F-1/A 1 df1a.htm AMENDMENT NO.1 TO FORM F-1 Amendment No.1 to Form F-1
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As filed with the Securities and Exchange Commission on June 16, 2010

Registration No. 333-167402

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

AMENDMENT NO. 1

TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AutoNavi Holdings Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands   7372   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

18/F, Daheng Scitech Mansion, South Section

No. 3 Suzhou Street

Haidian District

Beijing 100080

The People’s Republic of China

(86-10) 5985-9900

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Law Debenture Corporate Services Inc.

400 Madison Avenue, 4th Floor

New York, New York 10017

(212) 750-6474

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road Central

Hong Kong

(852) 3740-4700

 

Leiming Chen, Esq.

Simpson Thacher & Bartlett LLP

ICBC Tower, 35/F

3 Garden Road

Central, Hong Kong

(852) 2514-7600

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                     

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to
be
registered(2)(3)
       Proposed
maximum offering
price per  share(3)
      

Proposed
maximum aggregate

offering price(2)(3)

      

Amount of

registration
fee(4)

Ordinary shares, par value $0.0001 per share(1)

  39,675,000       $ 3.125       $ 123,984,375       $ 8,841

 

 

(1) American depositary shares issuable upon deposit of the ordinary shares registered hereby have been registered under a separate registration statement on Form F-6 (Registration No. 333-167537). Each American depositary share represents four ordinary shares.
(2) Includes ordinary shares that are issuable upon the exercise of the underwriters’ option to purchase additional shares. Also includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
(4) $7,130 was previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated June 16, 2010.

8,625,000 American Depositary Shares

LOGO

AutoNavi Holdings Limited

Representing 34,500,000 Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, of AutoNavi Holdings Limited, or AutoNavi.

AutoNavi is offering 7,500,000 ADSs. The selling shareholders identified in this prospectus are offering an additional 1,125,000 ADSs. Each ADS represents four of our ordinary shares, par value $0.0001 per share. We will not receive any proceeds from the ADSs sold by the selling shareholders.

Prior to this offering, there has been no public market for the ADSs or the ordinary shares. It is currently estimated that the initial public offering price per ADS will be between $10.50 and $12.50. We have applied to list the ADSs on the Nasdaq Global Market under the symbol “AMAP.”

See “Risk Factors” beginning on page 14 for factors you should consider before buying the ADSs.

 

 

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per ADS    Total

Initial public offering price

   $                 $             

Underwriting discount

   $      $  

Proceeds, before expenses, to AutoNavi

   $      $  

Proceeds, before expenses, to the selling shareholders

   $                 $             

To the extent the underwriters sell more than 8,625,000 ADSs, the underwriters have a 30-day option to purchase up to an additional 1,293,750 ADSs from us at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on                     , 2010.

 

Goldman Sachs (Asia) L.L.C.

 

 

Oppenheimer & Co.    Pacific Crest Securities

 

 

Prospectus dated                     , 2010.


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TABLE OF CONTENTS

Prospectus

 

     Page

Summary

   1

Risk Factors

   14

Special Note Regarding Forward-Looking Statements

   46

Use of Proceeds

   48

Dividend Policy

   49

Capitalization

   50

Dilution

   51

Exchange Rate Information

   53

Enforceability of Civil Liabilities

   54

Corporate Structure

   56

Selected Consolidated Financial Data

   61

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   64

Industry

   99

Business

   104

Regulation

   120

Management

   132

Principal and Selling Shareholders

   140

Related Party Transactions

   144

Description of Share Capital

   146

Description of American Depositary Shares

   154

Shares Eligible for Future Sales

   163

Taxation

   165

Underwriting

   171

Expenses Related to This Offering

   178

Legal Matters

   179

Experts

   180

Additional Information

   181

Index to Consolidated Financial Statements

   F-1

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Through and until             , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our financial statements and related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In this prospectus, unless the context indicates otherwise, “we,” “us,” “our company,” “our,” and “AutoNavi” refer to AutoNavi Holdings Limited, its subsidiaries and consolidated variable interest entities, and the variable interest entities’ subsidiaries; and “China” or the “PRC” refers to the People’s Republic of China excluding, for the purpose of this prospectus only, Hong Kong, Macau and Taiwan. This prospectus contains information from three reports commissioned by us and prepared by Analysys International, an independent market research firm, to provide information on the in-dash navigation market, portable navigation devices market and Internet location-based services market in China, respectively. We refer to these reports as the Analysys In-Dash Report, the Analysys PND Report and the Analysys Internet Report, respectively, in this prospectus. In addition, this prospectus contains information from a report commissioned by us and prepared by Frost & Sullivan, also an independent market research firm, to provide information on the wireless location-based services market in China. We refer to this report as the Frost & Sullivan Report in this prospectus.

AutoNavi Holdings Limited

Overview

We are a leading provider of digital map content and navigation and location-based solutions in China. At the core of our business is a comprehensive nationwide digital map database that covers approximately 2.8 million kilometers of roadway and over 12.5 million points of interest across China. Almost all of China’s 1.3 billion people live within the area covered by our digital map database. In addition, we have completed 3-D navigation maps of key areas in 19 major cities and photo-realistic 3-D models of 16 cities for public sector projects. We have also built a technology platform that enables us to develop tailored solutions for our customers.

Through our nationwide digital map database and proprietary technology platform, we have become a market leader in providing the following comprehensive, integrated navigation and location-based solutions optimized for the Chinese market and users:

 

  Ÿ  

Automotive Navigation.    We provide digital map data for in-dash navigation systems installed by a number of international and domestic automobile manufacturers on over 100 car models in China, including multiple Audi and BMW models. According to the Analysys In-Dash Report, we were the largest provider of digital map data for in-dash navigation systems in China, with a 48.7% market share based on the number of copies of digital map data sold in 2009. We also provide customized navigation solutions, ranging from digital map data to a “total solution” which consists of digital map data, the navigation engine and the user interface, to many major portable navigation device manufacturers in China. According to the Analysys PND Report, we were the largest provider of digital map data for portable navigation devices in China, with a 30.3% market share based on the number of portable navigation devices sold that have installed our solutions in 2009.

 

  Ÿ  

Public Sector and Enterprise Applications.    We provide a wide range of solutions to public sector and enterprise customers, including aerial photogrammetry solutions, 3-D modeling applications, location-based public sector solutions and location-based enterprise solutions.

 

 

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Wireless/Internet Location-based Solutions.    China Mobile Communications Corporation, or China Mobile, the world’s largest mobile operator measured by number of subscribers, uses our nationwide digital map database for its wireless location-based services. We and China Mobile are also jointly developing a new mobile navigation service utilizing our map data and navigation engine, which is expected to be launched in 2010. Our contractual relationship with China Mobile is maintained through China Mobile Group Liaoning Co., Ltd., or China Mobile Liaoning, the China Mobile subsidiary in charge of constructing and operating a location-based service platform for China Mobile’s nationwide network. We also have collaborated with several mobile phone manufacturers, primarily Samsung, to pre-install our navigation solutions on their mobile phones. In addition, we provide map application solutions, including through application programming interface, or map API, to more than 6,500 websites in China, including websites operated by Google Inc., or Google, and SINA Corporation, or SINA, enabling them to provide location-based services to their end-users. According to the Analysys Internet Report, our map database accounted for 49.7% of the total accesses to map data by Internet users in China in 2009, more than any other digital map provider in China. According to the Frost & Sullivan Report, MiniMap, our user-end map application software for mobile phone users, which is currently provided free of charge, was the second most widely used map application software for mobile phone users in China in 2009.

In 2009, net revenues from our automotive navigation, public sector and enterprise applications and wireless/Internet location-based solutions businesses accounted for 63.3%, 25.1% and 9.0%, respectively, of our total net revenues. For the three months ended March 31, 2010, net revenues from our automotive navigation, public sector and enterprise applications and wireless/Internet location-based services businesses accounted for 73.8%, 13.8% and 10.7%, respectively, of our total net revenues.

Our net revenues increased from $29.7 million in 2007 to $45.5 million in 2008 and to $57.2 million in 2009, representing a compound annual growth rate, or CAGR, of 38.8% from 2007 to 2009, and increased by 42.7% from $11.6 million for the three months ended March 31, 2009 to $16.6 million for the three months ended March 31, 2010. Net income attributable to AutoNavi Holdings Limited shareholders decreased by 61.7% from $5.7 million in 2007 to $2.2 million in 2008, and increased by 371.7% from $2.2 million in 2008 to $10.4 million in 2009. Net income attributable to AutoNavi Holdings Limited shareholders decreased by 42.6% from $1.6 million for the three months ended March 31, 2009 to $897,000 for the three months ended March 31, 2010. In 2009, we incurred share-based compensation expenses of $4.8 million, including $2.9 million from our continuing operations. For the three months ended March 31, 2010, our share-based compensation expenses were $4.3 million, compared to nil for the three months ended March 31, 2009.

Our Industry

Digital map information has a wide range of applications, including navigation, location-based services and other geography-related applications. Navigation applications and location-based services not only help individual consumers find their way from one place to another, but also provide useful information about their current location or destination such as nearby businesses, restaurants, lodging and entertainment venues and public services. Governments and enterprises also use digital map data and related solutions in a wide range of applications such as infrastructure and assets planning, fleet and logistics management and location-based monitoring.

We believe that China’s digital map data, navigation and location-based services markets are poised for substantial growth.

 

  Ÿ  

Automotive Navigation.    According to the Analysys In-Dash Report, sales of in-dash navigation systems in China are projected to grow at a CAGR of 44.6% from 348,000 units in

 

 

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2009 to 1.1 million units in 2012. Sales of portable navigation devices in China are expected to increase at a CAGR of 22.2% from 1.5 million units in 2009 to 2.8 million units in 2012, according to the Analysys PND Report.

 

  Ÿ  

Public Sector and Enterprise Applications.    There is a growing demand for digital map data and geographic information in the public sector in China. In 2006, the State Bureau of Surveying and Mapping of China announced the “Digital City Geospatial Framework” initiative to help municipal governments across China build uniform citywide geographic information platforms. The State Bureau of Surveying and Mapping expects to expand this initiative to over 330 large and medium-sized cities and additional selected small cities by the end of 2015. In addition, state-owned and private enterprises in China are also increasingly demanding location-based solutions for better management of assets and other resources.

 

  Ÿ  

Wireless/Internet Location-based Services.    China has the largest population of mobile subscribers and Internet users in the world. According to the Ministry of Industry and Information Technology of China, the total number of mobile subscribers in China reached 786.5 million as of the end of April 2010. The Frost & Sullivan Report estimates that the total size of the wireless location-based services market will increase from RMB2.3 billion ($339.6 million) in 2009 to RMB11.5 billion ($1.7 billion) in 2012, representing a CAGR of 70.7%. In addition, China Internet Network Information Center estimates that the total number of Internet users in China reached 410 million as of the end of April 2010. According to the Analysys Internet Report, the total market size of the Internet location-based services market is expected to increase from RMB362 million ($53.1 million) in 2009 to RMB722 million ($105.7 million) in 2012, representing a CAGR of 25.8%.

Our Competitive Strengths

We believe that the following strengths differentiate us from our competitors:

 

  Ÿ  

Integrated and dynamic data collection, processing and application system;

 

  Ÿ  

Self-developed comprehensive nationwide digital map database;

 

  Ÿ  

Market leader in providing comprehensive, integrated navigation and location-based solutions optimized for the Chinese market and users;

 

  Ÿ  

Extensive customer relationships with leading players in our target markets;

 

  Ÿ  

Strong research and development capabilities; and

 

  Ÿ  

Experienced management team with proven execution capabilities.

Our Strategy

Our goal is to maintain our position as a leading provider of digital map content and become the largest location-based information and value-added solution provider in China. To achieve this goal, we intend to leverage our existing strengths and pursue the following strategies:

 

  Ÿ  

Enhance the quality, coverage and depth of our digital map database to support more specialized and customized solutions;

 

  Ÿ  

Continue to invest in research and development to increase the efficiency of our technology platform and expand our technological capabilities;

 

  Ÿ  

Improve existing and develop new navigation and location-based solutions;

 

  Ÿ  

Build a backend service system capable of supporting location-based solutions provided to a large number of end-users through any device;

 

 

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Strengthen relationships with customers and other industry constituents; and

 

  Ÿ  

Pursue selective strategic acquisitions, investments and alliances.

Our Challenges

Our ability to achieve our goal and execute our strategies is subject to risks and uncertainties, including those relating to:

 

  Ÿ  

our ability to adequately maintain and update our digital map database and minimize errors in our solutions;

 

  Ÿ  

our current reliance on the automotive navigation market and a small number of customers for a substantial portion of our revenues;

 

  Ÿ  

the project-based nature of our public sector and enterprise applications business;

 

  Ÿ  

our limited operating history in the wireless/Internet location-based solutions markets;

 

  Ÿ  

our compliance with a complex set of laws, rules and regulations governing our surveying and mapping and other businesses in China;

 

  Ÿ  

competition in the navigation and location-based solutions businesses in China; and

 

  Ÿ  

our ability to manage our growth effectively and efficiently.

Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks.

Corporate History and Structure

In April 2002, our founders began to carry out research and development activities relating to digital map data for in-dash navigation systems through AutoNavi Software Co., Ltd., or AutoNavi Software. In September 2002, we formed Beijing ADF Navigation Technology Co., Ltd., or ADF Navigation, a subsidiary of AutoNavi Software, to develop our automotive navigation business in China. In 2004, we obtained a Class A surveying and mapping qualification certificate issued by the State Bureau of Surveying and Mapping and began providing digital map data to a major automobile manufacturer in China. In 2005, we started supplying digital map data to portable navigation device manufacturers. In 2006, we entered the Internet location-based solutions market by acquiring control of Beijing MapABC Technology Co., Ltd., or MapABC Technology, a leading online map application solution provider in China. Also in 2006, we entered the wireless location-based solutions market by providing China Mobile with a nationwide digital map database for its location-based services. In December 2006, we commenced our aerial photogrammetry business by acquiring Beijing Xingtiandi Information Technology Co., Ltd., or Xingtiandi Technology, which holds a Class A surveying and mapping qualification certificate for aerial photogrammetry issued by the State Bureau of Surveying and Mapping.

In August 2006, in order to facilitate international financing, our founders formed AutoNavi Holdings Limited, a Cayman Islands company, to be our holding company. We also formed AutoNavi International Limited, a British Virgin Islands company, to be our intermediate holding company and AutoNavi Information Technology Co., Ltd., or AutoNavi Technology, a wholly-owned subsidiary of AutoNavi International Limited, under PRC law. In October 2006, we issued 40 million Series A convertible preferred shares, or Series A preferred shares, to a group of private equity investors. In January 2008, we established a Hong Kong company, AutoNavi Asia Limited, to be the direct holding company of AutoNavi Technology.

 

 

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In December 2009, we distributed the equity interests in Shanghai AutoNavi Software Co., Ltd., or AutoNavi Shanghai, to all of our shareholders or their designated persons. AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, had been engaged in the telematics business, which was not part of our core business, and had accounted for 1.3%, 0.7% and 1.2% of our total revenues in 2007, 2008 and 2009, respectively. The results of the telematics business have been presented as discontinued operations in this prospectus.

Due to certain restrictions under PRC law on foreign ownership of entities engaged in surveying and mapping and Internet businesses, we conduct our operations in China principally through contractual arrangements among our wholly-owned PRC subsidiary, AutoNavi Technology, our affiliated entities in China, AutoNavi Software and MapABC Technology, and the shareholders of AutoNavi Software and MapABC Technology. These contractual arrangements enable us to:

 

  Ÿ  

exercise effective control over AutoNavi Software and MapABC Technology;

 

  Ÿ  

receive substantially all of the economic benefits of AutoNavi Software and MapABC Technology in consideration for the services provided by us; and

 

  Ÿ  

have an exclusive option to purchase all of the equity interests in AutoNavi Software and MapABC Technology when and to the extent permitted under PRC law.

As a result of these contractual arrangements, we are the primary beneficiary of AutoNavi Software and MapABC Technology and treat them as our variable interest entities under the generally accepted accounting principles in the United States, or U.S. GAAP. We have consolidated the financial results of these companies and their subsidiaries in our consolidated financial statements in accordance with U.S. GAAP.

 

 

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The following diagram illustrates our corporate structure immediately upon the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs from us:

 

LOGO

 

 

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Corporate Information

Our principal executive offices are located at 18/F, Daheng Scitech Mansion, South Section, No. 3 Suzhou Street, Haidian District, Beijing 100080, the People’s Republic of China. Our telephone number at this address is +86-10-5985 9900. Our registered office in the Cayman Islands is located at International Corporation Services Ltd., Harbour Place 2nd Floor, 103 South Church Street, PO Box 472, George Town, Grand Cayman KY1-1106, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.AutoNavi.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 400 Madison Avenue, 4th Floor, New York, New York 10017.

 

 

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THE OFFERING

The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Price per ADS

We currently estimate that the initial public offering price will be between $10.50 and $12.50 per ADS.

 

ADSs offered by us

7,500,000 ADSs

 

ADSs offered by the selling shareholders

1,125,000 ADSs

 

ADSs outstanding immediately after this offering

8,625,000 ADSs (or 9,918,750 ADSs if the underwriters exercise the option to purchase additional ADSs from us in full)

 

Ordinary shares outstanding immediately after this offering

182,298,000 ordinary shares (or 187,473,000 ordinary shares if the underwriters exercise the option to purchase additional ADSs from us in full)

 

The ADSs

Each ADS represents four ordinary shares. The depositary will hold the ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement.

We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares, after deducting its fees and expenses.

You may turn in your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Option to purchase additional ADSs

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional 1,293,750 ADSs.

 

 

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Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of 430,000 ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed share program.

 

Use of proceeds

We expect that we will receive net proceeds of approximately $75.9 million from this offering, assuming an initial public offering price of $11.50 per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to expand our data processing facilities and build a research and development center, to fund the capital expenditure for our aerial photogrammetry business and for general corporate purposes, including funding potential acquisitions of complementary businesses, although we are not currently negotiating any such transactions. See “Use of Proceeds” for more information.

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

Nasdaq symbol

AMAP

 

Depositary

Deutsche Bank Trust Company Americas

 

Lock-up

We, our directors and executive officers, all of our existing shareholders and certain of our option holders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. In addition, through a letter agreement, we have agreed to instruct Deutsche Bank Trust Company Americas, as depositary, not to accept any deposit of any ordinary shares or issue any ADSs for 180 days after the date of this prospectus unless we consent to such deposit or issuance, and not to provide consent without the prior written consent of Goldman Sachs (Asia) L.L.C. The foregoing does not affect the right of ADS holders to cancel their ADSs and withdraw the underlying ordinary shares. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.

The number of ordinary shares that will be outstanding immediately after this offering:

 

  Ÿ  

is based upon 152,298,000 ordinary shares outstanding as of the date of this prospectus, assuming the conversion of all outstanding Series A preferred shares into 40,000,000 ordinary shares immediately upon the completion of this offering;

 

 

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  Ÿ  

excludes 14,824,600 ordinary shares issuable upon the exercise of options outstanding as of the date of this prospectus, at a weighted average exercise price of $0.42 per share;

 

  Ÿ  

excludes 800,000 restricted shares granted under our 2007 Share Incentive Plan that have not vested; and

 

  Ÿ  

excludes 6,412,400 ordinary shares reserved for future issuances under our 2007 Share Incentive Plan.

Except as otherwise indicated, all information in this prospectus assumes no exercise by the underwriters of their option to purchase additional ADSs.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of operations data for the years ended December 31, 2007, 2008 and 2009 and the summary consolidated balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2007 have been derived from our audited financial statements not included in this prospectus. The following summary consolidated statement of operations data for the three months ended March 31, 2009 and 2010 and the summary consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our unaudited results for the three months ended March 31, 2010 may not be indicative of our results for the full year ending December 31, 2010.

You should read this Summary Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2007     2008     2009     2009     2010  
    (in thousands of $ except for share, per
share and per ADS data)
 

Consolidated Statement of Operations Data

         

Net revenues

  29,653      45,538      57,163      11,633      16,599   

Cost of revenues(1)

  (12,292   (18,842   (20,031   (4,335   (5,668
                             

Gross profit

  17,361      26,696      37,132      7,298      10,931   
                             

Operating expenses(1)

         

Research and development

  (3,167   (5,045   (7,338   (1,585   (2,471

Selling and marketing

  (2,148   (3,591   (5,608   (1,422   (2,276

General and administrative

  (7,523   (9,264   (9,613   (1,747   (4,522

Impairments of goodwill and indefinite-lived intangible assets

  —        (674   —        —        —     
                             

Total operating expenses

  (12,838   (18,574   (22,559   (4,754   (9,269
                             

Government subsidies

  2,308      387      1,016      59      57   

Operating income

  6,831      8,509      15,589      2,603      1,719   
                             

Income from continuing operations

  7,307      5,891      15,005      2,402      1,167   
                             

Loss on discontinued operations, net of tax(1)(2)

  (1,575   (2,212   (4,181   (708   —     

Net income

  5,732      3,679      10,824      1,694      1,167   
                             

Less: Net income (loss) attributable to noncontrolling interest

  (13   1,476      433      132      270   

Net income attributable to AutoNavi Holdings Limited shareholders

  5,745      2,203      10,391      1,562      897   
                             

Net income per share:

         

Net income from continuing operations per share attributable to AutoNavi Holdings Limited shareholders:

         

Basic

  0.05      0.03      0.10      0.01      0.01   

Diluted

  0.05      0.03      0.10      0.01      0.01   

Net income from continuing operations per Series A preferred share-Basic

  0.05      0.03      0.10      0.01      0.01   
                             

 

 

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    Year Ended December 31,     Three Months
Ended March 31,
    2007     2008     2009     2009     2010
    (in thousands of $ except for share, per
share and per ADS data)

Net loss on discontinued operations attributable to AutoNavi Holdings Limited shareholders:

         

Basic

  (0.01   (0.02   (0.03   (0.00   —  

Diluted

  (0.01   (0.02   (0.03   (0.00   —  

Net loss on discontinued operations per Series A preferred share-Basic

      (0.01       (0.02       (0.03       (0.00       —  
                           

Net income per share attributable to AutoNavi Holdings Limited shareholders:

         

Basic

  0.04      0.01      0.07      0.01      0.01

Diluted

  0.04      0.01      0.07      0.01      0.01

Net income per Series A preferred share-Basic

      0.04          0.01          0.07          0.01          0.01
                           

Net income per ADS attributable to AutoNavi Holdings Limited shareholders:(3)

         

Basic

  0.15      0.06      0.27      0.04      0.02

Diluted

  0.15      0.06      0.26      0.04      0.02

Weighted average number of shares used in calculating net income per ordinary share:

         

Basic

  114,000,000      114,000,000      115,675,002      114,000,000      108,292,011

Diluted

  154,000,000      154,000,000      157,188,766      154,000,000      158,515,244

Weighted average number of shares used in calculating net income per Series A preferred share

  40,000,000      40,000,000      40,000,000      40,000,000      40,000,000

 

(1) Including share-based compensation expenses as follows:

 

     Year Ended
December 31,
   Three
Months Ended
March 31,
       2007        2008        2009        2009        2010  
     (in thousands of $)

Allocation of Share-based Compensation Expenses

              

Cost of revenues

   —      —      268    —      385

Research and development

   —      —      601    —      595

Selling and marketing

   —      —      143    —      720

General and administrative

   —      —      1,864    —      2,573

Discontinued operations

   —      —      1,956    —      —  
                        

Total share-based compensation expenses

   —      —      4,832    —      4,273
                        

 

(2) In December 2009, we distributed the equity interests in AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, to all of our shareholders or their designated persons on a pro rata basis. We recorded the pro-rata distribution at the book value of AutoNavi Shanghai, $904,000, as a reduction of retained earnings. AutoNavi Shanghai had been engaged in the telematics business and the results of that business have been presented as discontinued operations for all periods presented in this prospectus.

 

(3) Each ADS represents four ordinary shares.

The following table presents a summary of our consolidated balance sheet data as of December 31, 2007, 2008 and 2009 and March 31, 2010:

 

  Ÿ  

on an actual basis; and

 

  Ÿ  

with respect to the consolidated balance sheet data as of March 31, 2010, also on a pro forma as adjusted basis to reflect the automatic conversion of all of our outstanding Series A

 

 

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preferred shares into 40,000,000 ordinary shares immediately upon the closing of this offering, and the sale of ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of $11.50 per ADS, the midpoint of the estimated range of the initial public offering price, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and assuming the underwriters’ option to purchase additional ADSs from us is not exercised. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the amounts representing cash, total current assets, total assets, total equity, and total liabilities, Series A convertible redeemable preferred shares and equity by $7.0 million.

 

     As of
December 31,
   As of March 31,
         2007            2008            2009            2010    
     Actual    Actual    Actual    Actual    Pro Forma
As
Adjusted
     (in thousands of $)

Consolidated Balance Sheet Data

              

Cash

   33,531    28,777    34,716    39,795    115,716

Total current assets

   61,946    62,268    76,009    82,418    158,339

Total current liabilities

   23,373    17,759    16,201    16,672    16,672

Series A convertible redeemable preferred shares

   39,326    39,326    39,326    39,326    —  

Total equity

   28,245    35,896    50,571    56,031    171,278

 

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Our failure to adequately maintain and update our digital map database and minimize errors in our navigation and location-based solutions could harm our reputation and subject us to liability claims, which could result in loss of customers, decreased revenues and unexpected expenses.

Our digital map database requires constant maintenance and updating, which is a complex process and subject to error. There is no assurance that our controls and procedures for maintaining and updating our digital map database will be adequate to keep pace with the rapidly changing road systems in China. We have in the past received feedback from customers and end-users identifying errors in our digital map data. If there are errors in our solutions due to actual or perceived database deficiencies, our reputation could be harmed and our customers may cease to buy our solutions.

Moreover, we could be subject to liability claims and the associated adverse publicity. Claims could be made by our customers if errors in our solutions result in the failure of their products or services, or by end-users of those products or services or others alleging loss or harm as a result of actual or perceived errors in our digital map data. Some of our license agreements include disclaimers, limitations of liability and similar provisions, which, however, may not be effective barriers to potential claims. Any associated adverse publicity may reduce our customers’ willingness to incorporate our map data and related applications into their products, which would adversely affect our revenues.

Liability claims present a risk of protracted litigation, substantial monetary damages, attorneys’ fees, costs and expenses, and diversion of management’s attention from the operation of our business. In some circumstances, we are contractually obligated to indemnify our customers for liabilities, costs and expenses arising out of liability claims. We may incur additional costs and expenses providing indemnification or contesting our customers’ indemnification claims. In addition, we may also have to recall our digital map data or offer to provide replacement, either involuntarily by mandate of our customers or a regulatory agency, or voluntarily in order to preserve our reputation and maintain good customer relations. Recalls or replacements can be costly and divert management’s attention from the operation of our business.

The markets for products and services of our customers incorporating our map data and solutions are evolving and their future growth is uncertain. If these markets fail to grow or even decline, or if we fail to adapt to the rapid changes in these markets, our results of operations and prospects may be adversely affected.

The markets for products and services of our customers incorporating our digital map data and solutions are evolving and are characterized by continuing advances in technology, evolving industry standards, frequent new product and service introductions and changes in the marketing and delivery of digital-map dependent products and services. Our success depends in part upon our customers’ abilities to successfully market and sell their products and services that incorporate our map data and solutions. If our customers cannot maintain market share for their existing products and services incorporating our map data and solutions or do not continue to successfully develop and market new products and services incorporating our map data and solutions, or if the products and services that our customers develop and market do not meet their consumers’ expectations or are not accepted by

 

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the market at all, our results of operations and growth prospects may be adversely affected because we may lose existing customers and have difficulty finding new customers, markets and applications for our map data and solutions. Moreover, if we fail to identify new opportunities in the navigation and location-based services markets, introduce new map data and solution features in a timely manner, keep abreast of our customers’ innovations or adapt our solutions to changing industry standards or customer requirements, we could lose our existing customers and be unable to attract new businesses, which could have a material adverse effect on our business, financial condition and results of operations.

We historically have derived a majority of our revenues from our automotive navigation business, which may be affected by fluctuations in the automotive market.

We derived 72.5%, 64.8%, 63.3% and 73.8% of our net revenues for the years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2010, respectively, from licensing map data for use in in-dash navigation systems installed on automobiles and customized solutions for use in portable navigation devices. Any significant downturn in the overall demand for automobiles could adversely affect the demand for both in-dash navigation systems and portable navigation devices, which in turn would materially decrease our revenues. Although China’s automotive market has grown in recent years, it is uncertain whether the number of automobiles to be manufactured will grow at a similar rate in the future. It is also uncertain that the percentage of new automobiles equipped with in-dash navigation systems or the demand for portable navigation devices will increase in the future. For example, the recent global economic downturn resulted in lower than anticipated growth in in-dash navigation systems and portable navigation devices sales in China. To the extent that our future revenues substantially depend on sales of in-dash navigation systems installed on automobiles and portable navigation devices, our business would be vulnerable to any downturns in China’s automotive market.

Our results of operations and cash flows may fluctuate due to the project-based nature of our public sector and enterprise applications business.

We generated 17.4%, 23.2%, 25.1% and 13.8% of our net revenues from our public sector and enterprise applications business for the years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2010, respectively. We expect that our public sector and enterprise applications business will continue to account for a significant portion of our revenues in the future. Historically, revenues from our public sector and enterprise applications business have typically been generated on a project basis. For instance, we provided aerial digital maps of two entire provinces and parts of three other provinces in connection with China’s second national land survey in 2007, 2008 and 2009. Revenues from this and other similar projects may fluctuate significantly from period to period, which makes it difficult for us to forecast revenues and cash flow and could adversely affect our working capital levels. The resulting period-to-period fluctuation in our results of operations could also cause the price of our ADSs to fluctuate or decline.

We have limited experience in the wireless/Internet location-based services markets, and may not be able to successfully address the challenges we face in these markets.

We entered the wireless/Internet location-based services markets in 2006. For the years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2010, revenues from our wireless/Internet location-based solutions business accounted for 3.1%, 5.8%, 9.0% and 10.7%, respectively, of our total net revenues. As we devote more resources in growing our business in the wireless/Internet location-based services markets, we face some new challenges that are different from the ones we face in the automotive navigation market, including:

 

  Ÿ  

adopting alternative revenue models and pricing structures;

 

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  Ÿ  

serving a larger number of small customers; and

 

  Ÿ  

interacting with end-users directly.

If we are unable to effectively respond to these challenges and expand our business in the wireless/Internet location-based services markets, our growth and prospects could be negatively affected. We have made and will continue to make investments in developing new solutions for customers in the wireless/Internet location-based services markets. If we are unable to generate sufficient revenues in these markets to recoup our investments, our future results of operations and financial condition could be materially and adversely affected. In addition, our limited experience in these markets may not provide a meaningful basis for you to evaluate our future prospects and results of operations.

If we fail to maintain our relationship with China Mobile, our wireless location-based solutions business and growth prospects could be materially and adversely affected.

A substantial portion of our revenues from our wireless location-based solutions business have been derived from our cooperation arrangements with China Mobile. Our contractual relationship with China Mobile is maintained through China Mobile Liaoning, the China Mobile subsidiary in charge of constructing and operating a location-based service platform for China Mobile’s nationwide network. We expect to continue relying on China Mobile for the growth of our wireless location-based solutions business in the near future. Since 2006, we have been providing a nationwide digital map database to support wireless location-based services throughout China Mobile’s nationwide network. Our contracts with China Mobile Liaoning in respect of nationwide digital map database will expire in December 2010. In November 2009, China Mobile engaged us to jointly develop and operate a new mobile navigation service, which is expected to be launched in 2010. Our contract with China Mobile Liaoning for the new mobile navigation service will expire in December 2010.

We cannot assure you that China Mobile Liaoning will agree to renew the cooperation agreements for the above projects upon the expiration of their respective terms, or enter into new agreements with us with substantially similar commercial terms. Our negotiating leverage with China Mobile is limited given its dominant position in China’s wireless communications market. If China Mobile Liaoning for any reason refuses to renew the cooperation agreements, or if it proposes new agreements with commercial terms materially different from the current ones, e.g., by changing the revenue sharing arrangement with us, our wireless location-based solutions business and growth prospects could be materially and adversely affected.

Our ability to generate revenues from our wireless location-based solutions business could suffer if China Mobile’s location-based services do not generate sufficient revenues.

In return for providing a base digital map database to support wireless location-based services offered throughout China Mobile’s nationwide network, we receive payments from China Mobile primarily based on the level of usage of our map data by China Mobile’s subscribers. For the mobile navigation service to be jointly developed by China Mobile and us, we will share a portion of the fees charged by China Mobile. Therefore, our ability to generate revenues from our wireless location-based solutions business is affected by the future success of the location-based services offered by China Mobile. The future success of China Mobile’s location-based services will depend on, among other things, the quality of its wireless network, the resources it commits to promoting and operating its location-based services and its ability to effectively manage its subscribers’ expectations. We, however, have no control over any of those factors. If the formal launch of some location-based services by China Mobile is delayed, or China Mobile does not allocate sufficient resources to promoting and operating its location-based services, or if China Mobile’s location-based services are not well received by users, those services may not generate sufficient usage and revenues. As a result, revenues from our wireless location-based solutions business may be adversely affected.

 

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A significant portion of our revenues historically have been attributable to a limited number of automobile manufacturers, and if we are unable to maintain these key relationships or establish new relationships with additional automobile manufacturers, our revenues will be adversely affected.

In the in-dash navigation systems market, automobile manufacturers generally have the power to select map data suppliers, regardless of whether the selected map data supplier enters into contract directly with the automobile manufacturer or not. In 2007, 2008, 2009 and the first quarter of 2010, revenues from our top five automobile manufacturer customers in each period accounted for approximately 69.2%, 54.7%, 55.9% and 70.4%, respectively, of our total revenues. We anticipate that a limited number of automobile manufacturers will continue to represent a significant percentage of our revenues for the foreseeable future. However, there is no assurance that our relationships with our existing automobile manufacturer customers will continue in the future, and we are not guaranteed any minimum level of revenues from them. We cannot assure you that revenues from our current customers will reach or exceed historical levels in any future period. The loss of one or more of our key automobile manufacturer customers, whether due to a change of control or bankruptcy of a customer or other causes, a reduction in orders from them, difficulty or failure to collect payments from any key customer under financial distress, or our failure to attract additional key customers, would adversely affect our revenues.

Our results of operations could suffer if we are not able to maintain the license fees we charge for the use of our map data and solutions in in-dash navigation systems and portable navigation devices.

We historically derived a substantial portion of our revenues from license fees we charge for the use of our map data in in-dash navigation systems and customized solutions in portable navigation devices. The license fees we charge our customers are affected by a number of factors, including the competitive landscape, pricing of vehicles and hardware that use our map data and price sensitivity of end-users of navigation products and services. Any one or a combination of these factors could require us to reduce our license fees and this could adversely affect our revenues and profitability. We have in the past lowered, and may in the future need to lower, our license fees in order to preserve customer relationships or to expand the use of our map data and solutions to a broader range of products. To the extent we lower our license fees in the future, we cannot assure you that we will be able to achieve related increases in the use of our map data and solutions or other benefits to fully offset the effects of these reductions. If we are unable to achieve related increases in the use of our map data and solutions to fully offset the effects of reductions in per-unit license fees, our revenues could suffer.

Digital map data piracy exists in China, and our inability to adequately protect against the illegal copying and selling of our digital map data could adversely affect our revenues.

Like many other software products, digital map data is vulnerable to piracy. While China has made progress to address the problem of piracy of intellectual property, the current legal system for intellectual property protection is still not well developed. Piracy of digital map data exists in China and is widespread in the portable navigation device market, where the map data formats used by different portable navigation device manufacturers are similar, making it easier to use pirated digital map data. Although we have taken a number of security measures to prevent piracy, and each copy of digital map data sold by us has been encrypted in accordance with the applicable government regulations, our digital map data has been illegally copied and sold through various channels because those security measures are not always effective against unlawful copying. We have not taken any legal actions against those who have pirated our map data. Preventing piracy is difficult, time-consuming and expensive, and may divert significant management and staff resources from our business operations. Continued unauthorized copying and piracy of our map data not only could adversely affect our revenues, but may also harm our reputation if the unauthorized copy is incomplete, out of date, or

 

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of substandard quality. In addition, large scale piracy of our digital map data could significantly impede our ability to recoup the substantial investments we have made in building and maintaining our digital map database.

If we are unable to achieve and maintain certain required quality assurance standards, our key customers may not do business with us.

Many of our customers, particularly those in the automotive industry, require their suppliers to maintain certain quality assurance standards and certifications, including those pursuant to the ISO series of international standards. We have obtained some of these certifications. For instance, in July 2009, we were granted the ISO/TS 16949:2002 certificate for our automotive navigation map design and production operations. The ISO/TS 16949 standard applies to the design/development, production and, when relevant, installation and servicing of automotive-related products and is an important independent indicator of quality process management. We cannot assure you that we will be able to continue to meet these standards on an on-going basis in the future. Our customers may later require us to obtain and maintain certifications under different or more stringent standards, which we may or may not be able to accomplish. If we are unable to obtain and maintain such certifications, those customers may refuse to do business with us, which could materially reduce our revenues and adversely affect our reputation.

A substantial portion of our cost of revenues is not directly linked to the level of our revenues. As a result, any shortfall in revenues could adversely affect our gross profit.

The majority of our cost of revenues is related to data collection and processing, which serve as the foundation for all aspects of our business. As a result, our cost of revenues is not directly linked to the level of our revenues. In addition, as we pursue the expansion of our business in the public sector and enterprise applications and wireless/Internet location-based services market segments, our cost levels are based, in part, on our expectation of future revenues from those market segments. However, we may not be able to achieve the growth of revenues as we anticipated. Any shortfall in revenues relative to our expectations in any given period would not necessarily result in a proportionate reduction in our costs, and could therefore have a material adverse effect on our operating results.

Our growth will depend in part on adding new solutions to our portfolio or adapting our business models in response to rapid changes in our industry, which can require significant expenditures in advance of revenues.

We face constant pressure to provide our customers and end-users with new solutions that incorporate the latest technology. We must make significant expenditures to research and develop new navigation and location-based solutions before we can generate any revenues from those new solutions. We may also be required to make unanticipated expenditures, for instance, to acquire key technologies to support or expand our solutions and replace outdated or failing equipment. In addition, we may need to change our business models from time to time in response to the rapid changes in China’s navigation and location-based services industry. The new business models may require substantial upfront capital expenditures. If our new solutions are not received favorably by our customers or the end-users or the new business models adopted by us do not work as well as we had expected, we may not be able to generate sufficient revenues to recoup the significant upfront expenditures, and our results of operations and financial position would be adversely affected.

The surveying and mapping business is highly regulated in China. If we fail to comply with applicable laws, rules and regulations, our surveying and mapping qualification certificates could be suspended or revoked, which would materially impede our business.

Due to national security concerns, the surveying and mapping business is highly regulated in China and is subject to a complex set of laws, rules and regulations administered primarily by the State

 

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Bureau of Surveying and Mapping. Only entities that have been granted a surveying and mapping qualification certificate for digital navigation map production by the State Bureau of Surveying and Mapping are permitted to engage in data collection, editing, processing, formatting, geographic information integration and other digital map production activities. In addition, the servers on which the map data are stored must be kept inside China with public Internet protocol addresses provided. AutoNavi Software, our variable interest entity in China, holds a Class A surveying and mapping qualification certificate for digital navigation map production and related activities, valid until December 31, 2014. Xingtiandi Technology, a subsidiary of AutoNavi Software, holds a Class A surveying and mapping qualification certificate for aerial photogrammetry. We cannot assure you that AutoNavi Software and Xingtiandi Technology will always be in compliance with the various laws, rules and regulations governing the surveying and mapping business. If either of them is found to be in violation of any of these laws, rules and regulations, we could face severe penalties, including postponement or denial of annual registration, downgrading of professional qualification, and suspension or even revocation of the Class A surveying and mapping qualification certificates. Any of these penalties could materially impede our ability to create, improve, license or distribute solutions incorporating digital map data, which could materially and adversely affect our financial condition and results of operations.

We rely on a third-party holder of a publishing license for electronic publication of our digital map data. If we are unable to continue the use of this license, our business could be adversely affected.

Under the relevant PRC laws and regulations, our digital map data are deemed electronic publications, which can only be published by a publishing entity with a publishing license for electronic publications granted by the General Administration of Press and Publications. Since we do not have such a license, we have entered into an agreement with SinoMaps Press, a publishing entity that holds a publishing license for electronic publications. Under the agreement, SinoMaps Press is responsible for reviewing, seeking approval for and publishing the digital maps we produce and deliver to them. For each electronic publication and its updated version, SinoMaps Press must submit the sample map and other required information to the State Bureau of Surveying and Mapping and the General Administration of Press and Publications for approval. Our agreement with SinoMaps Press is effective until November 2014. We cannot assure you that SinoMaps Press will agree to renew this agreement upon the expiration of the current term. If we fail to renew the agreement with SinoMaps Press or enter into a replacement contract with another holder of a publishing license for electronic publications, our business could be adversely affected.

We depend on in-dash navigation system manufacturers to distribute our digital map data to automobile manufacturers, and any delays or errors in the distribution of our map data to automobile manufacturers could adversely affect our business.

In the in-dash navigation systems market, it is critical that we maintain a good reputation among automobile manufacturers, whether we have entered contracts with them directly or through in-dash navigation system manufacturers. We usually convert our digital map data into different proprietary formats of the in-dash navigation system manufacturers and send DVD copies or hard disk drives of the converted map data to these companies. These companies then distribute the DVDs or hard disk drives along with their own products to the automobile manufacturers. To the extent we continue to rely on in-dash navigation system manufacturers to distribute our map data, their failure to distribute our map data in a timely manner and meet the requirements of automobile manufacturers may harm our reputation and relationships with our automobile manufacturer customers.

 

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If our customers do not accurately report the amount of fees owed to us under our agreements with them, we will not receive all of the revenues to which we are entitled.

For a portion of our sales to the portable navigation device manufacturers and our wireless/Internet location-based solutions business, we rely on our customers to accurately report the amount of fees owed to us under our agreements with them. Some of our agreements with our customers give us the right to audit their records to verify this information. However, these audits can be expensive, time-consuming and possibly harmful to our ongoing business relationships with our customers. To date we have not audited any customers and have relied primarily on the data in our customers’ reports. To the extent those reports are inaccurate, the revenues we collect from our customers could be materially less than the amount we would be entitled to from them. In addition, even if we conduct audits, there can be no assurance that any additional fees determined to be payable to us in such audits would be recoverable or that, if recoverable, such additional fees would be sufficient to cover our audit expenses.

We may not be able to effectively identify or pursue targets for acquisitions or investments, and even if we complete such transactions, we may be unable to successfully integrate them into, or realize anticipated benefits to, our business, which may adversely affect our growth and results of operations.

Historically, we have acquired new capabilities and additional customers through selected acquisitions. For example, we gained Internet-based map application capabilities in 2006 by acquiring control of MapABC Technology, one of our variable interest entities in China, a leading online map application solution provider in China. In 2006, we added aerial photogrammetry to our portfolio of solutions by acquiring Xingtiandi Technology, which holds a Class A surveying and mapping qualification certificate for aerial photogrammetry issued by the State Bureau of Surveying and Mapping. We expect to continue to selectively acquire or invest in businesses that complement our existing business. We may not, however, be able to identify suitable candidates for acquisitions or investments in the future. Even if we are able to identify suitable candidates, we may be unable to complete a transaction on terms commercially acceptable to us. If we fail to identify appropriate candidates or complete the desired transactions, our growth may be impeded.

Even if we complete the desired acquisitions or investments, such acquisitions and investments may expose us to new operational, regulatory, market and geographic risks and challenges, including:

 

  Ÿ  

diversion of our management’s attention and other resources from our existing business;

 

  Ÿ  

our inability to maintain the key business relationships and the reputations of the businesses we acquire or invest in;

 

  Ÿ  

our inability to retain key personnel of the acquired or invested company;

 

  Ÿ  

uncertainty of entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;

 

  Ÿ  

failure to comply with laws and regulations as well as industry or technical standards of the markets into which we expand;

 

  Ÿ  

our dependence on unfamiliar affiliates and partners of the companies we acquire or invest in;

 

  Ÿ  

unsatisfactory performance of the businesses we acquire or invest in;

 

  Ÿ  

our responsibility for the liabilities associated with the businesses we acquire, including those which we may not anticipate; and

 

  Ÿ  

our inability to maintain internal standards, controls, procedures and policies.

 

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Any of these events could disrupt our ability to manage our business. These risks could also result in our failure to derive the intended benefits of the acquisitions or investments, and we may be unable to recover our investment in such initiatives or may have to recognize impairment charges as a result.

Furthermore, the financing and payment arrangements we use in any acquisition could have a negative impact on you as an investor, because if we issue shares in connection with an acquisition, your holdings would be diluted. Moreover, if we take on significant debt to finance such acquisitions, we would incur additional interest expenses, which would divert resources from our working capital and potentially have a material adverse impact on our results of operations.

We face significant competition in the navigation and location-based services industry, and if we are unable to compete effectively with our existing and potential competitors, we could lose market share and our results of operations and financial condition may be materially and adversely affected.

The markets for navigation and location-based solutions in China are highly competitive. We compete for customers and business with other solution providers on the basis of, among other things, the coverage and accuracy of map data, the amount and accuracy of point of interest information, the frequency of database update, variety of presentation features, the ability to provide customized solutions to meet customers’ specific needs, price and variety and quality of solutions offered.

We face competition in each line of navigation and location-based solutions that we offer. In the in-dash navigation systems market, our primary competitor is NavInfo Co., Ltd. The portable navigation devices market for digital map solutions is highly competitive with multiple map data providers and, as a result, price competition is intense in that market. Some of our competitors in the automotive navigation market have formed joint ventures or have otherwise cooperated with the two major international digital map providers, NAVTEQ Corporation, a subsidiary of Nokia Corporation, and Tele Atlas N.V., a subsidiary of TomTom N.V. The global reach of these two companies, their pre-existing relationships with some of our key customers, their greater financial resources and their affiliation with global navigation hardware manufacturers may help our competitors expand their business in China. Competition in public sector and enterprise applications is primarily based on technology capability, service capacity, customer relations, price and ability to provide integrated solutions consisting of both map data and software applications. In mobile navigation and user-end map applications, we face competition primarily from several companies that offer similar solutions. The competition is primarily based on product design and marketing. In providing map application solutions to Internet websites, we compete primarily with Mapbar. In addition, as technology and the regulatory environment in China evolve, new entrants may enter the business of developing digital maps. For example, Google recently decided to stop using map data from Tele Atlas and now uses its own map data for the United States market. If China’s regulatory regime for digital map production changes in the future to allow foreign companies to develop digital maps on their own, demand for our map data and solutions could be adversely affected. Increased competition from our current competitors or new market entrants may result in price reductions, reduced profit margins and/or loss of market share by us.

We may not be able to sustain or improve the strength of our brand, and we may consequently experience difficulties in improving market acceptance.

We intend to maintain a clear and consistent brand across all of our solutions and in all of our markets. Maintaining and strengthening our brand will depend on our success in providing high-quality solutions that are favorably received by our customers and end-users. The strength of our brand also depends in part on our being a technology leader in providing navigation and location-based solutions, and we cannot be certain that our research and development efforts will continue to succeed in this regard. In addition, the strength of our brand depends in part on the products and services of third

 

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parties whose products incorporate our map data and over which we have little or no control. Defects, errors or failures in third-party products and services could damage our reputation or our brand. Any negative publicity of our map database or solutions, or otherwise about our company, may have a negative impact on our reputation or brand. If we fail to increase awareness of our brand and strengthen our reputation for providing high-quality solutions, or if any other factor negatively affects our reputation or our brand image, our business, results of operations or financial condition could be materially and adversely affected.

If we fail to manage our growth effectively, our business may be materially and adversely affected.

We have grown in recent years. Our total net revenues grew from $29.7 million in 2007 to $45.5 million in 2008 and to $57.2 million in 2009, representing a CAGR of 38.8%, and increased by 42.7% from $11.6 million for the three months ended March 31, 2009 to $16.6 million for the three months ended March 31, 2010. There can be no assurance that we will be able to maintain our past rates of growth. Our growth has placed, and will continue to place, a significant strain on our management, personnel, systems and resources. To accommodate our growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. We also will need to continue to expand, train, manage and motivate our workforce and manage our client relationships. Moreover, as we introduce new navigation and location-based solutions or enter into new markets, we may face unfamiliar market and technological and operational risks and challenges. Any of these endeavors will involve risks and require substantial management resources and attention. We may be unable to manage our growth effectively, which could have a material adverse effect on our business.

We may not be able to prevent unauthorized use of our intellectual property, which could reduce demand for our solutions, adversely affect our revenues and harm our competitive position.

We rely primarily on a combination of patent, copyright, software registration, trade secret, trademark and unfair competition laws and contractual rights to establish and protect our intellectual property rights for our database, software and related technologies. We cannot assure you that the steps we have taken or will take in the future to protect our intellectual property from infringement, misappropriation or piracy will prove to be sufficient. Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other developed countries. Current or potential competitors may use our intellectual property without our authorization in the development of databases, software or technologies that are substantially equivalent or superior to ours, which could reduce demand for our solutions, adversely affect our revenues and harm our competitive position. Even if we were to discover evidence of infringement or misappropriation, our recourse against such competitors may be limited or could require us to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation of our business.

Confidentiality agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information.

We require our employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect our trade secrets and other proprietary information. These agreements might not effectively prevent disclosure of our trade secrets, know-how or other proprietary information and might not provide an adequate remedy in the event of unauthorized disclosure of such confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-

 

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consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may face intellectual property infringement claims that could be time-consuming and costly to defend and may result in the loss of significant rights by us.

The validity, enforceability and scope of protection of intellectual property rights in digital map-related industries in China are evolving and uncertain. Many industry participants actively seek protection for digital map-related technologies, including through copyright or patent registration and litigation. Copyrights or patents issued or pending that are held by others may cover significant aspects of our technologies, solutions or business methods. Although we have not been subject to any litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights, we cannot assure you that infringement claims will not be asserted against us in the future.

Intellectual property litigation is expensive and time-consuming and could divert resources and management attention from the operation of our business. If there is a successful claim of infringement, we may be required to alter our technologies, cease certain activities, pay substantial royalties and damages to, and obtain one or more licenses from, third parties. We may not be able to obtain those licenses on commercially acceptable terms, or at all. Any of those consequences could cause us to lose revenues, impair our customer relationships and harm our reputation.

Our future success depends on the continuing efforts to retain our existing management team and other key employees as well as to attract, integrate and retain highly skilled and qualified personnel, and our business may be adversely affected if we lose their services or if their outside business interests create conflicts or give rise to negative publicity.

Our future success depends heavily on the continued services of our current executive officers, particularly Jun Hou, our chairman, Congwu Cheng, our chief executive officer, and Jun Xiao, our chief operating officer. We also rely on the skills, experience and efforts of other employees, including management, sales, support, research and development, technical and services personnel. Qualified employees are in high demand throughout technology-based industries in China, and our future success depends on our ability to attract, train, motivate and retain highly skilled employees and the ability of our executive officers and other members of senior management to work effectively as a team.

If one or more of our executive officers or other key employees is unable or unwilling to continue in their present positions, we may not be able to find suitable replacements easily or at all, which may disrupt our business operations. We do not have key person insurance in place. If any of our executive officers or other key employees joins a competitor or forms a competing company, we may lose customers, know-how, key professionals and staff members. Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-competition provisions. However, if any dispute arises between our executive officers and us, we cannot assure you of the extent to which any of these agreements could be enforced in China, where these executive officers reside, because of the uncertainties of China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

In addition, some of our executive officers may have other business dealings or activities outside their employment with us that are relating to digital map information, navigation and location-based solutions, and similar businesses, as well as businesses outside of our industry. Conflicts of interest may arise between their outside business interests and our company. We do not believe any of our executive officers currently has a conflict of interest with us. In the event that a conflict of interest occurs in the future, we expect our executive officers to abide by our code of business conduct and ethics and their obligations under their respective employment agreements. If any of them does not

 

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abide by the above, we intend to resort to appropriate remedies to address the situation. However, we cannot assure you that conflicts of interests, if any, will always be resolved in our favor. In addition, if any of the business associates or entities in which our executive officers are involved makes any claims or initiates litigation against them or against us, we may also be subject to costly legal proceedings and claims. Our directors and senior management could also be subject to scrutiny by the media and the public, which may result in press coverage of unverified, inaccurate or misleading information about them. Negative publicity about our directors or senior management, even if untrue or inaccurate, may have an adverse impact on our reputation and the trading price of our ADSs.

Our operations rely on our technology, telecommunications and other infrastructure systems, which can suffer failures and business interruptions that could increase our operating costs and cause delays in our operations.

Our systems and operations are vulnerable to damage or interruption from fire, earthquake, flood, power loss, computer hardware and software failure, telecommunications failure, computer hacking and similar events. Our disaster recovery plans and redundant systems may not be sufficient to cure such system failures in a timely manner. The occurrence of a natural disaster or unanticipated problems with our technology, telecommunications and other infrastructure systems at our offices in the Changping Hi-tech Park, Beijing, where we keep our production facility and the servers that store our digital map database and run our technology platforms, could cause interruptions or delays in the ongoing development and enhancement of our digital map database and related software, and inhibit our ability to timely deliver our solutions to our customers, which in turn could cause us to lose customers or revenues. Similarly, system failures and operational interruptions of our customers could also adversely affect our own revenues. Our technology, telecommunications and other infrastructure systems may also be subject to capacity constraints which would cause increased operating costs in order to overcome these constraints.

In the course of preparing our consolidated financial statements, we have identified material weaknesses and other control deficiencies in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.

We will be subject to reporting obligations under the U.S. securities laws after this offering. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. Prior to this offering, we have been a private company and have had limited accounting personnel and other resources with which to address our internal control over financial reporting. In the course of preparing our consolidated financial statements, we and our independent registered public accounting firm identified certain material weaknesses and other control deficiencies, each as defined in the U.S. Public Company Accounting Oversight Board Standard AU Section 325, Communications About Control Deficiencies in an Audit of Financial Statements, or AU325, in our internal control over financial reporting as of December 31, 2009. As defined in AU325, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis, and a “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

The material weaknesses identified primarily related to: (i) lack of accounting personnel with appropriate U.S. GAAP knowledge; and (ii) lack of an accounting policies and procedures manual in accordance with U.S. GAAP. Neither we nor our independent registered public accounting firm

 

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undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the number of material weaknesses and other control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

Following the identification of these material weaknesses and other control deficiencies, we have taken measures and plan to continue to take measures to remedy these weaknesses and deficiencies. However, the implementation of these measures may not fully address these material weaknesses and other control deficiencies in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct these material weaknesses and other control deficiencies or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover, ineffective internal control over financial reporting significantly hinder our ability to prevent fraud.

Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2011. In addition, beginning at the same time, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. If we fail to remedy the problems identified above, our management and our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective. This could adversely impact the market price of our ADSs due to a loss of investor confidence in the reliability of our reporting processes. We will need to incur significant costs and use significant management and other resources in order to comply with Section 404 of the Sarbanes-Oxley Act.

We have limited insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies do. Other than automobile insurance on certain vehicles, property and casualty insurance on some of our assets and group accident insurance for our field survey employees, we do not have commercial insurance coverage on our digital map database, other assets and personnel, nor do we have insurance to cover our business or interruptions of our business, litigation or product liability. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence of loss or damage to property, litigation or business disruption may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

We may be unable to manage risks associated with our potential expansion into international markets.

We may expand our business into international markets in the future. In our international expansion, we may face economic, regulatory, legal and political risks inherent in having relationships, operations and sales in other jurisdictions, including challenges caused by distance and linguistic and cultural differences, the potential for longer collection periods and for difficulty in collecting accounts receivable and enforcing contractual obligations, fluctuations in currency exchange rates, unanticipated changes in

 

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laws or regulatory requirements, including tariffs or other barriers to trade, and the potential for political, legal and economic instability. Any of these or other factors could have an adverse effect on our sales or costs, on the market acceptance of our solutions or on our ability to compete in one or more jurisdictions, which could have a material adverse effect on our business, results of operations or financial condition.

Expansion into international markets may place significant additional burdens on our senior management and our sales and marketing teams. We also may not be able to process and make available to our customers navigation and location-based solutions for a new geographic market in a timely or commercially favorable manner, in the native language or without substantial errors. Moreover, our ability to expand successfully depends in part on our establishing sufficient operational resources and infrastructure. Our sales and marketing efforts in a new geographic market may fail to establish a viable distribution network or our solutions may not gain market acceptance or brand recognition sufficient to offset the costs of geographic expansion. If we fail to properly manage these risks, we may incur higher expenses and lower revenues, and any geographic expansion we undertake could have a material adverse effect on our business, results of operations or financial condition.

End-user privacy concerns may limit the growth of our solutions.

Concerns have been raised with respect to the possibility that GPS-based navigation products could be used to violate personal privacy by making available a record of a person’s geographical location to others. While we do not directly collect data on the location of individual end-users, our location-based solutions could enable our mobile operator customers to collect such data if they chose to do so. The technological potential of our current or future solutions may create privacy concerns in the general public. If these or other problems with public opinion arise in connection with our solutions or the navigation and located-based services industry in general, or if new laws or regulations are passed relating to privacy concerns, our reputation, results of operations or financial condition could be materially and adversely affected.

Our business and results of operations may be adversely affected by a severe and prolonged global economic downturn and the corresponding slowdown of the Chinese economy.

Recent global market and economic conditions have been unprecedented and challenging with recession in most major economies persisting in 2009 and significant market volatility in 2010. Continued concerns about the systemic impact of a potentially long-term and widespread recession, energy costs, geopolitical issues, and the availability and cost of credit have contributed to increased market volatility and diminished expectations for economic growth around the world. The difficult economic outlook has negatively affected business and consumer confidence and contributed to volatility of unprecedented levels. The Chinese economy also faces challenges. The stimulus plans and other measures implemented by the Chinese government may not work effectively or quickly enough to maintain economic growth in China or avert a severe economic downturn.

Since we derive all of our revenues from our navigation and location-based solutions in China, any prolonged slowdown in the Chinese economy may have a negative impact on our business and results of operations. Our revenues in the automotive navigation and wireless location-based solutions segments ultimately depend on end-user spending, which in turn depend on the end-users’ level of disposable income, perceived future earnings and willingness to spend. As there are still substantial uncertainties in the current and future conditions in the global and Chinese economies, consumers may avoid purchasing new automobiles and reduce their spending on discretionary items, such as portable navigation devices and wireless location-based services. Moreover, to the extent we offer credit to any customer and such customer experiences financial difficulties due to the economic slowdown, we could have difficulty collecting payments from such customers. Further disruptions of the financial markets could also significantly restrict our ability to obtain financing in the capital markets or from financial institutions.

 

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We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

Our business could be materially and adversely affected by natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, or another epidemic. On May 12, 2008 and April 14, 2010, severe earthquakes hit part of Sichuan province in southeastern China and part of Qinghai province in western China, respectively, resulting in significant casualties and property damage. While we did not suffer any loss or experience any significant increase in cost resulting from these earthquakes, if a similar disaster were to occur in the future affecting Beijing or another city where we have major operations in China, our operations could be materially and adversely affected due to loss of personnel and damages to property, including our raw data, digital map database and technology systems. In addition, a similar disaster affecting a larger, more developed area could also cause an increase in our costs resulting from the efforts to resurvey the affected area.

In April 2009, a new strain of influenza A virus subtype H1N1, commonly referred to as “swine flu,” was first discovered in North America and quickly spread to other parts of the world, including China. In early June 2009, the World Health Organization declared the outbreak to be a pandemic, while noting that most of the illnesses were of moderate severity. The PRC Ministry of Health has reported several hundred deaths caused by the influenza A (H1N1). Any outbreak of avian influenza, SARS, the influenza A (H1N1), or other adverse public health developments in China may have a material and adverse effect on our business operations. These occurrences could cause severe disruption to our daily operations, including our field survey, data production and sales and marketing activities, and may even require a temporary closure of our data production facilities.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in surveying and mapping, digital navigation map production, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Current PRC laws and regulations place certain restrictions on foreign ownership of companies that engage in surveying and mapping, the production of digital navigation maps, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services. Specifically, a foreign investor may only hold a minority interest in a Chinese entity that engages in surveying and mapping, and foreign-invested companies are prohibited from engaging in the production of digital navigation maps and aerial photogrammetry. In addition, foreign ownership in an Internet content provider or other value-added telecommunication service providers may not exceed 50%. We conduct our operations in China principally through contractual arrangements among our PRC subsidiary, AutoNavi Technology, two affiliated companies in the PRC, AutoNavi Software and MapABC Technology, and their respective shareholders. AutoNavi Software and MapABC Technology and their subsidiaries hold the licenses and permits necessary to conduct our surveying and mapping business, value-added telecommunication services and related businesses in China.

Our contractual arrangements with AutoNavi Software and MapABC Technology and their respective shareholders enable us to:

 

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exercise effective control over AutoNavi Software and MapABC Technology;

 

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receive substantially all of the economic benefits of AutoNavi Software and MapABC Technology in consideration for the services provided by AutoNavi Technology, our wholly-owned subsidiary in China; and

 

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  Ÿ  

have an exclusive option to purchase all or part of the equity interests in each of AutoNavi Software and MapABC Technology when and to the extent permitted by PRC law.

Because of these contractual arrangements, we become the primary beneficiary of AutoNavi Software and MapABC Technology and hence treat them as our variable interest entities and consolidate their results.

If we, our PRC subsidiary or either of our variable interest entities is found to be in violation of any existing or future PRC laws or regulations, including the restrictions on foreign ownership of companies that engage in surveying and mapping, the production of digital navigation maps, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services, or fails to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the State Bureau of Surveying and Mapping, which regulates digital navigation map production and aerial photogrammetry, the Ministry of Industry and Information Technology, which regulates value-added telecommunication services, and General Administration of Press and Publication, which regulates electronic and Internet publication, as well as the Ministry of Commerce, which is the primary regulator of foreign investment in China, and the National Development and Reform Commission, would have broad discretion in dealing with such violations or failures, including:

 

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revoking the business and operating licenses and surveying and mapping qualification certificates of our PRC subsidiary and variable interest entities;

 

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discontinuing or restricting our PRC subsidiary’s and variable interest entities’ operations;

 

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imposing fines, confiscating the income from our PRC subsidiary and variable interest entities’ operations, or imposing conditions or other requirements with which we or our PRC subsidiary or variable interest entities may not be able to comply;

 

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requiring us or our PRC subsidiary and variable interest entities to restructure the relevant ownership structure or operations; or

 

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restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business.

In many cases, existing regulations with regard to investments from foreign investors in the companies that engage in surveying and mapping, the production of digital navigation maps, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services lack detailed explanations and operational procedures, and are subject to interpretation, which may change over time. Most of these regulations have not been interpreted by the relevant authorities in circumstances similar to our corporate structure. Accordingly, we cannot be certain how the regulations will be applied to our business, either currently or in the future. Moreover, new regulations may be adopted and the interpretation of existing regulations may change, any of which could result in a material and adverse effect on our ability to conduct our business.

We rely on contractual arrangements with AutoNavi Software and MapABC Technology and their shareholders for our China operations, which may not be as effective as direct ownership, in providing operational control.

We rely on contractual arrangements with our variable interest entities, AutoNavi Software and MapABC Technology, and their shareholders to operate our business. For a description of these contractual arrangements, see “Corporate Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our variable interest entities. Under the

 

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current contractual arrangements, as a legal matter, if our variable interest entities or their shareholders fail to perform their respective obligations under these contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective.

Under the equity pledge agreements between our subsidiary AutoNavi Technology and the respective shareholders of AutoNavi Software and MapABC Technology, those shareholders pledged their equity interests in AutoNavi Software and MapABC Technology to AutoNavi Technology to secure AutoNavi Software’s and MapABC Technology’s obligations under the exclusive technology and consulting service agreements, the know-how license agreements and, in the case of AutoNavi Software, the domain name license agreement and the patent license agreement. Our PRC counsel, Jun He Law Offices, has advised us that these pledges were duly created by recording the pledge on AutoNavi Software’s and MapABC Technology’s respective register of shareholders in accordance with the PRC Security Law. However, according to the PRC Property Rights Law, which became effective as of October 1, 2007, a pledge will not be effective unless it has been registered with the relevant administration for industry and commerce. AutoNavi Software and MapABC Technology intend to apply for such pledge registrations. If AutoNavi Software and MapABC Technology are unable to register the pledges, the pledges may be deemed ineffective under the PRC Property Rights Law. As a result, if AutoNavi Software and MapABC Technology breach their obligations under the various agreements described above, AutoNavi Technology may not be able to successfully enforce the pledges.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements, which may make it difficult to exert effective control over our variable interest entities, and our ability to conduct our business may be negatively affected.

Contractual arrangements we have entered into among our PRC subsidiary, our variable interest entities and their respective shareholders may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC variable interest entities and their subsidiaries owe additional taxes, which could substantially reduce our consolidated net income and the value of your investment.

Under applicable PRC laws, and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among AutoNavi Technology, our wholly-owned subsidiary in China, AutoNavi Software and MapABC Technology, our variable interest entities in China, and their respective shareholders were not entered into on an arm’s-length basis or resulted in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust AutoNavi Software and MapABC Technology’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of, for PRC tax purposes, expense deductions recorded by AutoNavi Software and MapABC Technology, which could in turn increase their respective tax liabilities. In addition, the PRC tax authorities may impose punitive interest on AutoNavi Software and MapABC Technology for the adjusted but unpaid taxes at the rate of 5% over the basic RMB lending rate published by the People’s Bank of China for a period according to the applicable regulations. Our consolidated net income could be materially and adversely affected if our variable interest entities’ tax liabilities increase or if they are required to pay punitive interest.

 

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The shareholders of our variable interest entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

Some of our founders and executive officers are direct and indirect owners of AutoNavi Software and MapABC Technology. Conflicts of interest may arise between the dual roles of those individuals who are both executive officers of our company and shareholders of our variable interest entities. We do not have existing arrangements to address potential conflicts of interest between those individuals and our company and cannot assure you that when conflicts arise, those individuals will act in the best interests of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and those individuals, we would have to rely on legal proceedings, which may materially disrupt our business. There is also substantial uncertainty as to the outcome of any such legal proceedings.

We may rely principally on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary 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 principally on dividends and other distributions on equity paid by AutoNavi Technology, our PRC subsidiary, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If AutoNavi Technology 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. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements AutoNavi Technology currently has in place with our variable interest entities in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us.

Under PRC laws and regulations, AutoNavi Technology, as a wholly foreign-owned enterprise in the PRC, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise such as AutoNavi Technology is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At its discretion, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

Any limitation on the ability of AutoNavi Technology to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—Risks Related to Doing Business in China—Our global income and the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to our PRC subsidiary and variable interest entities or to make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiary and variable interest entities. We may make loans to our PRC subsidiary and variable interest entities, or we may make additional capital contributions to our PRC subsidiary.

 

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Any loans to our PRC subsidiary, which is treated as a foreign-invested enterprise under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to AutoNavi Technology to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange. We may also decide to finance AutoNavi Technology by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to our variable interest entities, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our variable interest entities by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in the surveying and mapping business or value-added telecommunication services, including but not limited to Internet content services, as well as licensing and other regulatory issues.

On August 29, 2008, the State Administration of Foreign Exchange 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 SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142 provides that the RMB 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, the State Administration of Foreign Exchange strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without the State Administration of Foreign Exchange’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of SAFE 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, including SAFE Circular 142, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or any variable interest entities or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Risks Related to Doing Business in China

Adverse changes in the political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

Substantially all of our assets are located in China and all of our revenues are derived from our operations there. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth in the past 30 years, the growth has been uneven across different periods, regions and among various economic sectors of China. We cannot assure you that the Chinese economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such a slowdown will not have a negative effect on our business.

 

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The PRC government exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency—denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. From late 2003 to mid-2008, the PRC government implemented a number of measures, such as increasing the People’s Bank of China’s statutory deposit reserve ratio and imposing commercial bank lending guidelines that had the effect of slowing the growth of credit, which in turn may have slowed the growth of the Chinese economy. In response to the global and Chinese economic downturn in 2008, the PRC government promulgated several measures aimed at expanding credit and stimulating economic growth, including decreasing the People’s Bank of China’s statutory deposit reserve ratio and lowering benchmark interest rates several times. Since January 2010, however, the People’s Bank of China has increased the statutory deposit reserve ratio in response to rapid growth of credit in 2009. It is unclear whether PRC economic policies will be effective in maintaining stable economic growth in the future. Any slowdown in the economic growth of China could lead to reduced demand for our solutions, which could materially and adversely affect our business, financial condition and results of operations.

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

We conduct our business primarily through our PRC subsidiary and variable interest entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiary is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. 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, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.

The laws and regulations governing navigation and location-based services in China are developing and subject to changes. If we fail to maintain and renew existing or obtain additional licenses and permits necessary to conduct our operations in China, our business would be materially and adversely affected.

The navigation and location-based services industry is highly regulated by the PRC government. Various regulatory authorities of the PRC government, such as the State Bureau of Surveying and Mapping, the General Administration of Press and Publications and the Ministry of Industry and Information Technology, are empowered to issue and implement regulations governing various aspects of the navigation and location-based services industry.

 

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We are required to obtain various licenses and permits from different regulatory authorities in order to conduct our operations. See “Regulation—Regulations on Licenses.” According to the Opinions on Strengthening the Administration of Internet Map Services and the Websites that Provide Geographical Information Services jointly issued by eight government agencies on February 25, 2008, the publication of Internet maps is subject to the approval of the General Administration of Press and Publications and requires an Internet publishing license. We have been providing Internet map solutions since 2006, but have not obtained an Internet publishing license for such business. We have obtained a surveying and mapping qualification certificate for Internet map service from the State Bureau of Surveying and Mapping. However, we cannot rule out the possibility that the General Administration of Press and Publications may demand that we suspend our Internet map application business for the lack of an Internet publishing license in the future and impose severe penalties on us. Although we have not generated significant revenues from our Internet map application business, suspension of this business may adversely affect our growth and prospects. In addition, AutoNavi Software holds a publication operating license necessary for sales of our digital map data. However, ADF Navigation does not have such a license. We derive a substantial portion of our revenues from licensing our digital map data to in-dash navigation system manufacturers and automobile manufacturers, mainly through ADF Navigation. We cannot rule out the possibility that the General Administration of Press and Publications may demand that ADF Navigation suspend its business for the lack of a publication operating license and impose severe penalties on ADF Navigation. According to the Administrative Rules of Surveying Qualification Certificate and the amended Standard for Internet Map Services issued by the State Bureau of Surveying and Mapping on March 12, 2009 and May 10, 2010, respectively, the provision of Internet map services by any non-surveying and mapping enterprise is subject to the approval of the State Bureau of Surveying and Mapping and requires a qualification certificate. Our variable interest entity, MapABC Technology, intends to apply for a qualification certificate. However, we cannot assure you that MapABC Technology will be able to obtain the certificate as the above Standard was newly issued and the detailed implementation procedures have yet to be promulgated.

As the navigation and location-based services industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to the navigation and location-based services industry.

We cannot assure you that we will be able to maintain our existing licenses and certificates or renew any of them when their current term expires. For example, our Class A surveying and mapping qualification certificate for digital navigation map production and related activities, which was issued by the State Bureau of Surveying and Mapping, is valid until December 31, 2014 and subject to annual review. If we are unable to maintain and renew one or more of our licenses and certificates, particularly our Class A surveying and mapping qualification certificate for digital navigation map production and related activities, or obtain such renewals on commercially reasonable terms, our operations could be materially disrupted. Furthermore, if the PRC government requires additional licenses or permits in the future in order for us to conduct our businesses, there is no guarantee that we would be able to obtain such licenses or permits in a timely manner, or at all.

Fluctuations in exchange rates may have a material adverse effect on your investment.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on exchange rates set by the People’s Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB solely to the U.S. dollar. Under this revised policy,

 

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the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over the following three years. Since July 2008, however, the RMB has traded within a narrow range against the U.S. dollar. As a consequence, the RMB has fluctuated significantly since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may last and when and how the RMB exchange rates may change going forward.

The reporting and functional currency of our Cayman Islands holding company is the U.S. dollar. However, all of the revenues and most of the expenses of our consolidated operating subsidiary and variable interest entities are denominated in RMB. Substantially all of our sales contracts were denominated in RMB and substantially all of our costs and expenses are denominated in RMB. The net proceeds from this offering will be denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect the relative purchasing power of these proceeds. In addition, appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of earnings from and the value of any U.S. dollar–denominated investments we make in the future.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

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

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current corporate structure, our Cayman Islands holding company may rely on dividend payments from our PRC subsidiary, AutoNavi Technology, to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. Therefore, AutoNavi Technology is able to pay dividends in foreign currencies to us without prior approval from the State Administration of Foreign Exchange by complying with certain procedural requirements. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. 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 currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may be liable for information displayed on, retrieved from, or linked to our Internet websites.

The PRC government has adopted certain regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that, among other things, violates PRC laws and regulations, impairs the national dignity of China, or is obscene, superstitious, fraudulent or defamatory. Meanwhile, when Internet content providers and Internet publishers find that information falling within the categories described above is transmitted on their website or is stored in its electronic bulletin service system, they must terminate the transmission of such information or delete such information immediately and keep records and report this to the relevant authorities. Failure to comply with these requirements could result in the revocation of the Internet content provider license and other required licenses and the closure of the concerned websites. The website operator may also be held liable for such prohibited information displayed on, retrieved from or linked to such website.

The Ministry of Industry and Information Technology has published regulations that subject website operators to potential liabilities for content included on their websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service provider to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible for the protection of the PRC government’s state secrets, is authorized to block any website it deems to be leaking state secrets or fail to meet the relevant regulations relating to the protection of state secrets in the dissemination of online information.

Through MapABC Technology, our variable interest entity in China, we operate our MapABC.com website which, among other things, allows users to post location-related information on the website. As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information on our websites, and keep records and report to relevant authorities. In addition, we may be subject to significant penalties for violations of those regulations, and our operations and reputation could be adversely affected.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, and, if required, we cannot predict whether we will be able to obtain such approval.

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006 and was amended on June 22, 2009. This regulation, among other things, requires offshore special purpose vehicles, or SPVs, formed for the purpose of acquiring PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the China Securities Regulatory Commission prior to listing their securities on an overseas stock exchange. The application of this regulation remains unclear. Currently, there is no consensus among the leading PRC law firms regarding the scope and applicability of the China Securities Regulatory Commission approval requirement. On September 21, 2006, the China

 

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Securities Regulatory Commission published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining the China Securities Regulatory Commission’s approval for overseas listings by special purposes vehicles. Our PRC counsel, Jun He Law Offices, has advised us that, based on their understanding of the current PRC laws, rules and regulations as well as the procedures announced on September 21, 2006:

 

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the China Securities Regulatory Commission currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation; and

 

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given that we established AutoNavi Technology before September 8, 2006, the effective date of this regulation, and that no provision in this regulation clearly classified contractual arrangements as a type of transaction subject to its regulation, we are not required to submit an application to the China Securities Regulatory Commission for its approval of the listing and trading of our ADSs on the Nasdaq Global Market.

Since there has been no official interpretation or clarification of this regulation since its adoption, there is uncertainty as to how this regulation will be interpreted or implemented. If it is determined that the China Securities Regulatory Commission’s approval is required for this offering, we may face sanctions by the China Securities Regulatory Commission or other PRC regulatory agencies for failure to seek the China Securities Regulatory Commission’s approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our China subsidiary, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The China Securities Regulatory Commission or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

The regulation discussed above could also make it more difficult for us to pursue growth through acquisitions.

The regulation discussed in the preceding risk factor also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including a requirement that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if either threshold under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings issued by the State Council on August 3, 2008 is triggered. To date, we have conducted our acquisitions in China exclusively through our PRC variable interest entities. In the future, we may grow our business in part by directly acquiring complementary businesses rather than through our variable interest entities. Complying with the requirements of the new regulation to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

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

The State Administration of Foreign Exchange has promulgated several regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, issued on November 1, 2005 and its implementation rules issued on November 24, 2005 and May 29, 2007, respectively, that require PRC residents and PRC corporate entities to register with and obtain approval from local branches of the State Administration of Foreign Exchange in connection with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future.

Under these foreign exchange regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations, 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 the previously filed registration with the local branch of the State Administration of Foreign Exchange, with respect to that offshore company, to reflect any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, a transfer or swap of shares, a merger, division, long-term equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that offshore company are required to urge the PRC resident shareholders to update their registration with the local branch of the State Administration of Foreign Exchange when such updates are required under applicable foreign exchange regulations. If any PRC shareholder fails to make the required registration or update the previously filed 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 its PRC subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have requested our PRC resident shareholders to file the necessary registrations and amendments as required under SAFE Circular No. 75 and related rules. However, we cannot provide any assurance that all of our shareholders who are PRC residents will make, obtain or update any applicable registrations or approvals required by these foreign exchange regulations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit our PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, our company, or prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially and adversely affected.

However, as these foreign exchange regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with other approval requirements, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to a 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

 

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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 foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, the State Administration of Foreign Exchange issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company. On March 28, 2007, the State Administration of Foreign Exchange promulgated the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rules. Under this rule, PRC citizens who participate in an employee stock ownership plan or a stock option plan of an overseas publicly listed company are required to register with the State Administration of Foreign Exchange and complete certain other procedures. For participants of an employee stock ownership plan, an overseas custodian bank should be retained by PRC agent, which could be the PRC subsidiary of such overseas publicly-listed company, to hold on trusteeship all overseas assets held by such participants under the employee share ownership plan. In the case of a stock option plan, a financial institution with stock brokerage qualification at the place where the overseas publicly listed company is listed or a qualified institution designated by the overseas publicly listed company is required to be retained by the PRC agent 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 employee stock ownership plan or stock option plan before the date of the Stock Option Rules, the Stock Option Rules require their PRC employers or PRC agents to complete the relevant formalities within three months of the date of this rule. We and our PRC citizen employees who participate in an employee stock ownership plan or a stock option plan will be subject to these regulations when our company becomes a publicly listed company in the United States. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions. See “Regulation—Regulations on Employee Stock Options Plan.”

The discontinuation of any of the preferential tax treatments 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 has 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 (i) reduces the statutory rate of the enterprise income tax from 33% to 25%, (ii) permits companies established before March 16, 2007 to continue to enjoy their existing tax incentives, adjusted by certain transitional phase-out rules promulgated by the 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 and new enterprises strongly supported by the state” which hold independent ownership of core intellectual

 

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property and simultaneously meet a list of other criteria, financial or non-financial, as stipulated in the implementation rules of the Enterprise Income Tax Law, to enjoy a reduced 15% enterprise income tax rate subject to certain new qualification criteria. AutoNavi Technology, AutoNavi Software and MapABC Technology were recognized by the local provincial level Science and Technology Commission, Finance Bureau, and State and Local Tax Bureaus as “high and new technology enterprises” in May 2009, December 2008 and May 2009, respectively, 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 in practice and a three-year review by the relevant government authorities in China. If any of AutoNavi Technology, AutoNavi Software and MapABC Technology fails to maintain its “high and new technology enterprise” qualification or renew its qualification when its current term expires, its applicable enterprise income tax rate may increase to 25%, which could have a material adverse effect on our financial condition and results of operations.

Preferential tax treatment granted to our subsidiaries by the local governmental authorities is subject to review and may be adjusted or revoked at any time. The discontinuation of any preferential tax treatments currently available to our wholly-owned PRC subsidiary and variable interest entities will cause our effective tax rate to increase, which could have a material adverse effect on our financial condition and results of operations. We cannot assure you that we will be able to maintain our current effective tax rate in the future.

Our global income and the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes 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 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 SAT Circular 82, on April 22, 2009. SAT Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by PRC individuals, like our company, the determining criteria set forth in SAT Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or individuals. Accordingly, we may be considered a resident enterprise and may therefore be subject to the enterprise income tax at 25% on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, 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.

Under the applicable PRC tax laws in effect before January 1, 2008, dividend payments to foreign investors made by foreign-invested enterprises in China, such as AutoNavi Technology, were exempt from PRC withholding tax. We have been advised by our PRC counsel, Jun He Law Offices, that pursuant to the PRC Enterprise Income Tax Law, however, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign investors will be subject to withholding tax at a rate of 10%, 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 Cayman Islands

 

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holding company and substantially all of our income may come from dividends we receive from our subsidiary located in Hong Kong, which is the direct holding company of our PRC subsidiary, AutoNavi Technology. If our Hong Kong subsidiary is considered a non-PRC resident enterprise and holds at least 25% of the equity interest of AutoNavi Technology, dividends that it receives from AutoNavi Technology may be subject to withholding tax at a preferential rate of 5% under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, effective on January 1, 2007, upon receiving approval from the local tax authority. However, if our Hong Kong subsidiary is not considered to be the beneficial owner of such dividends under a tax notice promulgated on October 27, 2009, such dividends would be subject to withholding tax at a rate of 10%. See “Regulation—Regulations on Tax—Dividend Withholding Tax.”

We have been advised by our PRC counsel, Jun He Law Offices, that 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, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would be subject to any PRC withholding 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 enterprise shareholders and ADS holders, your investment in our ordinary shares or ADSs may be materially and adversely affected.

The enforcement of the Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and our results of operations.

On June 29, 2007, the National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. Compared to the Labor Law, the Labor Contract Law establishes more restrictions and increases costs for employers to dismiss employees, including specific provisions related to fixed-term employment contracts, temporary employment, probation, consultation with the labor union and employee assembly, employment without a contract, dismissal of employees, compensation upon termination and overtime work, and collective bargaining. According to the Labor Contract Law, an employer is obliged to sign a labor contract with an unlimited term with an employee if the employer continues to hire the employee after the expiration of two consecutive fixed-term labor contracts or if the employee has worked for the employer for ten consecutive years. The employer also has to pay compensation to an employee if the employer terminates an unlimited-term labor contract. Such compensation is also required when the employer refuses to renew a labor contract that has expired, unless it is the employee who refuses to extend the expired contract. In addition, under the Regulations on Paid Annual Leave for Employees, effective on January 1, 2008, employees who have served more than one year for an employer are entitled to a paid vacation ranging from 5 to 15 days, depending on their length of service. Employees who waive such vacation time at the request of employers shall be compensated for three times their regular salaries for each waived vacation day. As a result of these new measures designed to enhance labor protection, our labor costs are expected to increase, which may adversely affect our business and our results of operations.

Risks Related to this Offering

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied to list the ADSs on the Nasdaq Global Market. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

 

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Negotiations with the underwriters will determine the initial public offering price for our ADSs which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The market price for our ADSs may be volatile.

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

 

  Ÿ  

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

 

  Ÿ  

announcements of studies and reports relating to the quality of our solutions or those of our competitors;

 

  Ÿ  

changes in the economic performance or market valuations of other companies that provide navigation and location-based solutions;

 

  Ÿ  

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

 

  Ÿ  

changes in financial estimates by securities research analysts;

 

  Ÿ  

conditions in the navigation and location-based services industry;

 

  Ÿ  

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

 

  Ÿ  

additions to or departures of our senior management;

 

  Ÿ  

fluctuations of exchange rates between the RMB and the U.S. dollar;

 

  Ÿ  

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

 

  Ÿ  

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

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

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of $7.84 per ADS, representing the difference between the assumed initial public offering price of $11.50 per ADS, the midpoint of the estimated range of the initial public offering price, and our net tangible book value per ADS as of March 31, 2010, after giving effect to the automatic conversion of our Series A preferred shares immediately upon the completion of this offering and net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay

 

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any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

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

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 182,298,000 ordinary shares outstanding including 34,500,000 ordinary shares represented by ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representative. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

Upon completion of this offering, certain holders of our ordinary shares will have the right to cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

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

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares represented by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. If we ask for your instructions and upon timely notice from us, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you, which contain, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exits or the matter materially and adversely affects the rights of holders of the ordinary shares.

 

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

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

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

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

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and all of our directors and executive officers reside outside the United States.

We are incorporated in the Cayman Islands and conduct substantially all of our operations in China through our PRC subsidiary and variable interest entities. All of our directors and executive officers reside outside the United States and a substantial portion of their assets are located outside of the United States. It may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind in a U.S. court, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

 

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Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2009 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, actions by minority shareholders and the fiduciary responsibilities of our directors are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedents in the Cayman Islands as well as from English common law, which provides persuasive, but not binding, authority. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.

As a result, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

We have not allocated a significant portion of the net proceeds of this offering to any particular purpose. Rather, our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

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

We have adopted an amended and restated memorandum and articles of association that will become effective immediately upon the closing of this offering. Our new memorandum and articles of association will contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

Our corporate actions are substantially controlled by our directors and executive officers, who can exert significant influence over important corporate matters, which may reduce the price of our ADSs and deprive you of an opportunity to receive a premium for your shares.

After this offering, our directors and executive officers will beneficially own approximately 44.9% of our outstanding ordinary shares. These shareholders, if acting together, could exert substantial influence over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company

 

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and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. In addition, these persons could divert business opportunities away from us to themselves or others.

We may be classified as a passive foreign investment company for United States federal income tax purposes, which could subject United States investors in the ADSs or ordinary shares to significant adverse tax consequences.

Depending upon the value of our ordinary shares and ADSs and the nature of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Based on our current income and assets and projections as to the value of our ordinary shares and ADSs pursuant to this offering, we do not expect to be classified as a PFIC for the current taxable year. While we do not anticipate becoming a PFIC in 2010, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. In addition, if it is determined that we do not own the stock of the consolidated variable interest entities for U.S. federal income tax purposes, we would likely be treated as a PFIC for our taxable year ending on December 31, 2010 and any subsequent taxable year. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year on the basis of the composition of our income and the value of our active versus passive assets, there can be no assurance that we will not be a PFIC for the taxable year 2010 or any future taxable year. The overall level of our passive assets will be affected by (i) future growth in activities that may potentially produce passive income (i.e., royalty income), and (ii) how, and how quickly, we spend our liquid assets and the cash raised in this offering. Under circumstances where revenues from activities that produce passive royalty income significantly increase relative to our revenues from activities that produce non-passive income or where we determine not to deploy significant amounts of cash for working capital or other active purposes, our risk of becoming classified as a PFIC may substantially increase.

If we were to be or become classified as a PFIC, a U.S. Holder (as defined in “Taxation—Material United States Federal Income Tax Considerations—General”) 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. Further, if we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares. You are urged to consult your tax advisor concerning the United States federal income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we are or become classified as a PFIC. For more information see “Taxation—Material United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

We will incur increased costs as a result of being a public company.

As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the Nasdaq, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” 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 some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

  Ÿ  

our goals and strategies;

 

  Ÿ  

our future business development, financial conditions and results of operations;

 

  Ÿ  

the expected growth of the navigation and location-based service market in China and internationally;

 

  Ÿ  

our expectations regarding demand for and market acceptance of our solutions;

 

  Ÿ  

our expectations regarding the retention and strengthening of our relationships with key customers;

 

  Ÿ  

our plans to invest in research and development to enhance our solution offerings;

 

  Ÿ  

competition in our industry in China and internationally; and

 

  Ÿ  

relevant government policies and regulations relating to our industry.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The navigation and location-based services industry may not grow at the rate projected by market data, or at all. The failure of this market to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the navigation and location-based services industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

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The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $75.9 million, or approximately $89.8 million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of $11.50 per ADS, the midpoint of the price range shown on the front cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $11.50 per ADS would increase (decrease) the net proceeds to us from this offering by $7.0 million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We plan to use the net proceeds of this offering as follows:

 

  Ÿ  

approximately $20 million to $30 million to expand our data processing facilities and build a research and development center;

 

  Ÿ  

approximately $10 million to $20 million to fund the capital expenditure for our aerial photogrammetry business; and

 

  Ÿ  

the balance for general corporate purposes, including funding potential acquisitions of complementary businesses, although we are not currently negotiating any such transactions.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

Pending any use, as described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

In using the proceeds of this offering, as an offshore holding company, we are permitted, under PRC laws and regulations, to provide funding to our PRC subsidiary only through loans or capital contributions and to our variable interest entities only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiary or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to our PRC subsidiary and variable interest entities or to make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

 

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DIVIDEND POLICY

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has complete discretion on whether to distribute dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2010:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the automatic conversion of all of our outstanding Series A preferred shares into 40,000,000 ordinary shares immediately upon the closing of this offering;

 

  Ÿ  

on a pro forma as adjusted basis to reflect the automatic conversion of all of our outstanding Series A preferred shares into 40,000,000 ordinary shares immediately upon the closing of this offering, and the sale of 30,000,000 ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of $11.50 per ADS, the midpoint of the price range shown on the front cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and assuming the underwriters’ option to purchase additional ADSs from us is not exercised.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2010
     Actual    Pro Forma    Pro Forma As
Adjusted
     (in thousands of $)

Series A convertible redeemable preferred shares, $0.0001 par value, 40,000,000 shares authorized, 40,000,000 shares issued and outstanding

   39,326    —      —  

Equity:

        

Ordinary shares, $0.0001 par value, 460,000,000 shares authorized, 112,298,000 shares issued and outstanding, and 152,298,000 shares issued and outstanding on a pro forma basis

   11    15    18

Additional paid-in capital(1)

   29,451    68,773    144,691

Statutory reserve

   4,100    4,100    4,100

Retained earnings

   12,007    12,007    12,007

Accumulated other comprehensive income

   7,943    7,943    7,943
              

Total AutoNavi Holdings Limited shareholders’ equity

   53,512    92,838    168,759
              

Noncontrolling interest

   2,519    2,519    2,519

Total equity(1)

   56,031    95,357    171,278
              

Total capitalization(1)

   95,357    95,357    171,278
              

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $11.50 would increase (decrease) each of additional paid-in capital, total equity and total capitalization by $7.0 million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the conversion of our Series A preferred shares and the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of March 31, 2010 was approximately $91.0 million, or $0.81 per ordinary share as of that date, and $3.24 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the conversion of all outstanding Series A preferred shares into ordinary shares immediately upon the completion of this offering and the additional proceeds we will receive from this offering, from the assumed initial public offering price per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after March 31, 2010, other than to give effect to the conversion of all outstanding Series A preferred shares into ordinary shares immediately upon the completion of this offering and our sale of the ADSs offered in this offering at the assumed initial public offering price of $11.50 per ADS, the midpoint of the estimated range of the initial public offering price, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2010 would have been $166.9 million, or $0.92 per ordinary share and $3.66 per ADS. This represents an immediate increase in net tangible book value of $0.32 per ordinary share and $1.27 per ADS to the existing shareholders and an immediate dilution in net tangible book value of $1.96 per ordinary share and $7.84 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share    Per
ADS

Assumed initial public offering price

   $ 2.875    $ 11.50

Net tangible book value as of March 31, 2010

   $ 0.81    $ 3.24

Pro forma net tangible book value after giving effect to the conversion of our Series A preferred shares

   $ 0.60    $ 2.39

Pro forma net tangible book value after giving effect to the conversion of our Series A preferred shares and this offering

   $ 0.92    $ 3.66

Amount of dilution in net tangible book value to new investors in this offering

   $ 1.96    $ 7.84

The amount of dilution in net tangible book value to new investors in this offering set forth above is calculated by deducting (i) the pro forma net tangible book value after giving effect to the automatic conversion of our Series A preferred shares and this offering from (ii) the assumed initial public offering price.

 

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The following table summarizes, on a pro forma basis as of March 31, 2010, the differences between existing shareholders, including holders of our Series A preferred shares that will be automatically converted into ordinary shares immediately upon the completion of this offering, and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share/ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs from us granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price Per
Ordinary
Share
   Average
Price Per
ADS
     Number    Percent     Amount    Percent           

Existing shareholders

   152,298,000    83.5   $ 58,233,049    40.3   $ 0.38    $ 1.53

New investors

   30,000,000    16.5   $ 86,250,000    59.7   $ 2.875    $ 11.50
                             

Total

   182,298,000    100.0   $ 144,483,049    100.0     
                             

A $1.00 increase (decrease) in the assumed public offering price of $11.50 per ADS would increase (decrease) our pro forma net tangible book value after giving effect to this offering by $7.0 million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to the automatic conversion of our Series A preferred shares and this offering by $0.04 per ordinary share and $0.15 per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by $0.21 per ordinary share and $0.85 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

The discussion and tables above also assume no exercise of any outstanding stock options. As of the date of this prospectus, there were 14,824,600 ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $0.42 per share, and there were 6,412,400 ordinary shares available for future issuance upon the exercise of future grants under our 2007 Share Incentive Plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

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EXCHANGE RATE INFORMATION

Substantially all of our operations are conducted in China and all of our revenues are denominated in RMB. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this prospectus were made at a rate of RMB6.8258 to $1.00, the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2010. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, at the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On June 11, 2010, the noon buying rate was RMB6.8320 to $1.00.

The following table sets forth information concerning exchange rates between the RMB 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 prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. The exchange rates of RMB into U.S. dollars are based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York.

 

Period

   Noon Buying Rate
     Period End    Average(1)    Low    High
     (RMB per $1.00)

2005

   8.0702    8.1826    8.2765    8.0702

2006

   7.8041    7.9579    8.0702    7.8041

2007

   7.2946    7.5806    7.8127    7.2946

2008

   6.8225    6.9193    7.2946    6.7800

2009

   6.8259    6.8295    6.8470    6.8176

December

   6.8259    6.8275    6.8299    6.8244

2010

           

January

   6.8268    6.8269    6.8295    6.8258

February

   6.8258    6.8285    6.8330    6.8258

March

   6.8258    6.8262    6.8270    6.8254

April

   6.8247    6.8256    6.8275    6.8229

May

   6.8305    6.8275    6.8310    6.8245

June (through June 11, 2010)

   6.8320    6.8294    6.8322    6.8268

 

Source: Federal Reserve Statistical Release

 

(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We were incorporated in the Cayman Islands in order to enjoy certain benefits, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of exchange control or currency restrictions, and the availability of professional and support services. However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include a less developed body of Cayman Islands securities laws that provide significantly less protection to investors as compared to the laws of the United States, and the potential lack of standing by Cayman Islands companies to sue before the federal courts of the United States.

Our organizational documents do not contain provisions requiring disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

We have appointed Law Debenture Corporate Services Inc., located at 400 Madison Avenue 4th Floor, New York, New York 10017 as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Thorp Alberga, our counsel as to Cayman Islands law, and Jun He Law Offices, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

  Ÿ  

recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

  Ÿ  

entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Thorp Alberga has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, and which was neither obtained in a manner nor is of a kind enforcement of which is contrary to natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation without any re-examination of the merits of the underlying dispute. However, the Cayman Islands courts are unlikely to enforce a punitive judgment of a United States court predicated upon the liabilities provisions of the federal securities laws in the United States without retrial on the merits if such judgment gives rise to obligations to make payments that may be regarded as fines, penalties or similar charges.

Jun He Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of

 

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reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

 

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CORPORATE STRUCTURE

Applicable PRC laws and regulations provide that foreign investors may only hold a minority interest in surveying and mapping companies formed in China. Moreover, foreign-invested surveying and mapping companies are prohibited from, among other things, producing digital navigation maps and providing aerial photogrammetry services. In addition, foreign investment in companies engaged in value-added telecommunication services, including but not limited to Internet content services, cannot exceed 50%. As a Cayman Islands corporation, we are deemed a foreign legal person under PRC laws. Accordingly, our PRC subsidiary, AutoNavi Technology, which is considered a wholly foreign-owned enterprise, is currently ineligible to engage in the production of digital navigation map data, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services.

We conduct our operations in China primarily through our variable interest entities in China, AutoNavi Software and MapABC Technology. AutoNavi Technology, each of AutoNavi Software and MapABC Technology and their respective shareholders have entered into a series of agreements that enable us to exercise effective control over AutoNavi Software and MapABC Technology in consideration for the services provided by our subsidiary in China. We have been and are expected to continue to be dependent on our variable interest entities to operate our business if the then PRC law does not allow us to directly operate such business in China. We believe that under these contractual arrangements, we have sufficient control over AutoNavi Software and MapABC Technology and their respective shareholders to renew, revise or enter into new contractual arrangements prior to the expiration of the current arrangements on terms that would enable us to continue to operate our business in China after the expiration of the current arrangements, or pursuant to certain amendments and changes of the current applicable PRC laws, regulations and rules on terms that would enable us to continue to operate our business in China validly and legally.

Our contractual arrangements with AutoNavi Software and MapABC Technology and their shareholders enable us to:

 

  Ÿ  

exercise effective control over AutoNavi Software and MapABC Technology;

 

  Ÿ  

receive substantially all of the economic benefits of AutoNavi Software and MapABC Technology in consideration for the services provided by our subsidiary in China; and

 

  Ÿ  

have an exclusive option to purchase all of the equity interests in AutoNavi Software and MapABC Technology, when and to the extent permitted under PRC law, regulations or legal proceedings.

 

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The following diagram illustrates our corporate structure immediately upon the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs from us:

LOGO

 

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The following is a summary of the currently effective contracts among our subsidiary AutoNavi Technology, our variable interest entities AutoNavi Software and MapABC Technology, and the respective shareholders of AutoNavi Software and MapABC Technology.

Agreements that Provide Us Effective Control over AutoNavi Software and MapABC Technology

Operating Agreements.    Pursuant to the operating agreement among AutoNavi Technology, AutoNavi Software and the shareholders of AutoNavi Software, AutoNavi Software must designate the candidates nominated by AutoNavi Technology to be the directors on its board of directors, and must appoint the persons recommended by AutoNavi Technology to be its president, financial controller and other senior executives. AutoNavi Software also agrees to accept the policies and guidance provided by AutoNavi Technology from time to time relating to employment, termination, operations and financial management. Moreover, AutoNavi Software agrees that it will not engage in any transactions that could materially affect its assets, liabilities, rights or operations without the prior consent of AutoNavi Technology. Such transactions include incurrence or assumption of any indebtedness; sale or purchase of any assets or rights, including but not limited to intellectual property rights; incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party; or transfer of any rights or obligations under this agreement to a third party. The term of this agreement will expire on September 27, 2016 and may be extended with AutoNavi Technology’s written confirmation prior to the expiration date. The term of the extension will be determined by AutoNavi Technology in its written confirmation. AutoNavi Technology may terminate the agreement at any time by providing 30 days’ advance written notice to AutoNavi Software and to each of its shareholders. Neither AutoNavi Software nor any of its shareholders may terminate this agreement prior to its expiration date.

The operating agreement and the supplementary agreement among AutoNavi Technology, MapABC Technology and the shareholders of MapABC Technology contain terms substantially similar to the operating agreement described above.

Equity Pledge Agreements.    Pursuant to the equity pledge agreement between AutoNavi Technology and the shareholders of AutoNavi Software, the shareholders of AutoNavi Software pledge all of their equity interests in AutoNavi Software to AutoNavi Technology to guarantee AutoNavi Software’s performance of its obligations under the exclusive technology consulting and service agreement, know-how license agreement, domain name license agreement and patent license agreement. If AutoNavi Software breaches its contractual obligations under those agreements, AutoNavi Technology, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The shareholders of AutoNavi Software agree that, during the term of the equity pledge agreement, without prior written consent of AutoNavi Technology, they will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests that would prejudice AutoNavi Technology’s interest. During the term of the equity pledge agreement, AutoNavi Technology is entitled to receive all the dividends paid on the pledged equity interests. The equity pledge agreement will expire when AutoNavi Software has fully performed its obligations under the exclusive technology consulting and service agreement, know-how license agreement, domain name license agreement and patent license agreement.

The equity pledge agreement between AutoNavi Technology and the shareholders of MapABC Technology is substantially similar to the equity pledge agreement described above, except that the equity interests in MapABC Technology are pledged to secure MapABC Technology’s performance of its obligations under the exclusive technology consulting and service agreement and know-how license agreement.

Power of Attorney.    Pursuant to the irrevocable powers of attorney, the shareholders of AutoNavi Software each appointed Mr. Congwu Cheng as their attorney-in-fact to vote on their behalf

 

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on all matters of AutoNavi Software requiring shareholder approval under PRC laws and regulations and the articles of association of AutoNavi Software. The appointment of Mr. Cheng as the attorney-in-fact is conditional upon his being an officer of AutoNavi Technology. Each power of attorney will remain in force until the earlier of the following events: (1) if the shareholder is instructed by AutoNavi Technology to designate another PRC citizen to be his attorney-in-fact because Mr. Cheng no longer holds any position with AutoNavi Technology, and (2) the operating agreement among AutoNavi Technology, AutoNavi Software and the shareholders of AutoNavi Software is terminated.

The shareholders of MapABC Technology have also each executed an irrevocable power of attorney appointing Mr. Congwu Cheng as their attorney-in-fact to vote on their behalf on all matters of MapABC Technology requiring shareholder approval, with terms substantially similar to the power of attorney executed by the shareholders of AutoNavi Software described above.

Agreements that Transfer Economic Benefits to Us

Exclusive Technology Consulting and Service Agreements.    Pursuant to the exclusive technology consulting and service agreement between AutoNavi Technology and AutoNavi Software, AutoNavi Technology has the exclusive right to provide to AutoNavi Software technology consulting and services related to geographic information systems (GIS), GPS systems, remote sensing technology, digital map, in-dash navigation, portable navigation, wireless and Internet location-based services, and certain other business areas. Without the prior written consent of AutoNavi Technology, AutoNavi Software may not accept technology consulting and services relating to the above business areas provided by any third party with a contract price exceeding RMB1 million ($146,503). AutoNavi Technology owns the exclusive intellectual property rights created as a result of the performance of this agreement. AutoNavi Software agrees to pay annual service fees to AutoNavi Technology in an amount equal to a certain percentage of AutoNavi Software’s annual net revenues. AutoNavi Technology is entitled to adjust the service fee rate from time to time according to the amount of services it has provided to AutoNavi Software. The term of this agreement will expire on September 27, 2016 and may be extended only with AutoNavi Technology’s written confirmation prior to the expiration date. The parties to this agreement will review the agreement at three-month intervals and decide if any amendment is needed. AutoNavi Technology is entitled to terminate the agreement at any time by providing 30 days’ prior written notice to AutoNavi Software.

The exclusive technology consulting and service agreement between AutoNavi Technology and MapABC Technology is substantially similar to the exclusive technology consulting and service agreement described above.

Patent, Know-how and Domain Name License Agreements.    Pursuant to the patent, know-how and domain name license agreements between AutoNavi Technology and AutoNavi Software, AutoNavi Technology grant AutoNavi Software a non-exclusive, non-assignable and non-transferable right to use AutoNavi Technology’s patents, know-how and domain names. AutoNavi Software can only use the patents, know-how and domain names to conduct business according to its authorized business scope. The annual license fee is RMB50,000 ($7,325) for each patent, RMB10,000 ($1,465) for each domain name and RMB50,000 ($7,325) for all the know-how. AutoNavi Technology may waive the license fees at its own discretion. AutoNavi Technology owns the rights to any new technology developed due to implementation of the contract and utilization of AutoNavi Technology’s patents and know-how. These agreements have ten-year terms generally, but in the case of the patent and domain name, the license agreements may expire at the expiration date of the patent and domain name, respectively, if it is less than ten years from the date of the agreement. In addition, with AutoNavi Technology’s written confirmation prior to the expiration date, all the license agreements can be extended for one year. The parties will review each agreement at three-month intervals and determine if any amendment is needed.

 

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The know-how license agreement between AutoNavi Technology and MapABC Technology is substantially similar to the know-how license agreement described above.

Agreements that Provide Us the Option to Purchase the Equity Interest in AutoNavi Software and MapABC Technology

Exclusive Purchase Option Agreements.    Pursuant to the exclusive purchase option agreement among AutoNavi Technology, AutoNavi Software and the shareholders of AutoNavi Software, AutoNavi Software’s shareholders irrevocably grant AutoNavi Technology (or its designated representative(s)) an exclusive option to purchase, to the extent and in the minimum amount permitted under PRC law, all or part of their equity interests in AutoNavi Software. AutoNavi Technology or its designated representative(s) has sole discretion to decide when to exercise the option, whether in part or in full. Without the prior written consent of AutoNavi Technology, AutoNavi Software may not amend the articles of association, increase or decrease the registered capital, sell, transfer, mortgage, create or allow any encumbrance or otherwise dispose of the assets, business, revenues or other beneficial interests, incur or assume any indebtedness, or enter into any material contracts with an amount exceeding RMB1 million ($146,503), except in the ordinary course of business. The term of the agreement will expire on September 27, 2016 and may be extended for an additional ten years at AutoNavi Technology’s discretion.

The exclusive purchase option agreement and the supplementary agreement among AutoNavi Technology, MapABC Technology and the shareholders of MapABC Technology contain terms substantially similar to the exclusive purchase option agreement described above.

In the opinion of Jun He Law Offices, our PRC legal counsel:

 

  Ÿ  

the ownership structures of our variable interest entities and our subsidiary in China, both currently and after giving effect to this offering, comply with all existing PRC laws and regulations;

 

  Ÿ  

the contractual arrangements among our PRC subsidiary, variable interest entities and their shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect; and

 

  Ÿ  

the business operations of our PRC subsidiary and our variable interest entities comply in all material respects with existing PRC laws and regulations.

We have been advised by our PRC legal counsel, however, that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have been further advised by our PRC counsel that if the PRC government finds that the agreements that establish the structure for operating our PRC navigation and location-based solutions businesses do not comply with PRC government restrictions on foreign investment in surveying and mapping and value-added telecommunication services, including but not limited to Internet content provision, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating our businesses in China do not comply with PRC governmental restrictions on foreign investment in surveying and mapping, digital navigation map production, aerial photogrammetry and value-added telecommunication services, including but not limited to Internet content services, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial information for the periods and as of the dates indicated should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results do not necessarily indicate results expected for any future periods.

Our selected consolidated financial data presented below for the years ended December 31, 2007, 2008 and 2009 and our balance sheet data as of December 31, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated balance sheet data as of December 31, 2007 have been derived from our audited consolidated financial statements not included in this prospectus. Our audited consolidated financial statements are prepared in accordance with U.S. GAAP and have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. We have not included financial information for the years ended December 31, 2005 and 2006, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2007, 2008 and 2009, and cannot be provided on a U.S. GAAP basis without unreasonable effort or expense. The selected consolidated statement of operations data for the three months ended March 31, 2009 and 2010 and the selected consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements.

 

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     Year Ended December 31,     Three Months
Ended March 31,
 
     2007     2008     2009     2009     2010  
     (in thousands of $ except for share, per share and
per ADS data)
 

Consolidated Statement of Operations Data

          

Net revenues

   29,653      45,538      57,163      11,633      16,599   

Cost of revenues(1)

   (12,292   (18,842   (20,031   (4,335   (5,668
                              

Gross profit

   17,361      26,696      37,132      7,298      10,931   
                              

Operating expenses(1)

          

Research and development

   (3,167   (5,045   (7,338   (1,585   (2,471

Selling and marketing

   (2,148   (3,591   (5,608   (1,422   (2,276

General and administrative

   (7,523   (9,264   (9,613   (1,747   (4,522

Impairments of goodwill and indefinite-lived intangible assets

   —        (674   —        —        —     
                              

Total operating expenses

   (12,838   (18,574   (22,559   (4,754   (9,269
                              

Government subsidies

   2,308      387      1,016      59      57   

Operating income

   6,831      8,509      15,589      2,603      1,719   
                              

Investment income

   1,296      324      109      1      —     

Interest income

   959      324      295      96      72   

Interest expense

   (249   —        —        —        —     

Impairment loss on short-term investment

   —        (2,000   —        —        —     
                              

Income before income taxes, share of net income of equity accounted investment and discontinued operations

   8,837      7,157      15,993      2,700      1,791   
                              

Income tax expense

   (1,530   (1,145   (1,144   (207   (637

Share of net income (loss) of equity method accounted investment

   —        (121   156      (91   13   
                              

Income from continuing operations

   7,307      5,891      15,005      2,402      1,167   
                              

Loss on discontinued operations, net of tax(1)(2)

   (1,575   (2,212   (4,181   (708   —     

Net income

   5,732      3,679      10,824      1,694      1,167   
                              

Less: Net income (loss) attributable to noncontrolling interest

   (13   1,476      433      132      270   

Net income attributable to AutoNavi Holdings Limited shareholders

   5,745      2,203      10,391      1,562      897   
                              

Net income per share:

          

Net income from continuing operations per share attributable to AutoNavi Holdings Limited shareholders:

          

Basic

   0.05      0.03      0.10      0.01      0.01   

Diluted

   0.05      0.03      0.10      0.01      0.01   

Net income from continuing operations per Series A preferred share-Basic

   0.05      0.03      0.10      0.01      0.01   
                              

Net loss on discontinued operations attributable to AutoNavi Holdings Limited shareholders:

          

Basic

   (0.01   (0.02   (0.03   (0.00   —     

Diluted

   (0.01   (0.02   (0.03   (0.00   —     

Net loss on discontinued operations per Series A preferred share-Basic

   (0.01   (0.02   (0.03   (0.00   —     
                              

Net income per share attributable to AutoNavi Holdings Limited shareholders:

          

Basic

   0.04      0.01      0.07      0.01      0.01   

Diluted

   0.04      0.01      0.07      0.01      0.01   

Net income per Series A preferred share-Basic

   0.04      0.01      0.07      0.01      0.01   
                              

 

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    Year Ended December 31,   Three Months Ended
March 31,
    2007   2008   2009   2009   2010
    (in thousands of $ except for share, per share and per ADS data)

Net income per ADS attributable to AutoNavi Holdings Limited shareholders:(3)

         

Basic

  0.15   0.06   0.27   0.04   0.02

Diluted

  0.15   0.06   0.26   0.04   0.02

Weighted average number of shares used in calculating net income per ordinary share:

         

Basic

  114,000,000   114,000,000   115,675,022   114,000,000   108,292,011

Diluted

  154,000,000   154,000,000   157,188,766   154,000,000   158,515,244

Weighted average number of shares used in calculating net income per Series A preferred share

  40,000,000   40,000,000   40,000,000   40,000,000   40,000,000

 

(1) Including share-based compensation expenses as follows:

 

    Year Ended
December 31,
  Three
Months
Ended
March 31,
    2007   2008   2009   2009   2010
    (in thousands of $)

Allocation of Share-based Compensation Expenses

         

Cost of revenues

  —     —     268   —     385

Research and development

  —     —     601   —     595

Selling and marketing

  —     —     143   —     720

General and administrative

  —     —     1,864   —     2,573

Discontinued operations

  —     —     1,956   —     —  
                   

Total share-based compensation expenses

  —     —     4,832   —     4,273
                   

 

(2) In December 2009, we distributed the equity interests in AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, to all of our shareholders or their designated persons on a pro rata basis. We recorded the pro-rata distribution at the book value of AutoNavi Shanghai, $904,000, as a reduction of retained earnings. AutoNavi Shanghai had been engaged in the telematics business and the results of that business have been presented as discontinued operations for all periods presented in this prospectus.

 

(3) Each ADS represents four ordinary shares.

 

     As of December 31,    As of
March 31,
             2007                    2008            2009    2010
     (in thousands of $)

Consolidated Balance Sheet Data

           

Cash

   33,531    28,777    34,716    39,795

Total current assets

   61,946    62,268    76,009    82,418
                   

Total assets

   92,008    93,645    106,630    112,542
                   

Total current liabilities

   23,373    17,759    16,201    16,672

Total liabilities

   24,437    18,423    16,733    17,185
                   

Series A convertible redeemable preferred shares

   39,326    39,326    39,326    39,326

Total equity

   28,245    35,896    50,571    56,031
                   

Total liabilities, series A convertible redeemable preferred shares and equity

   92,008    93,645    106,630    112,542
                   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading provider of digital map content and navigation and location-based solutions in China. At the core of our business is a comprehensive nationwide digital map database that covers approximately 2.8 million kilometers of roadway and over 12.5 million points of interest across China. Almost all of China’s 1.3 billion people live within the areas covered by our digital map database. In addition, we have completed 3-D navigation maps of key areas in 19 major cities and photo-realistic 3-D models of 16 cities for government related projects. We have also built a technology platform that enables us to develop solutions for our customers.

We have derived our revenues primarily from licensing our digital map data for use in in-dash navigation systems for automobiles and our navigation solutions for use in portable navigation devices. We also derive revenues through providing solutions to public sector and enterprise customers, including aerial photogrammetry solutions, 3-D modeling applications, location-based public sector solutions and location-based enterprise solutions. In addition, we generate revenues by providing our digital map data and solutions to support the location-based services offered by China Mobile, the world’s largest mobile operator by number of subscribers, to several mobile phone manufacturers for pre-installation on their mobile phones, and to more than 6,500 Internet websites in China, including websites operated by Google and SINA.

In 2009, net revenues from our automotive navigation, public sector and enterprise applications and wireless/Internet location-based solutions businesses accounted for 63.3%, 25.1% and 9.0%, respectively, of our total net revenues. For the three months ended March 31, 2010, net revenues from our automotive navigation, public sector and enterprise applications and wireless/Internet location-based services businesses accounted for 73.8%, 13.8% and 10.7%, respectively, of our total net revenues.

Our net revenues increased from $29.7 million in 2007 to $45.5 million in 2008 and to $57.2 million in 2009, representing a CAGR of 38.8% from 2007 to 2009, and increased by 42.7% from $11.6 million for the three months ended March 31, 2009 to $16.6 million for the three months ended March 31, 2010. Net income attributable to AutoNavi Holdings Limited shareholders decreased by 61.7% from $5.7 million in 2007 to $2.2 million in 2008, and increased by 371.7% from $2.2 million in 2008 to $10.4 million in 2009. Net income attributable to AutoNavi Holdings Limited shareholders decreased by 42.6% from $1.6 million for the three months ended March 31, 2009 to $897,000 for the three months ended March 31, 2010. In 2009, we incurred share-based compensation expenses of $4.8 million, including $2.9 million from our continuing operations. For the three months ended March 31, 2010, our share-based compensation expenses were $4.3 million, compared to nil for the three months ended March 31, 2009.

Factors Affecting Our Results of Operations

Our business and operating results are affected by the general forces driving China’s navigation and location-based services industry, which include the overall national economic growth, the increase

 

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in disposable income, the sales of new vehicles equipped with in-dash navigation systems and sales of portable navigation devices, government policies and initiatives affecting demand for digital map data and location-based solutions, and the demand for wireless and Internet location-based solutions in China. Unfavorable changes in any of these general industry conditions could negatively affect our results of operations.

Our operating results are also affected by company-specific factors, including:

 

  Ÿ  

sales of products and services by our customers that incorporate our map data and solutions;

 

  Ÿ  

development of new solutions utilizing our digital map database;

 

  Ÿ  

ability to secure additional contracts and projects for our public sector and enterprise applications business; and

 

  Ÿ  

acquisitions.

Sales of products and services by our customers incorporating our map data and solutions

Our revenues are directly affected by the sales of products and services incorporating our map data and solutions, which include vehicles with in-dash navigation systems, portable navigation devices, mobile phones and wireless location-based services offered by China Mobile. The quality, coverage and depth of our digital map database directly affects the experience of the end-users. According to the Analysys In-Dash Report, sales of in-dash navigation systems in China are projected to grow at a CAGR of 44.6% from 348,000 units in 2009 to 1.1 million units in 2012. Sales of portable navigation devices in China are expected to increase from 1.5 million units in 2009 to 2.8 million units in 2012, representing a CAGR of 22.2%, according to the Analysys PND Report. In addition, China has the largest number of mobile subscribers in the world, reaching 786.5 million as of the end of April 2010, according to the PRC Ministry of Industry and Information Technology. Unit sales of GPS-enabled mobile phones in China are projected to grow at a CAGR of 128.6% from 7.4 million in 2009 to 88.4 million in 2012, according to Analysys International. The introduction of 3G mobile services by all three mobile operators in China in 2009, coupled with the increasing adoption of GPS in mobile phones, presents significant opportunities for location-based service providers as their applications become increasingly available to users.

The process of selecting the map data supplier for a new vehicle model and integrating the map data with the vehicle’s hardware and software environment is long, generally beginning two to four years before the new vehicle model is introduced in the market. Because of system compatibility concerns, the switching costs are relatively high, and once a map data supplier is selected for a particular vehicle model, the automobile manufacturer rarely changes the map data supplier for that model. We currently provide digital map data for use in over 100 vehicle models sold in China, including multiple Audi and BMW models and other international and domestic automobile models. On the other hand, it is relatively easy for portable navigation device manufacturers to switch map data and solution providers.

Our future operating results and growth prospects will largely depend on the growth in sales of our customers’ products and services incorporating our map data and solutions. Therefore, it is important that we retain existing key customers and develop business relationships with additional customers. Our agreements with China Mobile Liaoning regarding the nationwide digital map database and the new mobile navigation service will expire in December 2010. If China Mobile Liaoning does not renew these agreements, or if it proposes new commercial terms materially different from the current terms, revenues from our wireless location-based solutions business may be materially and adversely affected. See “Risk Factors—Risks Related to Our Business and Industry—If we fail to maintain our relationship with China Mobile, our wireless location-based solutions business and growth prospects could be materially and adversely affected.”

 

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Development of new solutions utilizing our digital map database

Creating a comprehensive digital map database and related technology platform requires substantial upfront investments. We have created a comprehensive digital map database and technology platform, which can support a wide variety of applications, and will only need to make incremental investments to maintain and improve our database and technology platform and develop new solutions in the future. Our history reflects the scalability of our digital map database. Initially, we built our digital map database and technology platform to supply digital map data for in-dash navigation systems. Subsequently, we have expanded our offerings to include navigation solutions for portable navigation devices and mobile phones, and location-based solutions utilizing our map database and/or technology platform for public sector and enterprise customers, mobile operators and Internet service providers. Our future results of operations will depend in part on our ability to develop new revenue-generating solutions based on our digital map database and technology platform.

Ability to secure additional contracts and projects for our public sector and enterprise applications business

Our revenues from the public sector and enterprise applications business have typically been generated on a project basis. We provide aerial photogrammetry solutions to government agencies in connection with land usage surveys and other projects. We also develop 3-D digital city models and geographic information systems for local governments. In addition, we provide, on a project basis, location-based wireless data collection solutions to municipal governments and location-based solutions to enterprises for asset tracking, fleet management and other purposes. After completing a project, we need to secure new projects in order to generate additional revenues. The Chinese government increasingly uses geographic information to improve public services. For example, the State Bureau of Surveying and Mapping announced in 2006 the “Digital City Geospatial Framework” initiative to help municipal governments across China build standard citywide geographic information platforms. The State Bureau of Surveying and Mapping expects this initiative to be implemented in over 330 large and medium-sized cities and additional selected small cities by the end of 2015. As the Chinese government continues to invest in geographic information platforms and related applications, usage of digital map and location-based services in the public sector is likely to increase.

We expect to continue to generate a substantial portion of our public sector and enterprise applications business through individual projects. In addition, we are exploring opportunities to develop longer term relationships with public sector and enterprise customers that will generate recurring revenue streams. Our future operating results will be affected by our ability to secure additional contracts and projects for our public sector and enterprise applications business, particularly government contracts for our aerial photogrammetry solutions and 3-D modeling applications.

Acquisitions

Historically, our business expansion has been driven primarily by organic growth, supplemented by selected acquisitions of additional capabilities, customers or licenses. For example, we gained Internet-based map application capabilities in 2006 by acquiring control of MapABC Technology, a leading online map application solution provider in China. In 2006, we added aerial photogrammetry solutions to our solution portfolio by acquiring Xingtiandi Technology.

 

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Net Revenues

Our net revenues are net of PRC business taxes and related surcharges. The following table sets forth our net revenues derived from each of our revenue sources, both in an absolute amount and as a percentage of total net revenues, for the periods presented.

 

    Year Ended
December 31,
  Three Months Ended March 31,
    2007   2008   2009   2009   2010
    $   %   $   %   $   %   $   %   $   %
    (in thousands, except percentages)

Net revenues:

                   

Automotive navigation

  21,491   72.5   29,527   64.8   36,210   63.3   6,940   59.7   12,258   73.8

Public sector and enterprise applications

  5,159   17.4   10,579   23.2   14,350   25.1   3,199   27.5   2,293   13.8

Wireless/Internet location-based solutions

  915   3.1   2,658   5.9   5,153   9.0   911   7.8   1,777   10.7

Other

  2,088   7.0   2,774   6.1   1,450   2.6   583   5.0   271   1.7
                                       

Total net revenues

  29,653   100.0   45,538   100.0   57,163   100.0   11,633   100.0   16,599   100.0
                                       

Automotive Navigation

Net revenues from the automotive navigation market accounted for 72.5%, 64.8%, 63.3% and 73.8% of our total net revenues in 2007, 2008, 2009 and the first quarter of 2010, respectively. We derive revenues in our automotive navigation business primarily from licensing our map data or navigation solutions for use in in-dash navigation systems and portable navigation devices.

In-dash Navigation Systems.    We derive revenues from licensing our digital map data to in-dash navigation system manufacturers and automobile manufacturers, mainly through ADF Navigation, a majority owned subsidiary of AutoNavi Software. We have entered into contractual relationships with both in-dash navigation system manufacturers and automobile manufacturers. Under these contracts, we charge a license fee for each copy of our digital map data delivered. We price our digital map data based on direct negotiations with our customers and may adjust the price from time to time in response to customer requests. In addition to the initial sale of map data, we also provide updated map data to our customers based on separately negotiated terms.

Our licensing revenues are affected primarily by the number of digital map data copies licensed, which in turn is directly linked to the number of vehicles sold equipped with in-dash navigation systems using our digital map data. The growth of our licensing revenues in the in-dash navigation systems market has been driven primarily by the growth in sales of existing vehicle models equipped with in-dash navigation systems using our digital map data. We expect that the future growth of our licensing revenues will also be driven by the additions of new vehicle models using our map data. Passenger car sales in China have grown rapidly in recent years, driven by rapid economic growth and the resulting increases in disposable income. Given China’s low vehicle penetration rate, we expect that the growth in passenger car sales, including sales of vehicles equipped with in-dash navigation systems, will continue. Moreover, we expect that the adoption rate of vehicles equipped with in-dash navigation systems, measured as a percentage of the total number of vehicles sold, will also increase. We believe that our sales volume in the in-dash navigation systems market will benefit from this growth trend. Any dramatic changes in China’s automotive market, however, could significantly affect our sales.

Portable Navigation Devices.    We license customized navigation solutions, ranging from digital map data to a total solution that consists of digital map data, the navigation engine and the user

 

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interface, to portable navigation device manufacturers. Under our contractual arrangements with portable navigation device manufacturers, we generally charge a license fee for each copy of our solutions provided to a customer. We price our customized solutions primarily based on the complexity of our solutions and market conditions and adjust our prices when needed.

Our licensing revenues from the portable navigation devices market in 2007, 2008, 2009 and the first quarter of 2010 were affected significantly by the timing and amount of the license fees we received from the one customer with which we had a fixed license fee arrangement. As sales to other portable navigation device manufacturers increase, we expect that our licensing revenues will increasingly be affected by the number of copies of our solutions licensed and the unit license fees. The number of copies of our navigation solutions licensed is directly linked to the sales by our customers of portable navigation devices incorporating our solutions. The unit license fees are affected primarily by competition. The portable navigation device market for digital map solutions is highly competitive with multiple map data providers. As a result of this and the relatively short product life cycles of portable navigation devices, we face greater pressure to lower prices and have adjusted prices more frequently than in the in-dash navigation systems market. We expect that this trend will continue in the future.

Public Sector and Enterprise Applications

Net revenues from the public sector and enterprise applications market accounted for 17.4%, 23.2%, 25.1% and 13.8% of our total net revenues in 2007, 2008, 2009 and the first quarter of 2010, respectively. We derive revenues in this market primarily from aerial photogrammetry solutions provided to government agencies for land use survey and other purposes. Revenues from aerial photogrammetry solutions are affected by the size of the areas covered by our aerial surveying and mapping missions. We also derive revenues from developing 3-D digital city models and geographic information systems for local governments and providing wireless data collection solutions to government agencies and location-based solutions to enterprises for asset tracking, fleet management and other purposes. We expect to develop more applications and endeavor to develop and sell solutions that generate recurring revenues. For example, we are developing a digital map-based geographic information platform designed specifically for local governments. In return for an annual subscription fee, the government users will be able to access the platform remotely and retrieve various types of location specific information. We expect to complete the platform in 2011 and will add more contents and functions to the platform in order to generate more revenues, especially recurring revenues. Historically, our revenues from the public sector and enterprise applications business have been generated primarily on a project basis. These project-based revenues are non-recurring in nature and may fluctuate significantly from period to period. However, as a result of the relationships we have built with our government and enterprise customers, we believe we are well positioned to provide subsequent system maintenance, upgrade and other services that will generate recurring revenues. For example, we have begun generating revenues from data update, system maintenance, new application developments and joint operations in connection with some of our location-based public sector and enterprise solution projects.

Wireless/Internet Location-based Solutions

Net revenues from the wireless/Internet location-based solutions business accounted for 3.1%, 5.8%, 9.0% and 10.7% of our total net revenues in 2007, 2008, 2009 and the first quarter of 2010, respectively. In our wireless location-based solutions business, we derive revenues from providing a nationwide digital map database to support China Mobile’s location-based services. In return for our solutions, we receive payments from China Mobile primarily based on the level of database usage by its subscribers. We also have collaborated with several mobile phone manufacturers, primarily Samsung, to pre-install our navigation solutions on their mobile phones. We receive payments from the phone manufacturers based on the number of copies of solutions installed. We believe this market has

 

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substantial growth potential and will contribute an increasing portion of our revenues in the next several years. In our Internet location-based solutions business, we derive revenues from providing third-party websites access to our digital map database, including through map API. We provide basic solutions to most of our website customers for free to increase awareness of our map application solutions. For a small number of customers that require advanced features of our digital map database, we charge fees for using our solutions, generally under two arrangements. Under the fixed fee arrangement, we charge a fixed fee for unlimited access to our map database over a specified period. Under the annual fee plus usage fee arrangement, we charge a minimum annual fee, which allows end-users to conduct up to a certain number of searches of our map data through one or more of our customers’ websites, and a usage fee based on the number of searches in excess of the number covered by the minimum annual fee.

Other

Net revenues from other miscellaneous sources accounted for 7.0%, 6.1%, 2.5% and 1.7% of our total net revenues in 2007, 2008, 2009 and the first quarter of 2010, respectively. We generated revenues from the distribution of in-dash navigation devices made by Aisin AW Co., Ltd., a minority shareholder of ADF Navigation. We recorded as revenues the net amount earned after deducting the amount paid to the in-dash system manufacturer. We ceased this distribution business in 2009. In addition, we have derived revenues from road test services provided in connection with furnishing our map data to in-dash navigation system manufacturers and automobile manufacturers, certain technical consulting services, and publishing and advertising services.

Cost of Revenues and Operating Expenses

The following table sets forth our cost of revenues and operating expenses, both in an absolute amount and as a percentage of total net revenues for the periods indicated.

 

    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    $     %     $     %     $     %     $     %     $     %  
    (in thousands, except percentages)  

Net revenues

  29,653      100.0      45,538      100.0      57,163      100.0      11,633      100.0      16,599      100.0   
                                                           

Cost of revenues(1)

  (12,292   (41.5   (18,842   (41.4   (20,031   (35.0   (4,335   (37.3   (5,668   (34.1
                                                           

Operating expenses:

                   

Research and development(1)

  (3,167   (10.7   (5,045   (11.1   (7,338   (12.8   (1,585   (13.6   (2,471   (14.9

Selling and
marketing(1)

  (2,148   (7.2   (3,591   (7.9   (5,608   (9.8   (1,422   (12.2   (2,276   (13.7

General and administrative(1)

  (7,523   (25.4   (9,264   (20.3   (9,613   (16.8   (1,747   (15.0   (4,522   (27.2

Impairment of goodwill and indefinite-lived intangible assets

  —        —        (674   (1.5   —        —        —        —        —        —     
                                                           

Total operating expenses

  (12,838   (43.3   (18,574   (40.8   (22,559   (39.4   (4,754   (40.8   (9,269   (55.8
                                                           

 

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(1) Include share-based compensation expenses as follows, both in an absolute amount and as a percentage of total net revenues for the periods indicated:

 

     Year Ended December 31,    Three Months
Ended March 31,
     2007    2008    2009    2009    2010
         $        %        $        %        $        %        $        %        $        %
     (in thousands, except percentages)

Allocation of Share-based Compensation Expenses

                             

Cost of revenues

   —      —      —      —      268    0.5    —      —      385    2.3

Research and development

   —      —      —      —      601    1.0    —      —      595    3.6

Selling and marketing

   —      —      —      —      143    0.3    —      —      720    4.3

General and administrative

   —      —      —      —      1,864    3.3    —      —      2,573    15.5
                                                 

Total share-based compensation expenses in continuing operations

   —      —      —      —      2,876    5.1    —      —      4,273    25.7
                                                 

Cost of Revenues

Our cost of revenues, which refers to costs directly related to the generation of revenues, consists principally of the following:

 

  Ÿ  

salary and benefit expenses for employees directly involved in data collection and processing;

 

  Ÿ  

direct production costs, which comprise primarily of aerial photogrammetry-related costs and field survey-related costs; and

 

  Ÿ  

depreciation of facilities and equipment used in data collection and processing.

Our cost of revenues is primarily related to data collection and processing and is not directly linked to the level of our revenues. As a result, if we experience a significant increase in our revenues, we would also expect an increase in our gross margin. Our cost of revenues as a percentage of our total net revenues decreased from 41.5% for the year ended December 31, 2007 to 35.0% for the year ended December 31, 2009, and to 34.1% for the three months ended March 31, 2010. Maintaining a comprehensive digital map database requires ongoing investments. As a result, we expect that the absolute amount of our cost of revenues will continue to increase.

Operating Expenses

Our operating expenses consist of research and development expenses, selling and marketing expenses, general and administrative expenses and impairment of goodwill and indefinite-lived intangible assets.

Research and Development Expenses.    Our research and development expenses primarily consist of salary and benefit expenses for research and development staff, including share-based compensation expenses. Our research and development expenses as a percentage of our total net revenues increased from 10.7% for the year ended December 31, 2007 to 12.8% for the year ended December 31, 2009 and to 14.9% for the three months ended March 31, 2010 primarily due to significant increases in resources committed to research and development activities as part of our growth strategy. We anticipate that our research and development expenses will increase as we devote more resources to developing new technologies and tools to enhance our database production capability and efficiency, improving our existing and developing new solutions and improving our analytical capability.

 

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Selling and Marketing Expenses.    Our selling and marketing expenses primarily consist of the following:

 

  Ÿ  

salary and benefit expenses for sales and marketing staff, including share-based compensation expenses;

 

  Ÿ  

promotion and marketing expenses, including costs for sponsoring special events such as the 2010 Shanghai World Expo and organizing and participating in industry conferences and expenses for business development activities; and

 

  Ÿ  

travel-related expenses for sales and marketing purposes.

Our selling and marketing expenses as a percentage of our total net revenues increased from 7.2% for the year ended December 31, 2007 to 9.8% for the year ended December 31, 2009 and to 13.7% for the three months ended March 31, 2010 primarily due to significant increases in salary and benefit expenses and promotion and marketing expenses. Going forward, we expect our selling and marketing expenses to continue to increase as we further expand our business, especially our wireless/Internet location-based solution business, which may require us to develop our brand recognition among end-users.

General and Administrative Expenses.    Our general and administrative expenses primarily comprise of the following:

 

  Ÿ  

salary and benefit expenses for management and administrative staff, including share-based compensation expenses;

 

  Ÿ  

depreciation of facilities and office equipment; and

 

  Ÿ  

professional service expenses.

Our general and administrative expenses as a percentage of our total net revenues decreased from 25.4% for the year ended December 31, 2007 to 16.8% for the year ended December 31, 2009, as our revenues grew at a faster pace than our general and administrative expenses during these periods, and then increased to 27.2% for the three months ended March 31, 2010 mainly as a result of share-based compensation expenses incurred during the period. We expect that our general and administrative expenses will continue to increase as we incur additional costs in connection with the growth of our business and with our becoming a publicly traded company, including share-based compensation expenses for management, depreciation of new properties and equipment purchased and costs to enhance our internal control.

Impairment of Goodwill and Indefinite-lived Intangible Assets.    We review annually the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. We recognized an impairment charge of $674,000 in 2008, primarily arising from our acquisition of Beijing Yadao Xingkong Advertising Co., Ltd. and Beijing Yadao Media & Culture Development Co., Ltd.

Critical Accounting Policies

We prepare our financial statements in accordance with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and liabilities, contingent assets and liabilities and net revenues and expenses. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from what we expect. This is especially true with some accounting policies that require

 

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higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because they involve the greatest reliance on our management’s judgment.

Revenue Recognition

Automotive Navigation

In-dash Navigation Systems.    We provide licenses of digital map data to automobile manufacturers for use in in-dash navigation systems on a per copy basis. At present, our sales to automobile manufacturers do not include any embedded navigation software, and we do not undertake to provide updates to map data as part of the initial transaction. If automobile manufacturers subsequently require updates, we enter into separately negotiated transactions with the manufacturers. We only provide telephone support to end-users in addition to basic warranty terms. Consequently, we recognize revenues from license of digital map data for in-dash navigation systems when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met upon delivery to the customer. Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement. Shipping documents are used to verify the delivery. We assess whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess the collectability of accounts receivable based primarily upon the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

Because our telephone support service is ongoing and is available to all end-users of our products, we believe it is reasonable to recognize the cost as a period cost when incurred rather than accrue for the cost at the time of the original sale. We do not make a provision for warranty costs as we have no history of significant costs incurred under our warranties.

Portable Navigation Devices.    We offer navigation solutions to portable navigation device manufacturers based on their specific needs, which range from digital map data only to a “total solution” including digital map data, a navigation engine and a user interface. We sometimes undertake to make available to end-users free updates to the map data for a specified period (usually not exceeding one year) on a when-and-if-available basis. Other than free updates to map data, we only provide telephone support to end-users in addition to basic warranty terms.

Because of our obligation to provide updates, we have considered whether we have adequate evidence that would allow us to bifurcate the revenues attributable to the license from the revenues attributable to the right to receive updates. However, we do not believe that we have sufficient evidence of the fair value of the update right and consequently only recognize revenues from each license over the term of the update right commencing with the delivery of the licenses.

Under our contracts with one navigation device manufacturer, because in this case a significant portion of the payments is due in more than one year, and due to a lack of historical experience with extended payment terms, we further limit the amount of revenues recognized to the amount of cash received.

Public Sector and Enterprise Applications

Aerial Photogrammetry and 3-D Modeling Applications.    We provide aerial digital maps and 3-D modeling applications to certain PRC government agencies to meet their land usage survey, specific needs for 3-D geographic information and other needs pursuant to a service arrangement, which usually takes several months to finish. We do not provide post contract services for these arrangements.

 

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For these contracts, we believe that it is appropriate to consider the guidance relating to the accounting for long-term contracts which generally requires that such contracts be accounted for based on the percentage of the completion at the reporting date, provided that the estimates of the costs to complete and the extent of the progress toward completion on long-term contracts are reasonably reliable. We have considered various methods to measure the percentage of completion, including proportional performance and the ratio of input costs incurred to total expected contract costs. The contracts involve the mapping of certain geographical areas and the costs incurred are generally evenly incurred as the mapping process proceeds. We therefore believe it is appropriate to use costs incurred to determine the amount of revenues to recognize on an uncompleted contract. We have experience dating back to 2004 in estimating total costs and appropriate systems for capturing such contract costs.

Location-based Public Sector and Enterprise Solutions.    We offer wireless data collection solutions designed to help municipal governments improve their civil management efficiency or to assist enterprises to better monitor and manage their resources, including tracking assets and managing fleets. These solution offerings usually include third-party hardware, application software for servers, application software for terminals, and free support services mainly including telephone support and free unspecified upgrades to application software on a when-and-if-available basis for one to two years.

The support services, which are the last undelivered element in the arrangement, start upon the delivery of the software. However, we do not believe that we have reliable evidence of the fair value of the support services. Moreover, the customer does not accept the delivered software and hardware until the completion of a preliminary acceptance test. Accordingly, the entire arrangement is accounted as a single unit of accounting, resulting in the revenues and costs applicable to both the delivered software and third-party hardware and undelivered support services being recorded ratably over the remaining service period upon the completion of the preliminary acceptance test.

Wireless/Internet Location-based Solutions

In our wireless location-based solutions business, we provide a nationwide digital map database to China Mobile to support its wireless location-based services provided to its subscribers. Revenues are computed based on a pre-agreed fee per usage of our map data by mobile subscribers. China Mobile provides us with a monthly statement, which represents the principal evidence that our solutions have been delivered. We recognize revenues on the basis of the monthly statements.

In addition, we provide map application solutions, including a perpetual license of map data, a navigation engine and a user interface, on a per copy basis to mobile phone manufacturers to pre-install the solutions on their mobile phones. As no free updates are provided, revenues are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are usually met upon the delivery of our solutions.

In our Internet location-based solutions business, we provide map application solutions to our customers, enabling their websites to access our digital map database and incorporate our location-based information into their own website applications. Revenues derived from this type of arrangements include a fixed annual or quarterly fee, or a minimum fee plus an additional fee when the website reaches certain performance goals, such as click rates or number of advertisements displayed. We recognize fixed fees and minimum fees ratably over the contract periods.

Other

We, through ADF Navigation, also serve as a distributor of a particular manufacturer’s in-dash navigation systems for sales to automobile manufacturers. We record as revenues the net amount

 

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earned after deducting the cost of navigation systems paid to the system manufacturer because (1) the system manufacturer is the primary obligor in the arrangement, (2) the price of the in-dash navigation systems is determined by the system manufacturer and automobile manufacturers, and we receive a predetermined fixed fee, (3) the system manufacturer and automobile manufacturers determine the product specifications, (4) the system manufacturer bears credit risk, and (5) we do not have the right to select suppliers.

Other miscellaneous services provided by us include technical consulting services, publishing and advertising services, and navigation system road test services. These revenues are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured. These criteria are generally met upon the completion of the services.

Research and Development Expenses

We have developed software for both internal purposes and for resale through incorporation into some of the solutions that we sell. We have considered whether it is appropriate to capitalize any part of those costs. We expense all such costs as incurred as it is impractical to separate the costs into costs incurred before or after establishing technical feasibility.

Share-based Compensation

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

On July 15, 2007, we adopted the 2007 Share Incentive Plan. The maximum aggregate number of our shares which may be issued pursuant to all awards under the plan, as currently in effect, is 31,987,000 shares. The options and nonvested shares discussed below were granted under the 2007 Share Incentive Plan.

On May 13, 2008, we granted 800,000 restricted shares to four employees. The shares, which are treated as nonvested shares under U.S. GAAP, will vest immediately upon our completion of an initial public offering and will be forfeited if employment is terminated prior to the vesting. The compensation costs in relation to these nonvested shares amounting to $328,000 will be recorded as of the completion of this offering.

On April 15, 2009, we granted options to purchase 7,732,000 ordinary shares at an exercise price of $0.30 per share and 5,868,000 nonvested shares, which will vest over certain periods, to our employees.

On December 24, 2009, we granted options to purchase 7,482,000 ordinary shares at an exercise price of $0.50 per share and 2,840,000 nonvested shares to our employees.

On March 31, 2010, we modified the terms of the options to purchase 14,736,800 ordinary shares as described below. These options had been granted to certain executive officers and employees and originally had a vesting schedule of 1/4 vesting on the first anniversary from the date of grant and 1/16 vesting in each of the 12 quarters subsequent to the first vesting date.

Options to purchase 1,252,000 ordinary share were canceled in exchange for the same number of nonvested shares, which vested immediately on March 31, 2010.

 

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Options to purchase 3,670,000 ordinary shares were modified to vest immediately on March 31, 2010. The vesting schedule of options to purchase 4,179,000 ordinary shares was modified so that 50% of the options vested immediately on March 31, 2010, 4.11% will vest in each of the subsequent 12 quarters after March 31, 2010 and 0.68% will vest on April 15, 2013. The vesting schedule of options to purchase 2,598,800 ordinary shares was modified so that 25% of the options vested immediately on March 31, 2010, 6.17% will vest in each of the subsequent 12 quarters after March 31, 2010 and 0.96% will vest on April 15, 2013. The vesting schedule of options to purchase 2,565,000 ordinary shares was modified so that 50% of the options vested immediately on March 31, 2010, 3.35% will vest in each of the subsequent 14 quarters after March 31, 2010 and 3.10% will vest on December 24, 2013. The vesting schedule of options to purchase 472,000 ordinary shares were modified so that 25% of the options vested immediately on March 31, 2010, 5.02% of the options will vest in each of the subsequent 14 quarters after March 31, 2010 and 4.72% will vest on December 24, 2013.

One employee’s options to purchase 150,000 ordinary shares were canceled.

In addition, on March 31, 2010, an aggregate of 2,799,000 nonvested shares previously granted to three employees, which originally had a vesting period of two years or three years from the date of grant, were modified to vest immediately on March 31, 2010.

On April 30, 2010, we granted options to purchase a total of 1,044,000 ordinary shares to our employees at an exercise price of $0.50 or $1.00 per share. The options will vest in accordance with the vesting schedule set out in the option award agreement, which is either (1) 100% immediately on date of grant or (2) first 1/4 on the date of grant and 3/64 in each of the 16 quarters subsequent to the date of grant.

The tables below set forth certain information concerning share options and nonvested shares granted to our employees on the dates indicated:

Options:

 

Grant Date

  No. of Ordinary
Shares Underlying
Options Granted
  Exercise Price
per Share
  Fair Value per
Share at the
Grant Date
    Intrinsic Value
per Option at
the Grant Date
  Type of
Valuation

April 15, 2009

  7,732,000   $ 0.30   $ 0.45      $ 0.15   Retrospective

December 24, 2009

  7,482,000   $ 0.50   $ 0.71      $ 0.21   Contemporaneous

April 30, 2010

  400,000   $ 0.50   $ 2.50 (1)    $ 2.00   Contemporaneous

April 30, 2010

  644,000   $ 1.00   $ 2.50 (1)    $ 1.50   Contemporaneous

 

(1) The fair value of our ordinary shares on April 30, 2010 was determined based on the purchase price of our ordinary shares in a share sale by one of our shareholders to an unrelated third party in May 2010.

Nonvested Shares:

 

Grant date

   No. of Nonvested 
Shares Granted
   Fair Value per Share at the
Grant Date
   Type of
Valuation

May 13, 2008

   800,000    $ 0.41    Retrospective

April 15, 2009

   5,868,000    $ 0.45    Retrospective

December 24, 2009

   2,840,000    $ 0.71    Contemporaneous

March 31, 2010

   1,252,000    $ 1.97    Contemporaneous

In determining the fair value of our equity instruments as of May 13, 2008, April 15, 2009, December 24, 2009 and March 31, 2010, we relied on valuation reports prepared by American Appraisal China Limited, or American Appraisal, an independent third-party appraisal firm, based on

 

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data we provided. The valuation reports provided us with guidelines in determining the fair value of the equity instruments, but the determination was made by our management.

In determining the fair value of our stock options, the binomial lattice option pricing model was applied. The key assumptions used to determine the fair value of the options at the relevant grant dates and modification date were as follows:

 

Risk-free interest rate of return

   2.772% to 3.572%

Exercise multiple

   2.0   

Expected volatility

   51.0% to 57.2%

Expected dividend yield

   0.00%

The risk-free interest rate was estimated based on the yield to maturity of China’s international government bonds with a maturity period close to the expected term of the options. The exercise multiple was estimated with reference to study on general exercise behaviors of employee stock options of public companies. The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the expected term of the options. The dividend yield was estimated based on our expected dividend policy over the expected term of the options. We are required to estimate forfeitures at the time of grant and record share-based compensation expenses only for those awards that are expected to vest. If actual forfeitures differ from these estimates, we may need to revise the estimates used in subsequent periods.

If factors change and we employ different assumptions for estimating share-based compensation expenses in future periods or if we decide to use a different valuation model, our share-based compensation expenses in future periods may differ significantly from what we have recorded in prior periods and could materially affect our operating income, net income and net income per share.

The binomial lattice option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, which are characteristics not present in our option grants. Existing valuation models, including the Black-Scholes and binomial lattice models, may not provide reliable measures of the fair value of our share-based compensation. Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may be significantly different from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based compensation awards, such as employee share options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair value originally estimated on the grant date and reported in our financial statements. Alternatively, values that are significantly higher than fair values originally estimated on the grant date and reported in our financial statements may be realized from these instruments. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

As a private company with no quoted market in our ordinary shares, we need to estimate the fair value of our ordinary shares at the relevant grant dates. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of each grant.

In determining the fair values of our ordinary shares as of each award grant date other than April 30, 2010, three generally accepted approaches to value were considered: cost, market and income approaches. While useful for certain purposes, the cost approach is generally not considered applicable to the valuation of a company as a going concern, as it does not capture the future earning

 

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potential of the business. The comparability of our peer companies’ financial metrics and the relevance of the market approach were also considered low since our target market and stage of development are different from those of the publicly listed companies in the same industry. In view of the above, we determined that the income approach is the most appropriate method to derive the fair values of our ordinary shares. In addition, we took into consideration of the guidance prescribed by the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid.

The income approach involves applying appropriate discount rates to estimated cash flows that are subject to a number of assumptions. These assumptions include: no material changes in the existing political, legal, fiscal and economic conditions in China; our ability to recruit and retain competent management, key personnel and technical staff to support our ongoing operations; and no material deviation in industry trends and market conditions from economic forecasts. These assumptions are inherently uncertain and subjective. The risks associated with achieving the estimated cash flow were assessed in selecting the appropriate discount rates, which had been determined to be 20.5%, 22.0%, 20.0% and 18.0% on May 13, 2008, April 15, 2009, December 24, 2009 and March 31, 2010, respectively. The discount rates were based on the estimated market required rate of return for investing in our company, or weighted average cost of capital (WACC), which was derived by using the Capital Asset Pricing Model, a method that market participants commonly use to price securities. The change in WACC was the combined result of the changes in the risk-free rate, industry-average correlated relative volatility coefficient beta, equity risk premium, size of our company, scale of our business and our ability in achieving forecast projections.

A discount for lack of marketability, or DLOM, was also applied to reflect the fact that there is no ready public market for our shares as we are a closely held private company. When determining the discount for lack of marketability, the Black-Scholes option model was used. Under the option-pricing method, the cost of the put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the discount for lack of marketability. Based on the analysis, DLOMs of 18%, 16%, 12% and 10% were used for the valuation of our ordinary shares as of May 13, 2008, April 15, 2009, December 24, 2009 and March 31, 2010, respectively.

The option-pricing method was used to allocate equity value of our company to preferred and ordinary shares, taking into account the guidance prescribed by the Practice Aid. This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. The volatility of our shares was estimated based on the historical volatility of comparable listed companies’ shares. Had we used different estimates of volatility, the allocations between preferred and ordinary shares would have been different.

The fair value of our ordinary shares increased from $0.41 per share for the May 13, 2008 grants to $0.45 per share for the April 15, 2009 grants. This increase was primarily attributable to the growth of our business.

The fair value of our ordinary shares increased from $0.45 per share for the April 15, 2009 grants to $0.71 per share for the December 24, 2009 grants. This increase was primarily attributable to the following factors:

 

  Ÿ  

We adjusted our estimated net income and cash flows for future periods primarily because revenues from the in-dash navigation systems market in 2009 significantly exceeded our projections in April 2009.

 

  Ÿ  

We used a lower DLOM because we re-commenced the preparation of our initial public offering in October 2009.

 

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  Ÿ  

We used a lower discount rate to reflect improvements in overall market conditions and comparable companies’ performances.

The fair value of our ordinary shares increased from $0.71 per share as of December 24, 2009 to $1.97 as of March 31, 2010. This increase was primarily attributable to the following factors:

 

  Ÿ  

Driven by sales growth in connection with existing car models and several new car models, net revenues from our in-dash navigation business in the first quarter of 2010 increased by 18.2% from the fourth quarter of 2009, exceeding our projection.

 

  Ÿ  

In the first quarter of 2010, we entered into a new agreement with China Mobile Liaoning in respect of nationwide digital map database, with a one-year term that will be automatically renewed for another year if neither party objects. In addition, we obtained more favorable revenue sharing arrangement under the new agreement.

 

  Ÿ  

We made significant progress in negotiations with two mobile phone manufacturers for pre-installing our navigation solutions on their mobile phones. In addition, we received increasing purchase orders from Samsung in connection with our mobile phone pre-installation business.

 

  Ÿ  

The continuous growth of our business and company size, together with the proximity of this offering, lowered the perceived risk of and market participant’s required rate of return for investing in our ordinary shares. These factors decreased our cost of capital and hence the discount rate applied for valuing our ordinary shares from 20% as of December 2009 to 18% as of March 2010.

We have considered the guidance prescribed by the Practice Aid in determining the fair value of our ordinary shares as of various dates before this offering. A detailed description of the valuation method used and the factors contributing to the changes in the fair value of our ordinary shares through March 31, 2010 is set out above. Paragraph 113 of the Practice Aid states that “the ultimate IPO price itself also is generally not likely to be a reasonable estimate of the fair value for pre-IPO equity transactions of the enterprise.” We, therefore, believe the ultimate price of this offering is generally not likely to be a reasonable estimate of the fair value of our ordinary shares as of various dates before this offering.

Nevertheless, we believe that the implied increase in fair value of our ordinary shares from $1.97 per share as of March 31, 2010 to $2.875, the midpoint of the estimated price range of this offering (after adjusting for the ADS to ordinary share ratio), is primarily attributable to the following factors:

 

  Ÿ  

We entered into a new agreement in April 2010 with a global mobile phone manufacturer in connection with the pre-installation of our navigation solutions on mobile phones made by this manufacturer. The negotiation with another mobile phone manufacturer reached an advanced stage during the period. These developments are expected to further increase our revenues from our wireless/Internet location-based solutions business.

 

  Ÿ  

We entered into an agreement with a domestic car manufacturer in April 2010 to supply our navigation solutions. We believe that the establishment and expansion of our business relationships with domestic car manufacturers will further contribute to the revenue growth from our automotive navigation business.

 

  Ÿ  

The impending launch of this offering, which will provide us with additional capital, enhance our ability to access capital markets to grow our business and raise our profile.

 

  Ÿ  

The completion of this offering would result in increased liquidity and marketability of our ordinary shares.

Impairment of Investment in Non-marketable Securities

We periodically review the investments for other-than-temporary impairment. Determination of whether the impairment is other than temporary and measurement of an impairment loss involve

 

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management’s judgments on a number of factors. These factors include, but are not limited to, determination of fair value of the investment, as discussed above, and whether the impairment is temporary or other than temporary, which involves judgment as to the severity and duration of the decline below fair value.

Income Taxes

U.S. GAAP requires that the impact of an uncertain income tax position on the income tax return is recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. Tax positions that previously failed to meet the more-likely-than-not threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. If we ultimately determine that the payment of these liabilities will be unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability no longer applies. Conversely, we record additional tax charges in a period in which we determine that a recorded tax liability is less than we expect the ultimate assessment to be.

We did not recognize any significant unrecognized tax benefits during the periods presented in this prospectus. However, since the commencement of operations, our entities in China, other than ADF Navigation, have not been examined by the relevant tax authorities and therefore are subject to tax audits at the discretion of the tax authorities.

On April 21, 2010, the State Administration of Taxation issued the Notice Regarding Further Clarification on Implementation of Preferential Enterprise Income Tax Rate during Transition Periods, or SAT Circular 157. SAT Circular 157 seeks to provide additional guidance on the implementation of certain preferential tax rates under the transitional rules of the new Enterprise Income Tax Law effective on January 1, 2008. Prior to SAT Circular 157, we interpreted the law to mean that if an entity was in a period during which it was entitled to a 50% reduction in the tax rate and was also entitled to a 15% tax rate due to its “high and new technology enterprise” status under the new Enterprise Income Tax Law, then it would be entitled to pay tax at the rate of 7.5%. SAT Circular 157 clarifies that such an entity should pay tax at a rate of either 15% or 50% of the standard PRC enterprise income tax rate. The effect of SAT Circular 157 is retrospective and would apply to 2008 and 2009.

As a consequence of SAT Circular 157, the preferential tax rate enjoyed by AutoNavi Technology, which qualifies as a “high and new technology enterprise,” during its 50% reduction period (2010-2011) will be 12.5% for the relevant years rather than 7.5%, which is the rate we had used prior to the issuance of SAT Circular 157. We believe that SAT Circular 157 is similar to a change in tax law, the cumulative effect of which should be reflected in the period of the change. As a result, we will adjust our deferred tax assets as of March 31, 2010 by $7,909 in the quarter ending June 30, 2010 and will recognize an additional tax liability of $47,819 in respect of the quarter ended March 31, 2010, resulting in an additional tax charge of $39,910.

Uncertainties exist with respect to how the PRC’s new Enterprise Income Tax Law applies to our overall operations, and more specifically, with regard to our tax residency status. The Enterprise Income Tax Law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their place of effective management or control is within the PRC. The implementation rules to the Enterprise Income Tax Law provide that non-resident legal entities will be considered PRC residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, among others, occur within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, we do not believe that our legal entities organized outside of the PRC should be treated as

 

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residents for the Enterprise Income Tax Law’s purposes. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operation. See “Risk Factors—Risks Related to Doing Business in China—Our global income and the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.”

Internal Control over Financial Reporting

In the course of preparing our consolidated financial statements, we and our independent registered public accounting firm identified certain material weaknesses and other control deficiencies, each as defined in AU325, in our internal control over financial reporting as of December 31, 2009. As defined in AU325, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis, and a “significant deficiency” is a deficiency, or a combination of deficiencies in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.

The material weaknesses identified primarily related to: (i) lack of accounting personnel with appropriate U.S. GAAP knowledge; and (ii) lack of an accounting policies and procedures manual in accordance with U.S. GAAP. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do once we become a public company. In light of the number of material weaknesses and other control deficiencies that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified. Following the identification of these material weaknesses and other control deficiencies, we hired a new accounting staff member with experience in U.S. GAAP in February 2010 and an internal auditor with over five years of relevant work experience in March 2010 as part of our efforts to address the material weaknesses and other control deficiencies identified.

We plan to take additional measures to improve our internal control over financial reporting in 2010 and 2011, including (1) hiring additional accounting personnel with extensive experience in U.S. GAAP and SEC reporting requirements and strong analytical skills; (2) providing regular training on an ongoing basis to our accounting personnel that cover a broad range of accounting and financial reporting topics; (3) developing a comprehensive manual with detailed step by step guidance on accounting policies and procedures and continuing to update the manual as needed; (4) hiring a director of internal audit with requisite experience in Section 404 of the Sarbanes-Oxley Act and U.S. GAAP; and (5) developing a formal risk assessment process. However, the implementation of these measures may not fully address the material weaknesses and other control deficiencies in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. See “Risk Factors—Risks Related to Our Business and Industry—In the course of preparing our consolidated financial statements, we have identified material weaknesses and other control deficiencies in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.”

 

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Taxation

We are incorporated in the Cayman Islands. Under the current law of the Cayman Islands, we are not subject to income or capital gains tax. Our subsidiaries in the British Virgin Islands, AutoNavi International Limited and AutoNavi Investment Limited, are not subject to income or capital gains tax either.

AutoNavi Technology, MapABC Technology, AutoNavi Software and AutoNavi Software’s subsidiaries were established in the PRC and as such are subject to PRC enterprise income tax on their taxable income in accordance with the relevant PRC income tax laws. Prior to the effectiveness of the new PRC Enterprise Income Tax Law on January 1, 2008, Chinese companies were generally subject to PRC enterprise income tax at a statutory rate of 33%. On January 1, 2008, the new PRC Enterprise Income Tax Law in China took effect. The PRC Enterprise Income Tax Law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises, except where a special preferential rate applies. The PRC Enterprise Income Tax Law provides a five-year transitional period for those entities established before March 16, 2007, which enjoyed a favorable income tax rate of less than 25% under the previous income tax laws and rules, to gradually change their rates to 25%, and in the case of preferential tax exemption or reduction for a specified term, until the expiration of such term. Under the new PRC Enterprise Income Tax Law and related implementation rules, enterprises that are qualified as “high and new technology enterprises strongly supported by the State” are entitled to a reduced enterprise income tax rate of 15%.

Our PRC subsidiary, two PRC variable interest entities and certain subsidiaries of one variable interest entity qualify as “high and new technology enterprises” located in a Beijing high-tech zone and therefore are generally entitled to a three-year exemption, a preferential tax rate of 50% of the applicable tax rate in the next three years, and a preferential tax rate of 15% thereafter as long as they continue to qualify as “high and new technology enterprises.” The preferential tax rates, which were used to calculate the tax provision based on our interpretation of the new Enterprise Income Tax Law as of March 31, 2010, prior to the issuance of SAT Circular 157, are presented in the following table.

 

     Exemption    7.5% rate    15% rate

AutoNavi Software

   N/A    N/A    2007 and thereafter

AutoNavi Technology

   2007 and 2009    2010 – 2011    2012 and thereafter

MapABC Technology

   N/A    N/A    2009 and thereafter

Xingtiandi Technology

   N/A    2006 – 2007    2009 and thereafter

The status of “high and new technology enterprise” is valid for three years and qualifying enterprises can then apply to renew it for an additional three years provided the company’s business operations continue to qualify for “high and new technology enterprise” status. The current “high and new technology enterprise” status of our entities was obtained in either 2008 or 2009.

ADF Navigation qualified as a “manufacturing foreign-invested enterprise” incorporated prior to the effectiveness of the new PRC Enterprise Income Tax Law and therefore was entitled to a two-year exemption from enterprise income tax since the earlier of its first tax-profitable year and 2008, followed by a 50% reduction in tax rates for the succeeding three years. Accordingly, ADF Navigation was entitled to an exemption from enterprise income tax for the years 2008 and 2009 and 12.5% preferential tax rates for 2010, 2011 and 2012. Our revenues generated from certain types of contracts are subject to business tax at a rate of 5%. Our revenues generated from certain technology development contracts were exempt from business tax. For some of our software, we are entitled to receive a 14% rebate on the total value-added tax, or VAT, payable of 17%.

As a consequence of SAT Circular 157, the preferential tax rate enjoyed by Autonavi Technology, which qualifies as a “high and new technology enterprise” during its 50% reduction period (2010-2011)

 

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will be 12.5% for the relevant years rather than 7.5%, which is the rate we had used prior to the issuance of SAT Circular 157. We believe that SAT Circular 157 is similar to a change in tax law, the cumulative effect of which should be reflected in the period of the change. As a result, we will adjust our deferred tax assets as of March 31, 2010 by $7,909 in the quarter ending June 30, 2010 and will recognize an additional tax liability of $47,819 in respect of the quarter ended March 31, 2010, resulting in an additional tax charge of $39,910.

Under the PRC Enterprise Income Tax Law, dividends from our PRC subsidiary out of earnings generated after the new law came into effect on January 1, 2008 are subject to withholding tax. Distributions of earnings generated before January 1, 2008 are exempt from PRC withholding tax. Dividends of our PRC subsidiary, which is directly held by our Hong Kong subsidiary, will benefit from a reduced withholding tax rate of 5% under the Arrangement to Avoid Double Taxation between Hong Kong and the central government of the PRC upon approval from the local tax authority. However, if our Hong Kong subsidiary is not considered to be the beneficial owner of any such dividends, such dividends would be subject to withholding tax at a rate of 10% rather than withholding tax at a preferential rate of 5%. See “Risk Factors—Risks Related to Doing Business in China—Our global income and the dividends that we may receive from our PRC subsidiary may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which would have a material adverse effect on our results of operations.” Dividends from our Hong Kong subsidiary are exempt from withholding tax. Dividend payments are not subject to withholding tax in the British Virgin Islands or the Cayman Islands.

For more information on PRC tax regulations, see “Regulation—Regulations on Tax.”

Spin-off of Discontinued Operations

In December 2009, we distributed the equity interests in AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, to all of our shareholders or their designated persons on a pro rata basis. We recorded the pro-rata distribution at the book value of AutoNavi Shanghai, $904,000, as a reduction of retained earnings. AutoNavi Shanghai had been engaged in the telematics business and the results of that business have been presented as discontinued operations for all periods presented in this prospectus.

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that you may expect for any future period.

 

    Year Ended December 31,     Three Months Ended March 31,  
    2007     2008     2009     2009     2010  
    $     % of net
revenues
    $     % of net
revenues
    $     % of net
revenues
    $     % of net
revenues
    $     % of net
revenues
 
    (in thousands, except percentages)        

Net revenues:

                   

Automotive navigation

  21,491      72.5      29,527      64.8      36,210      63.3      6,940      59.7      12,258      73.8   

Public sector and enterprise applications

  5,159      17.4      10,579      23.2      14,350      25.1      3,199      27.5      2,293      13.8   

Wireless/Internet location-based solutions

  915      3.1      2,658      5.9      5,153      9.0      911      7.8      1,777      10.7   

Other

  2,088      7.0      2,774      6.1      1,450      2.6      583      5.0      271      1.7   
                                                           

Total net revenues

  29,653      100.0      45,538      100.0      57,163      100.0      11,633      100.0      16,599      100.0   
                                                           

Cost of revenues(1)

  (12,292   (41.5   (18,842   (41.4   (20,031   (35.0   (4,335   (37.3   (5,668   (34.1
                                                           

Gross profit

  17,361      58.5      26,696      58.6      37,132      65.0      7,298      62.7      10,931      65.9   
                                                           

Operating expenses:

                   

Research and development(1)

  (3,167   (10.7   (5,045   (11.1   (7,338   (12.8   (1,585   (13.6   (2,471   (14.9

Selling and marketing(1)

  (2,148   (7.2   (3,591   (7.9   (5,608   (9.8   (1,422   (12.2   (2,276   (13.7

General and administrative(1)

  (7,523   (25.4   (9,264   (20.3   (9,613   (16.8   (1,747   (15.0   (4,522   (27.2

Impairment of goodwill and indefinite-lived assets

  —        —        (674   (1.5   —        —        —        —        —        —     
                                                           

Total operating expenses

  (12,838   (43.3   (18,574   (40.8   (22,559   (39.4   (4,754   (40.9   (9,269   (55.8
                                                           

Government subsidies

  2,308      7.8      387      0.8      1,016      1.8      59      0.5      57      0.3   

Operating income

  6,831      23.0      8,509      18.7      15,589      27.3      2,603      22.4      1,719      10.4   
                                                           

Investment income

  1,296      4.4      324      0.7      109      0.2      1      —        —        —     

Interest income

  959      3.2      324      0.7      295      0.5      96      0.8      72      0.4   

Interest expense

  (249   (0.8   —        —        —        —        —        —        —        —     

Impairment loss on short-term investment

  —        —        (2,000   (4.4   —        —        —        —        —        —     
                                                           

Income before income taxes, share of net income of equity method accounted investment and discontinued operations

  8,837      29.8      7,157      15.7      15,993      28.0      2,700      23.2      1,791
  
  10.8   
                                                           

Income tax expense

  (1,530   (5.2   (1,145   (2.5   (1,144   (2.0   (207   (1.8   (637   (3.8

Share of net income (loss) of equity method accounted investment

  —        —        (121   (0.3   156      0.3      (91   (0.8   13      —     
                                                           

Income from continuing operations

  7,307      24.6      5,891      12.9      15,005      26.3      2,402      20.6      1,167      7.0   
                                                           

Discontinued operations:

                   

Loss on discontinued operations before income tax(1)(2)

  (1,453   (4.9   (2,551   (5.6   (4,328   (7.6   (733   (6.3   —        —     

Income tax benefit (expense)

  (122   (0.4   339      0.7      147      0.3      25      0.2      —        —     
                                                           

Loss on discontinued operations, net of tax

  (1,575   (5.3   (2,212   (4.9   (4,181   (7.3   (708   (6.1   —        —     
                                                           

Net income

  5,732      19.3      3,679      8.0      10,824      19.0      1,694      14.6      1,167      7.0   
                                                           

Net income (loss) attributable to noncontrolling interest

  (13   —        1,476      3.2      433      0.8      132      1.1      270      1.6   

Net income attributable to AutoNavi Holdings Limited shareholders

  5,745      19.4      2,203      4.8      10,391      18.2      1,562      13.4      897      5.4   
                                                           

 

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    Year Ended December 31,   Three Months Ended
March 31,
    2007   2008   2009   2009   2010
    $     % of net
revenues
  $     % of net
revenues
  $     % of net
revenues
  $     % of net
revenues
  $   % of net
revenues
    (in thousands, except percentages)    

Net income per share:

                   

Net income from continuing operations per share attributable to AutoNavi Holdings Limited shareholders:

                   

Basic

  0.05        0.03        0.10        0.01        0.01  

Diluted

  0.05        0.03        0.10        0.01        0.01  

Net income from continuing operations per Series A preferred share-Basic

  0.05        0.03        0.10        0.01        0.01  
                                     

Net loss on discontinued operations per share attributable to AutoNavi Holdings Limited shareholders:

                   

Basic

  (0.01     (0.02     (0.03     (0.00     —    

Diluted

  (0.01     (0.02     (0.03     (0.00     —    

Net loss on discontinued operations per Series A preferred share-Basic

  (0.01     (0.02     (0.03     (0.00     —    
                                     

Net income per share attributable to AutoNavi Holdings Limited shareholders:

                   

Basic

  0.04        0.01        0.07        0.01        0.01  

Diluted

  0.04        0.01        0.07        0.01        0.01  

Net income per Series A preferred share-Basic

  0.04        0.01        0.07        0.01        0.01  
                                     

 

(1) Include share-based compensation expenses as follows:

 

    Year Ended December 31,   Three Months Ended March 31,
    2007   2008   2009   2009   2010
        $       % of net
revenues
      $       % of net
revenues
      $       % of net
revenues
      $       % of net
revenues
      $       % of net
revenues
    (in thousands, except percentages)

Allocation of Share-based Compensation Expenses

                   

Cost of revenues

  —     —     —     —     268   0.5   —     —     385   2.3

Selling and marketing

  —     —     —     —     143   1.0   —     —     720   3.6

General and administrative

  —     —     —     —     1,864   0.3   —     —     2,573   4.3

Research and development

  —     —     —     —     601   3.3   —     —     595   24.4

Discontinued operations

  —     —     —     —     1,956   3.4   —     —     —     —  
                                       

Total share-based compensation expenses

  —     —     —     —     4,832   8.5   —     —     4,273   34.7
                                       

 

(2) In December 2009, we distributed the equity interests in AutoNavi Shanghai, then a wholly-owned subsidiary of AutoNavi Software, to all of our shareholders or their designated persons on a pro rata basis. We recorded the pro-rata distribution at the book value of AutoNavi Shanghai, $904,000, as a reduction of retained earnings. AutoNavi Shanghai had been engaged in the telematics business and the results of that business have been presented as discontinued operations for all periods presented in this prospectus.

Comparison of the Three Months Ended March 31, 2010 and March 31, 2009

Net Revenues.    Our total net revenues increased by 42.7% from $11.6 million for the three months ended March 31, 2009 to $16.6 million for the three months ended March 31, 2010. This increase resulted from increases in net revenues from our automotive navigation and wireless/Internet location-based solutions business lines, partially offset by a decrease in net revenues from our public sector and enterprise applications business.

Automotive navigation.    Net revenues from the automotive navigation market increased by 76.6% from $6.9 million for the three months ended March 31, 2009 to $12.3 million for the three

 

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months ended March 31, 2010. This increase was attributable to a 86.5% increase in revenues from the in-dash navigation systems market, partially offset by a 10.8% decrease in revenues from the portable navigation devices market.

The increase in revenues from the in-dash navigation systems market was due mainly to an increase in the number of copies of digital map data licensed, partially offset by a small decrease in average unit license fees. The decrease in revenues from the portable navigation devices market was mainly due to the fact that we did not receive any license fees from one portable navigation device manufacturer with respect to which we limit the amount of revenues recognized to the amount of cash received. The decrease in amounts collected from that customer was partially offset by a significant increase in sales to other portable navigation devices customers.

Public sector and enterprise applications.    Net revenues from the public sector and enterprise applications market decreased by 28.3% from $3.2 million for the three months ended March 31, 2009 to $2.3 million for the three months ended March 31, 2010. This decrease resulted from a decrease in revenues from our aerial photogrammetry business, partially offset by an increase in revenues from our enterprise solutions business. The decrease in revenues from aerial photogrammetry was primarily attributable to a relatively high level of revenues in the first quarter of 2009, resulting from new contracts in connection with the second national land survey, and unfavorable weather conditions in the first quarter of 2010, which adversely affected our ability to carry out flight missions. The increase in revenues from our enterprise solutions was primarily due to a series of new contracts entered into in the second half of 2009, which started to generate revenues in the fourth quarter of 2009 and continued to generate revenues in the first quarter of 2010.

Wireless/Internet location-based services.    Net revenues from the wireless/Internet location-based services market increased by 95.1% from $911,000 for the three months ended March 31, 2009 to $1.8 million for the three months ended March 31, 2010. This increase was primarily due to a 348.0% increase in revenues from pre- installing our navigation solutions on certain mobile phone models, a 65.1% increase in revenues from our Internet map application business and a 9.7% increase in revenues from the provision of a nationwide digital map database to support China Mobile’s location-based services.

Cost of Revenues.    Our cost of revenues increased by 30.7% from $4.3 million for the three months ended March 31, 2009 to $5.7 million for the three months ended March 31, 2010. This increase was primarily due to an increase in the salary and benefit expenses, share-based compensation expenses of $385,000 in the first quarter of 2010 and an increase in costs of hard disk materials associated with our in-dash navigation and mobile phone pre-installation businesses. The increase in salary and benefit expenses was attributable to an increase in the average salary for our data collection and processing employees as well as an expansion of our data collection and processing work force from an average of 1,035 in the first quarter of 2009 to an average of 1,052 in the first quarter of 2010. We did not incur any share-based compensation expenses as part of cost of revenues for the quarter ended March 31, 2009.

Gross Profit.    Our gross profit increased by 49.8% from $7.3 million for the quarter ended March 31, 2009 to $10.9 million for the quarter ended March 31, 2010. Our gross profit as a percentage of net revenues, or gross margin, increased from 62.7% in the first quarter of 2009 to 65.9% in the first quarter of 2010.

Operating Expenses.    Our total operating expenses increased by 95.0% from $4.8 million for the three months ended March 31, 2009 to $9.3 million for the three months ended March 31, 2010. Our operating expenses for the quarter ended March 31, 2010 included share-based compensation expenses of $3.9 million, primarily due to our acceleration of the vesting of certain previously granted

 

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options and nonvested shares and the grant of new restricted shares to an executive officer in exchange for the cancellation of certain previously granted options. We did not incur any share-based compensation expenses as part of operating expenses for the quarter ended March 31, 2009.

Research and development expenses.    Our research and development expenses increased by 55.9% from $1.6 million for the three months ended March 31, 2009 to $2.5 million for the three months ended March 31, 2010, primarily due to share-based compensation expenses of $595,000 for the quarter ended March 31, 2010 and an increase in salary and benefit expenses mainly as a result of an increased headcount, from an average of 303 in the first quarter of 2009 to an average of 339 in the first quarter of 2010.

Selling and marketing expenses.    Our selling and marketing expenses increased by 60.1% from $1.4 million for the three months ended March 31, 2009 to $2.3 million for the three months ended March 31, 2010. This increase was primarily due to share-based compensation expenses of $720,000 for the quarter ended March 31, 2010 and increases in marketing expenses that we incurred in promoting our new solutions.

General and administrative expenses.    Our general and administrative expenses increased by 158.8% from $1.7 million for the three months ended March 31, 2009 to $4.5 million for the three months ended March 31, 2010. This increase was attributable mainly to share-based compensation expenses of $2.6 million for the quarter ended March 31, 2010, an increase in professional service expenses and an increase in business development expenses.

Government Subsidies.    Government subsidies decreased by 3.4% from $59,000 for the three months ended March 31, 2009 to $57,000 for the three months ended March 31, 2010.

Operating Income.    Our operating income decreased by 34.0% from $2.6 million for the three months ended March 31, 2009 to $1.7 million for the three months ended March 31, 2010. As a percentage of our net revenues, our operating income decreased from 22.4% for the three months ended March 31, 2009 to 10.4% for the three months ended March 31, 2010.

Income Tax Expense.    Our income tax expense increased by 207.7% from $207,000 for the three months ended March 31, 2009 to $637,000 for the three months ended March 31, 2010. The effective income tax rate for the three months ended March 31, 2010 was 35.6%, compared to 7.7% for the three months ended March 31, 2009. The significant increase in our effective tax rate was primarily due to the significant increase in our tax-exempted holding company’s operating loss, resulting from the share-based compensation expenses of $4.3 million, in the first quarter of 2010.

Income from Continuing Operations.    Income from continuing operations decreased by 51.4% from $2.4 million for the three months ended March 31, 2009 to $1.2 million for the three months ended March 31, 2010.

Discontinued Operations.    Loss on discontinued operations net of tax was $708,000 for the three months ended March 31, 2009. We did not have loss on discontinued operations for the three months ended March 31, 2010 as the spin-off of AutoNavi Shanghai was completed in December 2009.

Net Income Attributable to AutoNavi Holdings Limited Shareholders.    Net income attributable to AutoNavi Holdings Limited shareholders decreased by 42.6% from $1.6 million for the three months ended March 31, 2009 to $897,000 for the three months ended March 31, 2010.

 

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Comparison of the Years Ended December 31, 2009 and 2008

Net Revenues.    Our total net revenues increased by 25.5% from $45.5 million in 2008 to $57.2 million in 2009. This increase resulted from increases in revenues from all our three major business lines.

Automotive navigation.    Net revenues from the automotive navigation market increased by 22.6% from $29.5 million in 2008 to $36.2 million in 2009. This increase was attributable to a 28.3% increase in revenues from the in-dash navigation systems market, partially offset by a 11.8% decrease in revenues from the portable navigation devices market.

The increase in net revenues from the in-dash navigation systems market was due mainly to an increase in the number of copies of digital map data licensed, partially offset by a small decrease in average unit license fees. The decrease in net revenues from the portable navigation devices market was mainly due to lower amount of license fees we received from one portable navigation device manufacturer with respect to which we limit the amount of revenues recognized to the amount of cash received. The decrease in amounts collected from that customer was partially offset by significant increases in sales to other portable navigation devices customers.

Public sector and enterprise applications.    Net revenues from the public sector and enterprise applications market increased by 35.6% from $10.6 million in 2008 to $14.4 million in 2009, primarily due to the increase in revenues from our aerial photogrammetry business as we entered into two new contracts in connection with the second national land survey to cover new areas during this period.

Wireless/Internet location-based solutions.    Net revenues from the wireless/Internet location-based solutions business increased by 93.9% from $2.7 million in 2008 to $5.2 million in 2009. This increase was primarily due to a 301.5% increase in revenues derived from the provision of a nationwide digital map database to support China Mobile’s location-based services and a 55.5% increase in revenues from our Internet map application business. Our solutions provided to China Mobile began generating revenues in the fourth quarter of 2008.

Cost of Revenues.    Our cost of revenues increased by 6.3% from $18.8 million in 2008 to $20.0 million in 2009. This increase was primarily due to the increase of salary and benefit expenses as a result of the expansion of our work force in our aerial photogrammetry business from an average of 98 in 2008 to an average of 150 in 2009, partially offset by a decrease in field survey related costs, primarily travel-related expenses. Our cost of revenues for the year ended December 31, 2009 included share-based compensation expenses of $268,000. No share-based compensation expense was recognized for the year ended December 31, 2008.

Gross Profit.    Our gross profit increased by 39.1% from $26.7 million in 2008 to $37.1 million in 2009. Our gross margin increased from 58.6% in 2008 to 65.0% in 2009.

Operating Expenses.    Our total operating expenses increased by 21.5% from $18.6 million in 2008 to $22.6 million in 2009. The increase primarily resulted from increases in research and development, and selling and marketing expenses. Our operating expenses for the year ended December 31, 2009 included share-based compensation expenses of $2.6 million. No share-based compensation expense was recognized for the year ended December 31, 2008.

Research and development expenses.    Our research and development expenses increased by 45.5% from $5.0 million in 2008 to $7.3 million in 2009, primarily due to increases in salary and benefit expenses as a result of an increased headcount, from an average of 263 in 2008 to an average of 326 in 2009, as part of our growth strategy, and share-based compensation expenses of $601,000 for the year ended December 31, 2009.

 

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Selling and marketing expenses.    Our selling and marketing expenses increased by 56.2% from $3.6 million in 2008 to $5.6 million in 2009. This increase was primarily due to increases in marketing expenses that we incurred in sponsoring the 2010 Shanghai World Expo and organizing and attending certain trade shows to promote our solutions. To a lesser degree, the increase also resulted from expenses incurred in connection with market research conducted or commissioned by us.

General and administrative expenses.    Our general and administrative expenses increased by 3.8% from $9.3 million in 2008 to $9.6 million in 2009. This increase was attributable mainly to the share-based compensation expenses of $1.9 million in 2009, offset by a decrease in fees paid for certain one-time professional services and decreases in facilities-related expenses, travel-related expenses and business development expenses as a result of cost control efforts.

Government Subsidies.    Government subsidies increased by 162.5% from $387,000 in 2008 to $1.0 million in 2009. The higher amount in 2009 was primarily due to a grant provided by the Shanghai Municipal Science Commission in connection with a software development project for the 2010 Shanghai World Expo.

Operating Income.    Our operating income increased by 83.2% from $8.5 million in 2008 to $15.6 million in 2009. As a percentage of our net revenues, our operating income increased from 18.7% in 2008 to 27.3% in 2009.

Impairment Loss on Short-term Investment.    On July 14, 2008, we purchased a convertible note with a principal amount of $2.0 million issued by a U.S.-based start-up company specialized in developing conversational voice search and recognition technologies. The note is convertible into preferred shares of that company at our option. As of December 31, 2008, we determined that the fair value of the note was nil and recognized an impairment loss of $2.0 million.

Income Tax Expense.    Our income tax expense was $1.1 million in both 2008 and 2009. The effective income tax rate for the year ended December 31, 2009 was 7.2%, compared to 16.0% for the year ended December 31, 2008. The decrease in effective tax rate primarily resulted from the preferential tax rates obtained in 2009 by certain of our major operating entities in the PRC as “high and new technology enterprise.”

Income from Continuing Operations.    Income from continuing operations increased by 154.7% from $5.9 million in 2008 to $15.0 million in 2009.

Discontinued Operations.    Loss on discontinued operations net of tax increased by 89.0% from $2.2 million in 2008 to $4.2 million in 2009, primarily due to share-based compensation expenses of $2.0 million recognized in 2009.

Net Income Attributable to AutoNavi Holdings Limited Shareholders.    Net income attributable to AutoNavi Holdings Limited shareholders increased by 371.7% from $2.2 million in 2008 to $10.4 million in 2009.

Comparison of the Years Ended December 31, 2008 and 2007

Net Revenues.    Our total net revenues increased by 53.6% from $29.7 million in 2007 to $45.5 million in 2008. This increase resulted from increases in revenues from all three major business lines.

Automotive navigation.    Net revenues from the automotive navigation market increased by 37.4% from $21.5 million in 2007 to $29.5 million in 2008. This increase resulted from a 22.5% increase in revenues from the in-dash navigation systems market and a 416.5% increase in revenues from the portable navigation devices market.

 

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The increase in net revenues from the in-dash navigation systems market was due mainly to an increase in the number of copies of digital map data licensed. The increase in net revenues from the portable navigation devices market was primarily due to higher amount of license fees we received from the portable navigation device manufacturer with respect to which we limit the amount of revenues recognized to the amount of cash received. The increase in net revenues from the portable navigation devices market was also driven by increases in sales to other portable navigation device manufacturers.

Public sector and enterprise applications.    Net revenues from the public sector and enterprise applications market increased by 105.1% from $5.2 million in 2007 to $10.6 million in 2008. This increase was mostly due to the growth in our aerial photogrammetry and location-based public sector solutions businesses. In 2008, we successfully secured a number of projects to provide our location-based solutions to government agencies.

Wireless/Internet location-based solutions.    Net revenues from the wireless/Internet location-based solutions business increased by 190.5% from $915,000 in 2007 to $2.7 million in 2008. This increase was primarily due to an increase in revenues from Internet map application solutions as a result of the signing of a new customer. The increase was also attributable to the commencement of our provision of a nationwide digital database to support China Mobile’s location-based services. Although we had entered into agreement with a subsidiary of China Mobile in 2006 to provide our digital map database to support its location-based services, we did not generate or recognize any revenues from our solutions provided to China Mobile until the fourth quarter of 2008.

Cost of Revenues.    Our cost of revenues increased by 53.3% from $12.3 million in 2007 to $18.8 million in 2008. The increase was primarily due to an increase in salary and benefit expenses as a result of an increase in headcount associated with data collection and processing from an average of 995 in 2007 to an average of 1,211 in 2008, an increase in depreciation of equipment and facilities and an increase in direct costs associated with our aerial photogrammetry business.

Gross Profit.    Our gross profit increased by 53.4% from $17.4 million in 2007 to $26.7 million in 2008. Our gross margin remained relatively unchanged from 2007 to 2008, at 58.5% and 58.6%, respectively.

Operating Expenses.    Our total operating expenses increased by 44.7% from $12.8 million in 2007 to $18.6 million in 2008. This increase was primarily due to increases in research and development expenses, selling and marketing expenses, and general and administrative expenses.

Research and development expenses.    Our research and development expenses increased by 59.3% from $3.2 million in 2007 to $5.0 million in 2008, primarily due to an increase in salary and benefit expenses as a result of a significant expansion of our research and development team, from an average headcount of 199 in 2007 to an average headcount of 283 in 2008, as part of our growth strategy.

Selling and marketing expenses.    Our selling and marketing expenses increased by 67.2% from $2.1 million in 2007 to $3.6 million in 2008. This increase was primarily due to an increase in salary and benefit expenses as a result of an increase in headcount of sales and marketing staff from an average of 74 in 2007 to an average of 123 in 2008.

General and administrative expenses.    Our general and administrative expenses increased by 23.1% from $7.5 million in 2007 to $9.3 million in 2008. This increase was attributable mainly to an increase in salary and benefit expenses as a result of increased headcount of our general administration staff, from an average of 54 in 2007 to an average of 103 in 2008, and business development expenses.

 

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Impairment of goodwill and indefinite-lived intangible assets.    We recognized an impairment charge of $674,000 in 2008 of goodwill and intangible assets arising from our acquisition of Beijing Yadao Xingkong Advertising Co., Ltd. and Beijing Yadao Media & Culture Development Co., Ltd. No such impairment charge was recognized in 2007.

Government Subsidies.    Government subsidies decreased by 83.2% from $2.3 million in 2007 to $387,000 in 2008. The much higher amount in 2007 was due to a one-time grant provided by the PRC National Development and Reform Commission to encourage our software development activities.

Operating Income.    Our operating income increased by 24.6% from $6.8 million in 2007 to $8.5 million in 2008. As a percentage of our net revenues, our operating income decreased from 23.0% in 2007 to 18.7% in 2008.

Investment Income.    Our investment income decreased by 75.0% from $1.3 million in 2007 to $324,000 in 2008, as we invested less in short-term marketable securities in 2008.

Impairment Loss on Short-term Investment.    As of December 31, 2008, as we believed the decline in fair value of the convertible note we purchased on July 14, 2008 was other than temporary, we recognized an impairment loss of $2.0 million.

Income Tax Expense.    Our income tax expense decreased by 25.2% from $1.5 million in 2007 to $1.1 million in 2008. The effective income tax rate for 2008 was 16.0%, lower than the 17.3% for 2007, as a result of several factors, including (1) the preferential tax treatments obtained in 2008 by certain major operating entities within our corporate group, and (2) the removal of tax limit over payroll costs for PRC domestic entities, along with the effectiveness of the new PRC Enterprise Income Tax Law in 2008.

Income from Continuing Operations.    Income from continuing operations decreased by 19.4% from $7.3 million in 2007 to $5.9 million in 2008.

Discontinued Operations.    Loss on discontinued operations net of tax increased by 40.4% from $1.6 million in 2007 to $2.2 million in 2008 primarily as a result of the more efforts taken in research and development activities in our telematics business.

Net Income Attributable to AutoNavi Holdings Limited Shareholders.    Net income attributable to AutoNavi Holdings Limited shareholders decreased by 61.7% from $5.7 million in 2007 to $2.2 million in 2008.

 

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Our Selected Quarterly Results of Operations

The following table sets forth our unaudited condensed consolidated quarterly results of operations for each of the nine quarters in the period from January 1, 2008 to March 31, 2010. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. We have prepared the unaudited consolidated quarterly financial information on the same basis as our audited consolidated financial statements. The unaudited consolidated financial information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented.

 

    Three Months Ended  
    March 31,
2008
    June 30,
2008
    September 30,
2008
    December 31,
2008
    March 31,
2009
    June 30,
2009
    September 30,
2009
    December 31,
2009
    March 31,
2010
 
    (in thousands of $)  
Consolidated Statement of Operations Data:            

Net revenues:

                 

Automotive navigation

  7,938      8,038      8,013      5,538      6,940      7,374      10,965      10,930      12,258   

Public sector and enterprise applications

  3,636      2,815      2,410      1,718      3,199      4,612      3,828      2,711      2,293   

Wireless/Internet location-based solutions

  433      587      735      903      911      1,071      1,385      1,786      1,777   

Other

  925      850      530      469      583      515      89      264      271   
                                                     

Total net revenues

  12,932      12,290      11,688      8,628      11,633      13,572      16,267      15,691      16,599   
                                                     

Cost of revenues(1)

  (3,588   (4,683   (5,315   (5,256   (4,335   (4,573   (4,899   (6,224   (5,668
                                                     

Gross profit

  9,344      7,607      6,373      3,372      7,298      8,999      11,368      9,467      10,931   
                                                     

Operating expenses

                 

Research and development(1)

  (885   (1,297   (1,237   (1,626   (1,585   (1,764   (1,641   (2,348   (2,471

Selling and marketing(1)

  (690   (878   (1,001   (1,022   (1,422   (1,295   (1,231   (1,660   (2,276

General and administrative(1)

  (2,562   (2,181   (2,576   (1,945   (1,747   (3,123   (2,127   (2,616   (4,522

Impairments of goodwill and indefinite-lived intangible assets

  —        —        —        (674   —        —        —        —        —     

Total operating expenses

  (4,137   (4,356   (4,814   (5,267   (4,754   (6,182   (4,999   (6,624   (9,269
                                                     

Government subsidies

  53      —        22      312      59      —        242      715      57   
                                                     

Operating income/(loss)

  5,260      3,251      1,581      (1,583   2,603      2,817      6,611      3,558      1,719   
                                                     

Investment income

  166      73      85      —        1      —        80      28      —     

Interest income

  117      69      63      75      96      52      59      88      72   

Interest expense

  —        —        —        —        —        —        —        —        —     

Impairment loss on short-term investment

  —        —        —        (2,000   —        —        —        —        —     
                                                     

Income/(loss) before income taxes, share of net income/(loss) of equity accounted investment and discontinued operations

  5,543      3,393      1,729      (3,508   2,700      2,869      6,750      3,674      1,791   
                                                     

Income tax expense

  (775   (474   (242   346      (207   (219   (516   (202   (637

Share of net income/(loss) of equity method accounted investment

  (39   (56   4      (30   (91   129      26      92      13   
                                                     

Income/(loss) from continuing operations

  4,729      2,863      1,491      (3,192   2,402      2,779      6,260      3,564      1,167