises and the administration measures should be implemented, regardless of whether they are controlled by PRC enterprises or PRC individuals. While we do not believe we 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
 
 
 
20

 
 
 
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 accordance with PRC accounting standards and regulations. In addition, we may  fail 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. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends except in the event of liquidation. 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.
 
The audit report included in this annual report are prepared by auditors who are not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection
 
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States) (“the “PCAOB), is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.  Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. 
 
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.  This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures.   As a result, investors may be deprived of the benefits of PCAOB inspections.  
 
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
 
 
 
21

 
 
 
The regulation of the China Securities Regulatory Commission, or the CSRC, 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.
 
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.
 
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.
 
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-
 
 
 
22

 
 
 
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. 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, an adverse impact, our business, operations and financial condition.
 
Risks Related to Our ADSs
 
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. Since our ADSs became listed on the New York Stock Exchange on July 20, 2010 up to April 24, 2012, the closing prices of our ADSs have ranged from US$26.73 to US$1.78 per ADS, and the last reported trading price on April 24, 2012 was US$3.16 per ADS. The price of our ADSs may continue to fluctuate 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;

 
 
23

 

 
 
·
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; 
     
 
·
general market conditions or other developments affecting us or our industry; and
     
 
·
negative market perception and media coverage of our company or other companies in the same or similar industry with us.
 
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.
 
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.
 
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
 
 
 
24

 
 

 
·
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 or the perception that these sales could occur, could cause the market price of our ADSs to decline. All ADSs sold in our initial public offering in July 2010 and follow-on public offering in December 2010 are 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.”  Shares owned by our founders, Mr. Yiming Ma and Ms. Heidi Chou, are also available for sale, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. We may also have shares issued upon exercise of the options that are granted to our directors and employees. To the extent these shares are sold into the market, 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’ 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.
 
 
 
25

 
 
 
Our company may be classified as a passive foreign investment company (or a “PFIC”) for United States federal income tax purposes, which could subject United States investors in our ADSs or ordinary shares to adverse tax consequences.
 
Although we do not believe that we were classified as a PFIC for the taxable year ended 2011, there is a significant risk that we will be classified as a PFIC for our current taxable year ending 2012 and future taxable years unless our share value increases and/or we invest a substantial amount of the cash and other passive assets that we hold in assets that produce or are held for the production of active income.  A non-United States corporation, such as our company, will be classified as a PFIC for United States federal income tax purposes for any taxable year, if either (1) 75% or more of its gross income for such year consists of certain types of “passive” income, or (2) 50% or more of its average quarterly assets as determined on the basis of fair market value during such year produce or are held for the production of passive income.  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 may be given with respect to our PFIC status for any taxable year.
 
If we are classified as a PFIC for any year during which a U.S. investor holds our ADSs or ordinary shares, a U.S. investor may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules.  Furthermore, a U.S. investor will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. investor’s holding period in which we become a PFIC and subsequent taxable years (“PFIC-Tainted Shares”) even if, we, in fact, cease to be a PFIC in subsequent taxable years.  Accordingly, a U.S. investor should, to the extent an election is available, consider making a “mark-to-market” election to avoid owning PFIC-Tainted Shares.  See the discussion under “Item 10.E. Taxation – Material United States Federal Income Tax Considerations – Passive Foreign Investment Company Considerations” concerning the United States federal income tax consequences of an investment in the ADSs or ordinary shares if we are or become classified as a PFIC, including the possibility of making a “mark-to-market” election.
 
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
 
 
 
26

 
 
 
represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.
 
 You may 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 the British Virgin Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
 
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
 
   
 
Camelot Information Systems Inc. is a British Virgin Islands holding company incorporated in November 2000 and 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) 10-82019000 and our fax number is (86) 10-82019100.
 
Investor inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above.  Our website is www.camelotchina.com.  The information contained on our website is not part of this annual report.  Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
 
In July 2010, we completed our initial public offering, in which, including the exercise of the over-allotment options, we issued and sold  of 9,166,667 ADSs representing 36,666,668 ordinary shares, and certain of our then shareholders sold 4,166,667 ADSs, representing 16,666,668 our ordinary shares. In December 2010, we completed our follow-on public offering of 7,160,206 ADSs representing 28,640,824 ordinary shares which were offered by our selling shareholders and we did not receive any proceeds from the sale of the ADSs by the selling shareholders. We also granted to the underwriters an option to purchase up to an additional 1,074,030 ADSs from us, which was exercised in full by the underwriters in December 2010. We received US$19.9 million from the sale of the 1,074,030 ADSs.
 
Historically, we have made a number of strategic acquisitions to complement our growth, including the acquisitions of Triumph Consulting & Service Co., Ltd. and its affiliates, or Triumph, Bayshore Consulting and Services Co., Ltd. and its PRC and offshore affiliates, or Bayshore, and Dalian Yuandong Digital Co., Ltd. and its PRC and offshore affiliates, or Dalian Yuandong, in 2006. Our significant acquisitions since 2007 include the following:
 
• In January 2007, we acquired 100% of Hwawei Digital Financial Technologies Co., Ltd. and its affiliates, or Hwawei, a specialized applications software implementation and development services provider to the financial service industry in Taiwan.
 
• In February 2008, we acquired 100% of Beijing Red River Valley Information Technology Co., Ltd and its offshore affiliates, or Red River Valley, which provides packaged software services tailored to the steel manufacturing industry in China to enhance operational productivity.
 
• In April 2008, we acquired 100% of VLife Technology Co., Ltd. and its PRC and offshore affiliates, or VLife. VLife focuses on providing application software development and implementation services to
 
 
 
27

 
 
 
life insurance companies in Taiwan by incorporating specific insurance regulations, actuarial requirements and industry prerequisites.
 
• In April 2008, we acquired 100% of Beijing Yinfeng Technology Development Co., Ltd. and its offshore affiliates, or Yinfeng. 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 Inc. and its affiliates, or Harmonation. 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.
 
• In July 2009, we acquired 100% of Agree Technology Co., Ltd. and its PRC and offshore affiliates, or Agree, a company that 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 Beijing Tansun Software Technology Co., Ltd. and its PRC and offshore affiliates, or Tansun , a company 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.
 
• In January 2011, we acquired 100% equity interest in Dimension InfoTech Co. Ltd and its offshore affiliates, or Dimension, a specialist in SAP project implementation and SAP-based customized solutions based in China, for a total consideration of US$14.5 million, including 1,152,352 shares of our ordinary shares,  US$4.0 million of cash and performance-based considerations with a fair value of US$5.2 million as of the acquisition date.
 
In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four-year term relating to the delivery center developed by Camelot to provide enterprise application services exclusively for IBM's customers. The renewal agreement with IBM is on substantially the same terms as the prior agreement, except that the right for IBM to purchase the delivery center has been removed.
 
In May 2011, our board of directors has authorized a share repurchase program of up to US$ 20 million running through the end of 2011. Any repurchase under the repurchase program may be made on the open market, depending on market conditions and other factors. The repurchase was funded from the company's available cash balance. As of December 31, 2011, we have repurchased 2,118,400 ADSs representing 8,473,600 ordinary shares of the company. As permitted under BVI law, we keep those shares as treasury shares.
 
In November 2011, our board of directors approved to reduce the exercise price of  all stock options granted to all employees under our 2006 Equity Incentive Plan. The reduced exercise price per ADS is US$0.01 or US$0.98 depending on their respective grant date ("Share Repricing"). Other than the exercise price of the option, the other terms of the options remained unchanged.
 
In December 2011, we established a wholly owned subsidiary Camelot Financial Information Technology Services Co., Ltd, in order to enhance our focus on clients, technology and markets in the banking, financial services and insurance sectors.  This new subsidiary will consolidate our Financial Industry Service resources and integrate teams from our previously acquired companies and our existing Financial Industry Service business line.
 
In April 2012, we signed a three-year strategic cooperative agreement (“Strategic Cooperative Agreement”) with Huawei Device Co. Ltd (“Huawei Device”) to develop enterprise application solutions for Huawei’s enterprise mobile solution platform.  Under the Strategic Cooperation Agreement, we will form special project teams to develop enterprise mobile application solutions for Huawei Device and will be named a strategic partner if Huawei accepts our enterprise mobile solutions.
 
See “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources” for a description of our principal capital expenditures in the last three financial years.
 
 
B.
BUSINESS 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. We focus on providing services at the higher end of the IT value chain. Our primary service lines are:
 
 
28

 
 
 

 
 
·
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.
 
The following table sets forth our net revenues by service line for the periods indicated.  
 
   
For the Year Ended December 31,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
Enterprise application services
    79,423       67.3       126,555       65.6       159,181       70.1  
Financial industry IT services
    38,580       32.7       66,308       34.4       67,939       29.9  
Total net revenues
    118,003       100.0       192,863       100.0       227,120       100.0  
 
Our enterprise application services business has historically been our largest service line. In recent years, we have significantly expanded our financial industry IT services business through both organic growth and acquisitions.
 
 Enterprise Application Services
 
Our largest service line, enterprise application services, largely consists of two main types of services: (i) packaged software services and (ii) software development and maintenance services.   
 
Packaged Software Services
 
We provide a wide range of implementation, customization and support services for packaged software systems to enterprise customers, with a focus on ERP software packages. Our packaged software services have a wide range of coverage in terms of both industries and applications. We have served clients and accumulated domain expertise in resources and energy, technology, manufacturing and automobile, as well as retail, consumer and transportation. We provide services for systems ranging from traditional ERP systems, such as those offered by SAP and Oracle, to new dimension applications, such as customer relationship management, business intelligence, supply chain management, integration tools and manufacturing supply execution.
 
 Packaged software systems purchased off-the-shelf generally require implementation prior to use. The system implementation process generally consists of installation of hardware and software, customization, test and documentation, configuration, training and delivery. A team with strong and relevant technical background, business expertise to match system functions and business processes, and deep understanding of implementation methodology is required to accomplish these tasks within the schedule and budget. In addition, the process of implementing, customizing and supporting a packaged software system poses significant challenges to organizations and may take several years. As a result, large enterprise organizations generally outsource such implementations to third-party IT service providers such as our company.
 
We have historically focused on SAP-based ERP services. We began providing services on SAP software package systems in 2001. We are certified vendors to many of the major international IT service providers including IBM and Accenture.
 
We acquired Triumph in 2006 and as a result of this acquisition, we have further strengthened our expertise in consulting services and expanded our customer base of mid-sized companies. In addition, through our acquisition of Red River Valley in 2008, we gained access to its domain expertise and customer base in the steel manufacturing industry, which we believe will assist to our goal of expanding into the automobile industry in China. In January 2011, we acquired Dimension, a specialist in SAP project implementation and SAP-based customized solutions.
 
 
 
29

 
 
 
Packaged software services can be broadly divided into implementation services and maintenance services.
 
Packaged Software Implementation Services
 
Our packaged software implementation services primarily consist of the following:
 
 
·
Packaged Software Integration.  We work with providers of packaged software to install and integrate these packages with our customers’ existing computer systems and with various Internet applications to meet the individual needs of our customers. ERP systems are built with the purpose of tightly integrating processes within an enterprise such as planning, manufacturing, sales, marketing, inventory control, customer service, finance and human resources. Our ERP integration services enable these systems to communicate with each other as well as the organization’s data warehouse, any custom-developed enterprise systems or legacy applications. Our integration services help our customers manage cost by reducing or eliminating duplicate data entry and time spent reconciling discrepancies between different systems. Our ERP integration services also enable our customers to streamline business processes and improve data access in support of data-based decision making.
     
 
·
Solution Design.  Our professionals assist our customers in the design of application configuration options, detailed business procedure documentation, customized extensions, interfaces and data conversions. In addition, we help our customers identify process and organizational changes required for the implementation of ERP systems.
     
 
·
Technical Configuration and Customization.  We provide configuration services to customers to match the ERP software package with the customers’ existing business processes. Further, we provide customization services to extend the use of the ERP system or change its use by creating customized interfaces and underlying application code.
     
 
·
Training.  In connection with the implementation of a system, we provide training to the various members of the customer’s staff, such as network specialists and end-users to help them acquire the required ERP application knowledge and skills.
     
 
·
Project Management.  We provide customer side project management for IT projects, starting from defining the scope, quality, time and cost considerations of the projects. For the duration of the projects, we provide systematic controlling, risk management, quality assurance and sub-contractor management. Our experts have the required IT specific knowledge on managing complex projects and achieving project goals.  
     
 
·
Quality Assurance and Testing.  We assist our customers in planning, scripting, executing and monitoring system and stress tests to see if the expectations of the end customers, defined in service level agreements, will be met. For each particular customer, we focus on developing a framework for ongoing testing in order to seek continuous improvement in the predictability of our customer’s internal systems.
 
Packaged Software Maintenance Services
 
Our packaged software maintenance services primarily consist of (i) maintenance and production support services, and (ii) infrastructure management.
 
 
·
Maintenance and production support.  We provide maintenance services for our customers’ ERP and other large software systems that cover a wide range of technologies and businesses. Our approach to software maintenance focuses on long-term functionality, stability and preventive maintenance. This approach, coupled with our quality processes, allows our customers to reduce recurring maintenance costs. We generally perform maintenance work at our development centers using secure and redundant communication links to our customers’ systems.
     
 
·
Infrastructure management.  To address our customers’ specific requests to provide infrastructure and technology support, we provide solutions and services which range from routine maintenance of software to complex security solutions. Our services include administration, infrastructure management, migration, upgrades, configuration, backup, security management, performance management, operations monitoring and consolidation services for a variety of operating systems and platforms.
 
 
 
30

 
 
 
In addition to packaged software implementation and maintenance services, we also provide IT consulting services, such as IT infrastructure assessment and technology roadmap development.
 
In 2007, we became one of the first packaged software service providers to establish a solution-based customer relationship management “competence center” to meet the growing demands of customers seeking packaged software solutions rather than services on particular software package systems. We continue to develop additional competence centers focusing on human resources, business intelligence, integration and manufacturing execution systems in response to client needs. In addition to better serving the needs of our customers, we believe that the competence centers enhance the skill-set of our professionals, increases our flexibility in allocating resources and maintain a level of challenge and work satisfaction among our professionals.
 
Software Development and Maintenance Services
 
We offer a wide range of software development, system migration and maintenance services based on existing and emerging technologies that are tailored to meet the specific needs of our customers. Our customers include IT service providers and corporations such as IBM, Nomura Research Institute, Ltd. and its affiliates, or NRI, and Hitachi. We are qualified as a Capability Maturity Model, or CMM, Level IV company. CMM is a service mark and refers to a development model elicited from actual data. CMM has been superseded by CMMI, though CMM continues to be a general theoretical process capability model used in the public domain.
 
 Financial Industry IT Services
 
We provide a wide range of services and solutions along the IT value chain to our financial industry customers, including (i) software solutions, (ii) system support and maintenance, and (iii) IT consulting services. We established our financial industry IT services business in 2002 to meet the special and growing needs of our financial industry customers. We significantly expanded the capabilities of our financial industry IT services through acquisitions since 2006.
 
 Software Solutions
 
We design, develop, implement and maintain customized IT solutions software for our financial industry customers to meet certain customer-specific demands. Our software solutions service offerings include the following areas:
 
 
·
intermediary business solutions for commercial banks, including teller/counter systems, channel management solutions, payment and settlement solutions, and front end communication exchange midware;
     
 
·
key function systems for commercial banks, including corporate loan, commercial loan, supply chain financing, cash management, as well as internal collaboration and workflow
     
 
·
check image processing services for commercial banks;
     
 
·
core life insurance solutions;
     
 
·
risk management and anti-money laundering systems for banks;
     
 
·
application localization and customization;
     
 
·
data transformation and verification; and
     
 
·
help desk support and production support.
 
System Support and Maintenance
 
We provide support and maintenance services of mainframe operating and database systems, such as IBM’s operating system and its sysplexes and subsystems, which are used by our financial industry customers. Our system software support and maintenance service offerings include the following areas:
 
 
 
31

 
 
 
 
·
maintenance of core banking systems, international banking systems, mutual fund systems, and credit card systems;
     
 
·
system installation and customization;
     
 
·
system performance health check and investigation of performance issues;
     
 
·
system performance tuning;
     
 
·
evaluation of longer-term capacity needs and recommendations on the architecture of new applications based on performance expectations;
     
 
·
system and application emergency support;
     
 
·
installation and maintenance of performance measurement tools; and
     
 
·
installation and maintenance of program temporary fix packages.
 
IT Consulting Services
 
We capitalize on our domain expertise and knowledge base in the financial services industry to provide consulting services by teaming with international IT service providers such as IBM and Accenture. Our consulting services seek to provide businesses with the flexibility and capability to respond to their customers’ needs on a timely basis. Our consulting service offerings include the following areas:
 
 
·
business process re-engineering;
     
 
·
Basel II risk management;
     
 
·
customer relationship management;
     
 
·
financial services logical data model; and
     
 
·
system conversion/cut-over.
 
Seasonality
 
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.
 
Sales and Marketing
 
We rely on our sales force to market and sell our solutions and services throughout mainland China, Taiwan, Japan and other locations.
 
The sales cycle for IT services is highly competitive, long and costly. As part of our strategy, we focus on securing new businesses from existing customers, particularly strategic accounts, by providing high-quality services and cross-selling new services. We also provide full-time account managers to serve the needs of our strategic accounts. On the other hand, from our customers’ perspectives, once a customer-provider relationship begins, there may be significant costs associated with switching to another provider. As a result, we have historically derived significant recurring revenues from repeat customers.
 
                We encourage our employees at every level to engage in managing our customer relationships. Our senior management seeks to develop and cultivate customer relationships by identifying customer needs and the types of services and solutions that we can provide to our customers. Our mid-level managers develop and maintain our customer relationships on a project-by-project basis by providing high-quality services and solutions, managing customer expectations and ensuring customer satisfaction. In addition, our dedicated sales teams for the large customers communicate with and provide support to such customers on an ongoing basis. Our sales staff receives a significant portion of its compensation from performance-based bonuses and some of our senior sales employees have received option grants under our equity incentive plan with the intention of aligning their interests with the growth of our business.
 
 
 
32

 
 
 
Customers
 
Our customer base consists of end customers in the PRC, Taiwan, Japan and the U.S. as well as multinational IT service providers and large state-owned enterprises.
 
Customer Profile
 
The following table sets forth our net revenues by the geographical location of our customer for the periods 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,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
PRC and Taiwan
    105,567       89.4       175,860       91.1       204,112       89.9  
Japan
    11,642       9.9       14,663       7.7       21,120       9.3  
Others
    794       0.7       2,340       1.2       1,888       0.8  
Total net revenues
    118,003       100.0       192,863       100.0       227, 120       100.0  
 
The following table sets forth, for the period indicated, our net revenues by industry in which our end customers operate.

   
For the Year Ended December 31,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
Financial services
    41,276       35.0       69,950       36.2       66,350       29.2  
Resources and energy
    28,256       23.9       41,413       21.5       42,794       18.8  
Manufacturing and automobile
    20,139       17.1       34,003       17.6       39,213       17.2  
Technology
    12,153       10.3       20,947       10.8       27,178       12.0  
Telecommunication, media and education
    4,346       3.7       6,778       3.6       13,563       6.0  
Construction and steel
    3,949       3.3       7,530       3.9       5,402       2.4  
Retail, consumer and transportation
    6,558       5.6       5,420       2.8       8,821       3.9  
Others
    1,326       1.1       6,822       3.6       23,799       10.5  
Total net revenues
    118,003       100.0       192,863       100.0       227,120       100.0  
 
In 2009, 2010 and 2011, our five largest customers accounted for 49.0%, 48.2% and 53.4%, respectively, of our net revenues.  During the same periods, our largest customer, IBM, which is also the only customer accounting for 10% or more of our total net revenues, accounted for 31.6%, 33.7% and 34.1%, respectively, of our net revenues.

General Customer Contracts

We have entered into services agreements both with the end customers and other IT service providers.

For services agreement directly signed with end customers, the terms vary based on different customers.

For services agreement signed with other IT service providers, the terms of our services are often governed by both a master agreement and a statement of work. Master agreements generally contain provisions relating to general responsibilities and obligations, service quality standards, confidentiality and ownership of intellectual property rights. However, master agreements are not commitments to purchase our services, and generally may be terminated without cause on short notice or when there is no outstanding statement of work under them. Statement of work generally describes our work scope, the delivery schedule, the acceptance methods, quality schedules and price and payment terms.

IBM Delivery Center Agreements 
 
 
 
33

 
 
 
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 wholly owned subsidiary, Shanghai Camelot Information Technology Co. Ltd., or Camelot Shanghai, developed the delivery center in 2008. In May 2011, we renewed the technical services agreement and the master SOW with IBM for an additional four-year term. Our net revenues derived from this delivery center totaled US$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% of our total net revenues, respectively.

Key terms of the renewed technical services agreement include the following:

 
·
3 Days Purchase Demand Priority. Subject to the accomplishment of IBM’s internal process and system setting, for technical service subcontracting demand of IBM 's application service business line (the scope of which will defined by IBM solely), IBM will provide us a purchase demand 3 days before it provides such purchase demand to other technical service suppliers. IBM reserves the right to change or cancel such 3 days priority, in the event we materially breach the renewed technical services agreement. 
 
 
·
Term and Termination. The initial term was four 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.
 
 
·
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 service agreement. However, such non-compete undertaking does not apply to our existing customers. Our non-compete undertaking is effective throughout the term of the master SOW and for a period of 18 months following the termination of the master SOW.
 
Delivery of Our Services
 
We provide a significant majority of our services on-site through our IT professionals based in Beijing, Shanghai, Dalian, Zhuhai, Nanjing, Wuxi, Taipei and Tokyo, as well as through our professionals based in Kunshan and Jiaxing which primarily support our Shanghai operations. We had 2,454, 3,162 and 4,017 IT professionals as of December 31, 2009, 2010 and 2011, respectively. The following table sets forth, as of December 31, 2011, the number of our professionals by the location in which they are based.
 
 
 
As of December 31, 2011
 
Services and Solutions Provided
 
Number of IT Professionals
 
% of Total
   
Beijing                              
1,968
 
49.0
 
all service lines
Shanghai                              
396
 
9.9
 
all service lines
Dalian                               
482
 
12.0
 
enterprise application services
Taipei                               
153
 
3.8
 
financial industry IT services
Zhuhai                               
189
 
4.7
 
financial industry IT services
Jiaxing                               
26
 
0.6
 
enterprise application services
Tokyo                               
40
 
1.0
 
enterprise application services
Nanjing                               
20
 
0.5
 
enterprise application services
Xiamen                               
227
 
5.7
 
financial industry IT services
Kunshan
436
 
10.8
 
enterprise application services
Wuxi 80       2.0   enterprise application services
    Total                             
4,017
 
100.0
   
 
On-site teams. Many of our customers require the presence of our project teams on their premises, particularly for mission critical or high-end projects. The customer’s team and our project team collaborate to develop services tailored to our customer’s specifications.
 
Off-site delivery. We believe that a key success factor in meeting our customers’ needs is our physical presence near the customers. Accordingly, we have established off-site delivery teams and facilities in our major markets, including Beijing, Dalian, Shanghai, Taipei and Tokyo. We largely service our Japanese clients from Dalian, which is generally considered a city with significant economic ties to Japan. We believe our off-site delivery capabilities allow us to respond quickly to customer requests and interact closely with the customer to develop IT solution and market services tailored to meet the needs of specific geographic markets.
 
 
 
34

 
 
 
Competition
 
The markets for IT services in China are highly competitive. The profiles and identities of our competitors may vary among our service lines and customers. In our enterprise application service business, we primarily compete with Chinese IT services firms, and we believe our competitors are Neusoft Corporation and Hand Enterprise Solutions Co., Ltd. Competitors in our financial industry IT services business include Digital China Holdings Limited. In addition, we may also compete with offshore 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.
 
Intellectual Property
 
Ownership of software and associated deliverables we create for our customers is retained by or assigned to the customer, and we do not retain an interest in such software or deliverables. We develop certain software solutions and rely upon a combination of non-disclosure and other contractual arrangements and copyright, trade secret, patent and trademark laws to protect our proprietary rights in technology. We require our professionals to enter into non-disclosure and assignment of rights agreements to limit use of, access to and distribution of our and our customers’ proprietary information. The source code for our proprietary software is generally protected as trade secrets and as unpublished copyright works. Although we believe that our services do not infringe the intellectual property rights of others, we cannot assure you that such a claim will not be asserted. See “Item 3. Key Information—D. Risk Factor— 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” for detailed discussion.
 
Regulation
 
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China and our shareholders’ rights to receive dividends and other distributions from us.
 
Information Service Industry Regulations
 
On June 24, 2000, the State Council promulgated Certain Policies in Encouraging the Development of Software and Integrated Circuit Industry, or the Encouraging Policy, in order to promote the development of the software and integrated circuit industries in China. Pursuant to the Encouraging Policy, the software enterprises in China are entitled to preferential treatment, including financing support, tax preferential treatment, export incentives, discretion and flexibility in determining employees’ welfare benefits and remuneration. For example, a recognized software enterprise is entitled to an exemption from enterprise income tax, or EIT, for its first two profitable years and a 50% reduction of its applicable EIT rate for the subsequent three years. A key software enterprise under the State plan is entitled to a 10% EIT. All of the above qualifications are subject to an annual assessment by the relevant government authority in China. Enterprises which fail to meet the annual examination standards are not entitled to the favorable EIT treatments.
 
 On October 16, 2000, the Ministry of Information Industry, Ministry of Education, Ministry of Science and Technology and the State Administration of Taxation promulgated Certifying Standards and Administration Measures for Software Enterprises (Trial Implementation), or the Certifying Standards. The Certifying Standards further elaborated the provisions of the Encouraging Policy by establishing the specific standards and procedures for the recognition and annual assessment of software enterprises.
 
 On January 4, 2001, the Ministry of Foreign Trade and Economic Cooperation, Ministry of Information Industry, State Administration of Taxation, General Administration of Customs, State Administration of Foreign Exchange and the State Statistics Bureau promulgated the Circular Concerning Relevant Issues about Software Export, or the Circular. Pursuant to the Circular, enterprises exporting software are entitled to preferential treatment, including government financial support, preferential interest rates of export credit and preferential tax treatment.
 
Regulations on Foreign Exchange
 
 The principal regulation governing foreign exchange in China is the PRC Foreign Exchange Administration Regulations (1996) promulgated by PBOC, as amended in 1997 and 2008. Under these
 
 
 
35

 
 
 
regulations, Renminbi is freely convertible only to the extent of current account items. For foreign exchange transactions under capital account items, such as making inbound and outbound direct investment, borrowing foreign loans, repatriation of investment and investment in securities outside China, prior approval of or registration with SAFE or its local branches is required.
 
 Pursuant to the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of transactions involving capital account items, obtaining approval from SAFE or its local branches. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the MOFCOM, SAFE and the National Development and Reform Commission, or the NDRC or their local counterparts.
 
 Pursuant to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Return Investments via Overseas Special Purpose Vehicles, generally known in China as SAFE Circular No. 75, issued on October 21, 2005, (i) onshore residents shall register with the local branch of SAFE before it establishes or controls an overseas special purpose vehicle, or SPV, for the purpose of overseas equity financing (including convertible debt financing); (ii) when an onshore resident contributes the assets or equity interests it holds in a domestic enterprise into an SPV, or engages in overseas financing after contributing assets or equity interests into an SPV, such onshore resident shall modify its SAFE registration in light of its interest in the SPV and any change thereof; and (iii) where an SPV undergoes material events relating to increases or decreases in investment amount, transfers or exchanges or shares, mergers or divestitures, long-term equity or debt investments, or external guarantees, or other material events that do not involve return investments, such onshore resident shall, within 30 days from the occurrence of such material event, apply to the local branch of SAFE to amend or file the registration of foreign exchange of overseas investment. Onshore residents who have established or controlled SPVs and completed return investments before November 1, 2005, the effective date of Circular 75, were also required to register with the local SAFE branch before March 31, 2006. In addition, according to Circular 75, onshore residents shall refer to domestic resident natural persons and domestic resident legal persons, and the former shall refer to those individuals who have PRC citizenship or other domestic lawful identity and those “individuals who do not have any domestic lawful identity in the PRC but reside in the PRC habitually for the purpose of economic interests.”
 
 To further clarify the implementation of Circular 75, the SAFE issued various rules, including Circular 106 on May 29, 2007 and Circular No.19 issued on May 20, 2011. Circular 106 distinguishes between various scenarios in offshore financing and round-trip investment, and puts forth the SAFE’s corresponding positions thereon. The overall theme is still on strengthening control over offshore financing routes by way of clarifying certain areas. Under Circular 106, onshore resident shareholders in an offshore company, which has at least two years’ operating history and has made investment in China, can apply for registration under Notice 75. There is no deadline for such registration. Also, under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report such shareholders to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company, and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. In accordance with Circular 106, “the individuals who do not have domestic lawful identity in the PRC but reside in the PRC habitually for the purpose of economic interests” mainly include the following (no matter whether he/she has a PRC legal identification certificate or not): (i) individuals who have domestic permanent residence leave this domestic permanent residence temporarily for reasons including overseas travel, study, medical treatment, work, or the requirements of overseas residence, etc.; (ii) individuals who hold domestic-funded rights and interests of domestic enterprises; and (iii) individuals who hold domestic-funded rights and interests in domestic enterprises which were converted into foreign-funded rights and interests with the same individuals holding the aforementioned rights and interests. Circular No.19 established more specific and stringent supervision on the registration process required by Circular No.75. For example, Circular No.19 imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities concerning any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries may lead to potential liability for the subsidiaries, and in some instances, for their legal representatives or other liable individuals. In view of the fact that none of our
 
 
 
36

 
 
 
direct or indirect shareholders is a PRC citizen or resides in the PRC habitually for the purpose of economic interests as specified in Circular 106, we understand none of our direct or indirect shareholders shall be deemed as a domestic resident natural person under Circular 75 and is subject to the requirement of registration with SAFE under the same. Furthermore, we have contacted the Beijing branch of SAFE and attempted to submit documents prepared for their registration. The officials at the local SAFE branch in Beijing stated that neither we nor our shareholders were in the categories which would require registration with SAFE. Therefore neither we nor our shareholders are subject to the requirement of registration with SAFE under Circular 75. Nonetheless, we are seeking further guidance from the relevant government authorities and will promptly take all steps to comply with their requirements when they become available.
 
On 29 August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or Circular 142. Pursuant to Circular 142, the Renminbi fund from the settlement of foreign currency capital of a foreign-invested enterprise must be used within the business scope as approved by the examination and approval department of the government, and cannot be used for domestic equity investment unless it is otherwise provided for.
 
PRC Regulations on Employee Stock Option Plans
 
In December 2006, the People’s Bank of China promulgated the Administrative Measures on Individual Person Foreign Exchange, or the PBOC Regulation, setting forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under current account items and capital account items. In January 2007, SAFE issued the implementation rules for the PBOC Regulation which, among others, specified the approval requirement for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plan or stock options plan of an overseas listed company.
 
On March 28, 2007, SAFE promulgated the Stock Option Rule to further clarify the formalities and application documents in connection with the subject matter. Under the Stock Option Rule, PRC individuals who will participate in the employment stock ownership plan or the stock option plan of an overseas listed company are required to appoint a domestic agent to deal with the relevant foreign exchange matters in the PRC. For participants of an employment stock ownership plan, an overseas custodian bank should be retained by the domestic agent to hold in trusteeship all overseas assets held by such participants under the employment stock ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification at the place where the overseas listed company is listed or a qualified institution designated by the overseas listed company is required to be retained to handle matters in connection with the exercise or sale of stock options for the stock option plan participants. For participants who had already participated in an employment stock ownership plan or stock option plan before the date of the Stock Option Rule, the Stock Option Rule requires their domestic employers or domestic agents to make up for the relevant formalities within three months of the date of the Stock Option Rule. The failure to comply with the Stock Option Rule may subject the plan participants, the company offering the plan or the relevant intermediaries, as the case may be, to penalties under the PRC foreign exchange regime. We are seeking further guidance from the relevant government authorities and will promptly take all steps to comply with their requirements when they become available.
 
 Regulations on Offshore Parent Holding Companies’ Direct Investment in and Loans to Their PRC Subsidiaries
 
An offshore company may make an equity investment in a PRC company, which will become the PRC subsidiary of the offshore holding company after investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign Owned Enterprise Law, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementing rules; the Tentative Provisions on the Foreign Exchange Registration Administration of Foreign-Invested Enterprise; and the Notice on Certain Matters Relating to the Change of Registered Capital of Foreign-Invested Enterprises.
 
Under the aforesaid laws and regulations, the increase of the registered capital of a foreign-invested enterprise is subject to the prior approval by the original approval authority of its establishment. In addition, the increase of registered capital and total investment amount shall both be registered with SAIC and SAFE. Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, which is subject to a number of PRC laws and regulations, including the
 
 
 
37

 
 
 
PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange.
 
Under these regulations, the shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debts that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to government approval.
 
Regulations on Dividend Distribution
 
The Wholly Foreign-Owned Enterprise Law (1986), as amended in 2000, and the Implementing Rules of the Wholly Foreign-Owned Enterprise Law (1990), as amended in 2001, are the principal regulations governing distribution of dividends of wholly foreign-owned enterprises.  
 
Under these regulations, wholly foreign-owned enterprises in China may distribute dividends only out of their accumulated profits determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to contribute at least 10% of their after-tax profits based on PRC accounting standards each year to its general reserves fund until the accumulated amount of the reserve fund reaches 50% of the registered capital of such wholly foreign-owned enterprise. The reserve fund cannot be distributed as cash dividends. A wholly foreign-owned enterprise is also required to allocate a portion, determined at its discretion, of its after-tax profits to its staff welfare and bonus fund, which may not be distributed to the investors, either.
 
Under the PRC Enterprise Income Tax Law and its Implementation Rules, dividends, interests, rent or royalties payable by a foreign-invested enterprise, such as our PRC subsidiaries, to any of its foreign non-resident enterprise investors, and proceeds from the disposition of assets (after deducting the net value of such assets) by such foreign enterprise investor, shall be subject to a 10% withholding tax unless such foreign enterprise investor’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding. 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.
 
Regulations on Taxation
 
See “Item 5. — Operating and Financial Review and Prospectus— A. Operating Results— Taxation.”
 
 
C.
ORGANIZATIONAL STRUCTURE
 
The following diagram illustrates our corporate structure as of the date of this annual report:
 
 
 
38

 
 
 
 
 
 
D.
PROPERTY, PLANTS AND EQUIPMENT
 
We currently have offices located in 15 cities across the PRC, Taiwan, Japan and Hong Kong. Our principal executive offices in Beijing, which we began to occupy in November 2009, consist of approximately 4,336 square meters of office space. Our lease for this office space expires in July 2019, and our rent is approximately US$75,700 per month in 2010 and 2011. Our principal executive offices accommodate our executive team and corporate functions, as well as a portion of our IT professionals. For information of our property and equipment, also see Note 7 to the financial statements attached to this annual report.
 
We also occupy leased facilities for our other offices under non-cancelable operating leases that expire at various dates through 2020 and that include fixed or minimum payments, plus, in some cases, scheduled base rent increases over the terms of the lease. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China —  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”.
 
The following table sets forth the location, type of ownership, and approximate size of our material facilities as of December 31, 2011.
 
 
Location
 
Type of Ownership
 
Approximate Size of Space
       
(Square meters)
Beijing, PRC
 
leased
 
6,912
Beijing, PRC
 
owned
 
748
Kunshan, PRC
 
leased
 
3,256
Xiamen, PRC
 
owned
 
1,611
Dalian, PRC
 
leased
 
3,374
Taipei, Taiwan
 
leased
 
1,494
Nanjing, PRC
 
leased
 
436
Taichung, Taiwan
 
leased
 
406
Shanghai, PRC
 
leased
 
933
Zhuhai, PRC
 
leased
 
81

 
39

 
 

Jiaxing, PRC
 
leased
 
266
Shenzhen, PRC
 
leased
 
876
Kaohsiung, Taiwan
 
leased
 
97
Hongkong, PRC
 
leased
 
44
Tokyo, Japan
 
leased
 
29
Wuxi, PRC
 
leased
 
1,594
Total space
     
22,157

ITEM 4A.
UNRESOLVED STAFF COMMENTS

None.
 
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
   
The following discussion and analysis of our financial condition and results of operations are based upon and should be read in conjunction with our consolidated financial statements and the related notes included in this annual report.  This discussion contains forward-looking statements that involve risks, uncertainties and assumptions.  We caution you that our business and financial performance are subject to substantial risks and uncertainties.  Our actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including those set forth in "Item 3. Key Information — D. Risk Factors" and elsewhere in this annual report.
 
 
A.
OPERATING RESULTS
 
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. We focus on providing services at the higher end of the IT value chain. Our primary service lines are enterprise application services, or EAS and financial industry IT services, or FIS.
 
Our operations are primarily based in China, where we derive a substantial portion of our revenues. 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 2009, 2010 and 2011, our net revenues totaled US$118.0 million, US$192.9 million and US$227.1 million, respectively.  In 2009 and 2010, our net income attributable to Camelot Information Systems Inc. totaled US$13.0 million and US$18.6 million, respectively. In 2011, our net loss attributable to Camelot Information Systems Inc. totaled US$40.8 million.
 
Our total assets as of December 31, 2011 were US$315.4 million of which cash and cash equivalent amounted to US$57.1 million and term deposits amounted to US$45.3 million.  Our total liabilities as of December 31, 2011 were US$83.3 million accounting for 26.4% of total liabilities and shareholders' equity. As of December 31, 2011, our retained earnings accumulated to US$10.4 million.
 
 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 is calculated based on the simple average number of employees at the beginning and end of each period, totaled approximately US$48,000,  US$58,600 and US$53,800, for 2009, 2010 and 2011, respectively. To enhance productivity and utilization of our professionals, 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
 
 
 
40

 
 
 
   
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. 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 14 years. IBM has been our largest customer in 2009, 2010 and 2011, accounting for 31.6%, 33.7% and 34.1% 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$15.7 million in 2009, US$36.5 million in 2010 and US$47.4 million in 2011, or 13.3%, 18.9% and 20.9% 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 acquisition 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 contributed to an increase in the absolute amounts of our operating expenses, which were US$20.9 million, US$39.4 million and US$102.9 million (including US$30.0 million impairment loss on intangible assets and impairment loss on goodwill) in 2009, 2010 and 2011, 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 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$29.4 million, US$39.0 million and US$63.5 million for 2009, 2010 and 2011, respectively, which reflected 24.9%, 20.2% and 28.0% of our net revenues, respectively. These costs have included share-based compensation expenses of US$147,000, US$136,000 and US$1,463,000 for share options granted to our IT professionals for the years ended December 31, 2009, 2010 and 2011, respectively.

 
 
41

 
 
 
Key Components of Results of Operations
 
Net Revenues
 
Our net revenues represent our total revenues less applicable business taxes and related surcharges. Our net revenues in 2009, 2010 and 2011 were US$118.0 million, US$192.9 million and US$227.1 million, respectively. Our business taxes and related surcharges in 2009, 2010 and 2011 were US$3.9 million, US$6.4 million and US$7.0 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,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
Enterprise application services
    79,423       67.3       126,555       65.6       159,181       70.1  
Financial industry IT services
    38,580       32.7       66,308       34.4       67,939       29.9  
Total net revenues
    118,003       100.0       192,863       100.0       227,120       100.0  
 
Net Revenues by Pricing Model
 
The following table sets forth our net revenues by pricing model for the years indicated.
 
   
For the Year Ended December 31,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
Time-and-expense contracts
    59,667       50.6       99,071       51.4       121,762       53.6  
Fixed-price contracts
    58,336       49.4       93,792       48.6       105,358       46.4  
Total net revenues
    118,003       100.0       192,863       100.0       227,120       100.0  
 
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 2009, 2010 and 2011.
 
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 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,
 
   
2009
   
2010
   
2011
 
   
Amount
   
% of Total
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(U.S. dollars in thousands, except percentages)
 
Single largest
    37,315       31.6       64,987       33.7       77,387       34.1  
Five largest
    57,869       49.0       92,974