F-1/A 1 df1a.htm AMENDMENT NO. 2 TO FORM F-1 Amendment No. 2 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on October 19, 2007

Registration No. 333-146437


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

AMENDMENT NO. 2

TO

FORM F-1

REGISTRATION STATEMENT UNDER

THE SECURITIES ACT OF 1933

Longtop Financial Technologies Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   7371   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

15/F, Block A, Chuangxin Building

Software Park

Xiamen, 361005

People’s Republic of China

(86 592) 2396 888

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

Law Debenture Corporate Services Inc.

4th Floor, 400 Madison Avenue,

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:

 

David T. Zhang, Esq.

Latham & Watkins LLP

41st Floor, One Exchange Square

8 Connaught Place

Central, Hong Kong

(852) 2912-2503

 

Kurt J. Berney, Esq.

O’Melveny & Myers LLP

37th Floor, Plaza 66

1266 Nanjing Road West

Shanghai 200040, P.R.C.

(86 21) 2307-7007

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
registered (1)(2)
   Proposed
Maximum
offering price
per share
   Proposed maximum aggregate
offering price(1)
   Amount of
registration fee
Ordinary Shares, par value $0.01 per ordinary share (2)(3)    12,000,000    $16.00    $192,000,000    $5,895(4)

(1) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(a) under the Securities Act of 1933.
(2) Includes 1,565,500 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) American depositary shares issuable upon deposit of the ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No.333-146783). Each American depositary share represents one ordinary share.
(4) 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 Commission, acting pursuant to such Section 8(a), may determine.

 



Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell 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 October 19, 2007.

LOGO

Longtop Financial Technologies Limited

10,434,500 American Depositary Shares

Representing

10,434,500 Ordinary Shares

 


Longtop Financial Technologies Limited, or Longtop, is offering 8,529,500 American depositary shares, or ADSs. The selling shareholders identified in this prospectus are offering an additional 1,905,000 ADSs. Each ADS represents one ordinary 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 our ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between $14.00 and $16.00. We have been approved to list the ADSs on the New York Stock Exchange under the symbol “LFT.”

See “ Risk Factors” beginning on page 12 to read about 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 Longtop

   $      $  

Proceeds, before expenses, to the selling shareholders

   $      $  

To the extent the underwriters sell more than 10,434,500 ADSs, the underwriters have an option to purchase up to an additional 470,500 ADSs from us and an additional 1,095,000 ADSs from the selling shareholders at the initial public offering price less the underwriting discount.

 


The underwriters expect to deliver the ADSs against payment in US dollars in New York, New York on                     , 2007.

Sole Global Co-ordinator

Goldman Sachs (Asia) L.L.C.

Joint Bookrunners

 

 

Goldman Sachs (Asia) L.L.C. Deutsche Bank Securities

Jefferies & Company

 


Prospectus dated                     , 2007.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

Prospectus
    Page

Summary

  1

Risk Factors

  12

Special Note Regarding Forward-Looking Statements

  34

Use of Proceeds

  36

Dividend Policy

  37

Capitalization

  38

Dilution

  39

Exchange Rate Information

  41

Enforceability of Civil Liabilities

  42

Selected Consolidated Financial Data

  44

Recent Developments

  47

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

  48

Industry Overview

  88

Business

  94

Regulation

  108

Management

  114

Principal and Selling Shareholders

  123

Related Party Transactions

  126

Description of Share Capital

  131

Description of American Depositary Shares

  140

Shares Eligible for Future Sale

  151

Taxation

  153

Underwriting

  159

Legal Matters

  164

Experts

  164

Additional Information

  165

Index to Consolidated Financial Statements

  F-1

Index to Unaudited Pro Forma Condensed Consolidated Financial Information

  P-1

 


Through and including                     , 2007 (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.

 


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


Table of Contents

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.”

Our Business

We are a leading software developer and information technology, or IT, services provider targeting the financial services industry in China. We develop and deliver a comprehensive range of software solutions with a focus on meeting the rapidly growing IT needs of financial institutions in China. According to IDC, an independent market research company, we were the third largest “banking IT solution provider” in China measured by market share in 2006.

We offer select software solutions in the following broadly defined categories: channel-related solutions, business-related solutions, management-related solutions and other value-added solutions, covering major categories of information technology requirements for financial institutions in China.

 

  Ÿ  

Our channel-related solutions enable banks to interact with their customers through various channels such as ATMs, bank tellers, call centers and online banking.

 

  Ÿ  

Our business-related solutions are directed at executing banking transactions such as international trade finance, payments and settlements and credit card operations.

 

  Ÿ  

Our management-related solutions support a financial institution’s internal operations and management, such as business intelligence, enterprise resource management, work-flow management and credit and risk management.

 

  Ÿ  

Our other value-added solutions address our banking and non-banking clients’ various IT needs such as payroll management for public sector employees.

We provide both custom-designed and standardized software solutions that are integrated into our clients’ existing IT hardware and software infrastructure. We additionally provide IT and maintenance services to our clients.

Our clients are primarily leading banks in China. We have extensive client relationships with three of the four largest state-controlled national banks, namely, China Construction Bank, Agricultural Bank of China and Bank of China. We have provided in recent years services to eight of the 13 national commercial banks, China Postal Savings Bank, leading city commercial banks in China, and two of the largest life insurance companies in China, namely, New China Life Insurance and China Pacific Insurance Group.

We operate five delivery centers located in Xiamen, Beijing, Shanghai, Chengdu and Guangzhou, two research centers located in Xiamen and Shanghai and 34 ATM service centers located in 20 out of 31 provinces in China. We have sales offices in Xiamen, Beijing and Shanghai. As of September 25, 2007, we had 1,094 employees in China.

Our total revenues grew from $15.2 million in 2004 to $43.2 million in 2006 and our net income grew from $6.6 million in 2004 to $8.3 million in 2006. Our total revenues for the three months ended

 

 

1


Table of Contents

March 31, 2007 and June 30, 2007 were $8.8 million and $16.1 million, respectively, and our net income for the three months ended March 31, 2007 and June 30, 2007 were $768,000 and $4.9 million, respectively. Our total share-based compensation expenses in 2005 and 2006 and for the three months ended March 31, 2007 and June 30, 2007 were $37,000, $12.9 million, $235,000 and $262,000, respectively. Effective April 1, 2007, we changed our fiscal year from a calendar year to a fiscal year ending March 31. Our revenues are generally lower in the first and second calendar quarters due to seasonal fluctuations partly as a result of our clients’ budgeting and spending cycles.

Consistent with our growth strategy to enhance our solution and service offerings and access additional clients, we acquired in 2006 Advanced Business Services (Beijing) Co., Ltd., or ABS, an integration services provider located in Beijing. In May 2007, we entered into asset transfer agreements to acquire the business of FEnet Co., Ltd., or FEnet, a software developer focused on business intelligence, and its subsidiary. We expect to complete the acquisition in October 2007, after which we will have a total of 1,355 employees. We believe we are well-positioned to serve the evolving needs of our clients and capitalize on the growth opportunities in China’s financial services IT market.

Our Industry

Financial services institutions globally have spent heavily on IT for many years. In the fast-paced, competitive financial services industry, companies are increasingly relying on flexible and reliable IT infrastructure to gain competitive advantages. According to IDC, global banking and insurance IT spending reached $124.9 billion and $43.8 billion, respectively, in 2006 and is expected to grow at a compound annual growth rate, or CAGR, of 6.4% and 5.6%, respectively, to reach $170.7 billion and $57.5 billion, respectively, in 2011.

China’s GDP has been growing at a rapid pace and China’s financial services industry has also experienced rapid expansion. Similar to their global peers, Chinese financial services institutions, particularly banks, have been increasing IT spending to manage both growth and growing business complexity. According to IDC, total IT spending by China’s banking industry reached RMB36.6 billion ($4.8 billion) in 2006, up 15.4% from 2005. Compared to developed economies, China’s financial services industry is unique in many aspects, including business organization, operating procedures, customer preferences and level of sophistication in products and services. In addition, the regulatory environment in China is also in a state of change, and the Chinese government has introduced a number of key reforms in the sector. As a result, China’s financial services industry needs highly specialized IT products and service providers who understand China’s domestic market and regulatory environment.

IT spending in China’s financial services industry is migrating from data concentration to application integration and financial product innovation. As financial services institutions continue to improve their IT infrastructure, the share of hardware in total spending will decrease while that of software and IT services will continue to grow. According to IDC, spending on banking IT hardware from 2007 to 2011 is projected to grow at a CAGR of 8.0% whereas spending on banking packaged software and spending on banking IT services are projected to grow at a CAGR of 21.7% and 22.3%, respectively.

 

 

2


Table of Contents

Our Competitive Strengths

We believe the following strengths differentiate us from our competitors, enabling us to attain a leadership position in the financial services IT market in China.

 

  Ÿ  

market leader with extensive financial services expertise;

 

  Ÿ  

strong solution and service development capability;

 

  Ÿ  

established relationships with leading financial institutions in China;

 

  Ÿ  

comprehensive solution and service offerings;

 

  Ÿ  

scalable, nationwide delivery and service platform; and

 

  Ÿ  

proven management with successful track record.

Our Strategy

Our goal is to become the dominant leader in software development and IT services for the financial services industry in China and expand globally. We intend to achieve this goal by implementing the following strategies:

 

  Ÿ  

strengthen relationships with key clients;

 

  Ÿ  

diversify our client base and service offerings to capture new growth opportunities;

 

  Ÿ  

continue to enhance our development and delivery capabilities;

 

  Ÿ  

attract and retain quality employees; and

 

   

pursue strategic acquisitions and alliances that fit with our core competencies and growth strategy.

Our Challenges

We believe our primary challenges are:

 

  Ÿ  

single industry focus;

 

  Ÿ  

past and likely future dependence on a few clients for a significant portion of our revenue and this dependence is likely to continue. In 2004, 2005, 2006 and for the three months ended March 31, 2007 and June 30, 2007, various branches and entities affiliated with our largest client accounted for 50.0%, 51.0%, 42.0%, 45.0% and 30.3% of our revenue, respectively, while various branches and entities affiliated with our second largest client accounted for 33.0%, 29.0%, 30.0%, 22.0% and 19.3% of our revenue, respectively;

 

  Ÿ  

uncertainties in our development, introduction and marketing of new solutions and services;

 

  Ÿ  

recruitment, training and retention of skilled software engineers and mid-level personnel;

 

  Ÿ  

competition from existing competitors and new market entrants;

 

  Ÿ  

execution of our growth strategy;

 

 

3


Table of Contents
  Ÿ  

protection of our trade secrets and other valuable intellectual property. We have transferred intellectual property rights to a number of our customized software solutions and a small number of our standardized solutions to our clients and consequently may not own all the intellectual property rights to our current and future software solutions; and

 

  Ÿ  

reliance principally on dividends paid by our PRC operating subsidiaries to fund cash and financing requirements, while there are PRC laws restricting the ability of these subsidiaries from paying dividends or making other distributions to us.

In addition, we face risks and uncertainties that may materially affect our business, financial condition, results of operations and prospects. Thus, you should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in the ADSs.

Our Corporate History and Structure

Our primary operating subsidiary, Xiamen Longtop System Co., Ltd., or Longtop System, was established in Xiamen, China, in July 1996. Longtop Financial Technologies (BVI) Limited, or Longtop BVI, our holding company incorporated in the British Virgin Islands in October 2000, acquired all of the equity interests of Longtop System in October 2004. In preparation for our initial public offering, we incorporated Longtop Financial Technologies Limited in the Cayman Islands on August 7, 2007. Longtop Financial Technologies Limited became our ultimate holding company when it issued shares to the existing shareholders of Longtop BVI on September 5, 2007 in exchange for all of the shares of Longtop BVI held by those shareholders. Neither of these corporate reorganizations resulted in a change of control of Longtop System or its subsidiaries in China.

We conduct substantially all of our business through Longtop System. We also conduct a portion of our business through Advanced Business Services (Beijing) Co., Ltd. and Guangzhou FEnet Information Technologies Co., Ltd.

Longtop System is the 100% beneficial owner of Xiamen Longtop Technology Co., Ltd., Xiamen Longtop Information Technology Co., Ltd., Beijing Longtop Technology Co., Ltd. and Shanghai Longtop Information Technology Co., Ltd. We formed Xiamen Longtop Technology Co., Ltd. in November 1996 to provide services to non-financial clients and formed Xiamen Longtop Information Technology Co., Ltd. in October 2004 to provide ATM maintenance services. Aggregate revenues from Xiamen Longtop Technology Co., Ltd. and Xiamen Longtop Information Technology Co., Ltd. for 2006 and the three months ended March 31, 2007 and June 30, 2007 constituted less than 10% of our revenues. Beijing Longtop Technology Co., Ltd. and Shanghai Longtop Information Technology Co., Ltd. have been inactive since inception, and Shanghai Longtop Information Technology Co., Ltd. is in the process of being liquidated. We formed Guangzhou FEnet Information Technologies Co., Ltd. as a wholly-owned subsidiary of Longtop BVI in July 2007 to primarily offer business intelligence solutions.

 

 

4


Table of Contents

The following diagram illustrates our corporate structure as of the date of this prospectus but does not reflect our outsourcing business which we spun off in July 2007. In February 2006, we established Longtop International Holdings Limited, or LTI, with three other shareholders to provide outsourcing services. We acquired the interest of these other shareholders in January 2007. To expand our outsourcing business, we acquired Minecode LLC through LTI in March 2007. In July 2007, we disposed of our interest in LTI and Minecode LLC for strategic business purposes. Our revenues for the three months ended March 31, 2007 and June 30, 2007 include $1.0 million and $4.5 million in outsourcing revenues.

LOGO


(1) Primarily to service our non-financial clients.
(2) Primarily to provide ATM maintenance services.
(3) Revenues from these entities constituted less than 10% of our total revenues in 2006 and during the three months ended March 31, 2007 and June 30, 2007.
(4) These entities have been inactive since their inception.
(5) Primarily to develop business intelligence solutions.

 

 

5


Table of Contents

Our Corporate Information

Our principal executive offices are located at 15/F, Block A, Chuangxin Building, Software Park, Xiamen 361005, People’s Republic of China. Our telephone number at this address is 86 (592) 2396 888. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our telephone number in the Cayman Islands is 1 (345) 949 1040.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our website is www.longtop.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the U.S. is Law Debenture Corporate Services Inc., located at 4th Floor, 400 Madison Avenue, New York, New York 10017. Law Debenture’s telephone number is 1 (212) 750-6474.

Conventions Used in this Prospectus

In this prospectus, unless the context otherwise requires, “Longtop,” “we,” “us,” “our company,” and “our” refer to Longtop Financial Technologies Limited, its predecessor and its subsidiaries and affiliated entities; “China” or “PRC” refers to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau; “shares” or “ordinary shares” refers to our ordinary shares; “ADSs” refers to American depositary shares, each representing one ordinary share; “Renminbi” or “RMB ” refers to the legal currency of China; and “$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States.

Unless otherwise indicated, all historical share and per-share data contained in this prospectus have been restated to give effect to an issue of bonus shares effected on October 9, 2007, which increased the number of the issued shares and share equivalents by approximately 50%.

This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, all translations from Renminbi to U.S. dollars in this prospectus have been made at the rate of RMB7.6120 to $1.00, which was the noon buying rate as of June 29, 2007 in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value of the Renminbi may reduce the value of your investment.” On October 18, 2007, the noon buying rate was RMB7.5148 to $1.00.

 

 

6


Table of Contents

THE OFFERING

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

 

ADSs offered by us

   8,529,500 ADSs

ADSs offered by the selling shareholders

   1,905,000 ADSs

Price per ADS

   $             per ADS

ADSs outstanding immediately after this offering

   10,434,500 ADSs

Ordinary shares outstanding immediately after this offering

  

49,277,600 shares, excluding 8,550,000 ordinary shares reserved for issuance under our employee share incentive plan, of which 3,580,740 are issuable upon the exercise of outstanding options, 541,650 are issuable upon the exercise of restricted share units and additional 4,427,610 are available for issuance.

ADS to ordinary share ratio

   Each ADS represents one ordinary share.

New York Stock Exchange symbol

   LFT

The ADSs

   The depositary will hold the 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

 

 

7


Table of Contents
  

agreement, which is filed as an exhibit to the

registration statement that includes this prospectus.

Depositary

   Deutsche Bank Trust Company Americas.

Option to purchase additional ADSs

   We and the selling shareholders have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an additional 1,565,500 ADSs.

Use of proceeds

   We intend to use the net proceeds from this offering to acquire an office building in Xiamen, China, pay previously declared cash dividends, pursue strategic acquisitions and for other general corporate purposes. See “Use of Proceeds” for more information. We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.

Lock-up

   We, our directors and executive officers and all of our shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Underwriting.”

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.

 

 

8


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of operations data and other consolidated financial data for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2006, June 30, 2006 and June 30, 2007 have been derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. You should read this Summary Consolidated Financial Data together with 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 generally accepted accounting principles in the United States, or U.S. GAAP.

We have changed our fiscal year from a calendar year to a fiscal year ending March 31, effective April 1, 2007. We prepared audited financial statements for the three months ended March 31, 2007. Because we changed our fiscal year to end on March 31, we have not combined our financial information for the three months ended March 31, 2006 and 2007 with our financial information for the three months ended June 30, 2006 and 2007 and have instead presented those periods separately. The three months ended June 30, 2007 correspond to the first fiscal quarter of our fiscal year ended March 31, 2008.

 

    For the Year Ended December 31,     For the Three Months
Ended March 31,
    For the Three Months
Ended June 30,
 
        2004             2005             2006             2006             2007             2006             2007      
    ($ in thousands, except share and per share or ADS data)  

Consolidated Statement of Operations Data:

             

Revenues:

             

Software development

  13,263     21,568     33,312     4,545     5,869     7,554     8,240  

Other services(1)

  1,968     3,718     9,868     1,825     2,887     3,387     7,833  
                                         

Total revenues

  15,231     25,286     43,180     6,370     8,756     10,941     16,073  

Less: Business taxes

  (111 )   (204 )   (534 )   (90 )   (105 )   (125 )   (117 )
                                         

Net revenues

  15,120     25,082     42,646     6,280     8,651     10,816     15,956  
                                         

Cost of revenues:

             

Software development(2)

  1,921     1,804     4,092     370     1,831     753     2,285  

Other services

  646     1,515     3,037     548     1,523     709     4,691  
                                         

Total cost of revenues

  2,567     3,319     7,129     918     3,354     1,462     6,976  
                                         

Gross profit

  12,553     21,763     35,517     5,362     5,297     9,354     8,980  

Operating expenses(2)

  4,182     6,522     22,921     10,986     3,926     1,864     3,889  
                                         

Income (loss) from operations

  8,371     15,241     12,596     (5,624 )   1,371     7,490     5,091  

Net income (loss)

  6,621     12,540     8,308     (4,070 )   768     5,109     4,929  

Net income (loss) per share/ADS:

             

—Basic

  0.29     0.42     0.25     (0.14 )   0.02     0.17     0.12  

—Diluted

  0.29     0.41     0.22     (0.14 )   0.02     0.14     0.12  

Shares used in computation of net income per share:

             

—Basic

  23,125,000     30,000,000     29,761,901     30,000,000     29,705,267     29,909,334     29,705,267  

—Diluted

  23,125,000     37,920,822     37,874,254     30,000,000     40,326,495     35,297,191     40,496,633  

Cash dividends declared per ordinary share

  0.08     0.03                      

 

 

9


Table of Contents

 


    For the Year
Ended
December 31,
 

For the Three Months Ended

      March 31,  

June 30,

    2004   2005   2006     2006       2007       2006       2007  
    ($ in thousands)

(1)    Outsourcing revenue recognized by LTI, which we spun off on July 1, 2007

          1.0     4.5

(2)    Includes share-based compensation expenses as follows:

Cost of revenues

      839   1   3   2   3

Operating expenses

    37   12,044   7,823   232   385   259

 

     As of June 30, 2007
         Actual            Pro Forma(1)        Pro Forma as
adjusted(2)
     ($ in thousands)

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   79,444    45,438    161,750

Accounts receivables, net

   19,131    19,131    19,131

Total assets

   134,774    100,768    217,080

Total current liabilities

   35,945    35,945    35,945

Total mezzanine equity

   47,887    47,887   

Total shareholders’ equity

   49,767    15,761    179,960

Total liabilities, mezzanine equity and shareholders’ equity

   134,774    63,826    180,138

 


(1) Our consolidated pro forma balance sheet data as of June 30, 2007 gives effect to the LTI spin-off and related distributions to our shareholders and the payment of our previously declared $30.0 million cash dividend to our shareholders as of October 5, 2007. See “Dividend Policy” and Note 2 to our unaudited consolidated financial statements for the three months ended June 30, 2007.
(2) Our consolidated pro forma as adjusted balance sheet data as of June 30, 2007 gives effect to (i) adjustments in footnote (1) above, (ii) the automatic conversion of all of our outstanding preference shares into 10,313,862 ordinary shares immediately prior to the closing of this offering, and (iii) the issuance and sale of 8,529,500 ordinary shares in the form of ADSs by us in this offering, assuming an initial public offering price of $15.00 per ADS, the midpoint of the estimated range of the initial public offering price, after deducting estimated underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per ADS would increase (decrease) the amounts representing cash and cash equivalents, total assets and total shareholders’ equity by $7,932,435.

 

 

10


Table of Contents

Other Selected Financial Data*

 

     For the Year Ended
December 31,
   

For the Three

Months Ended

 
       March 31,     June 30,  
     2004     2005     2006     2006     2007     2006     2007  

Software development gross profit margins(1)

   84.8 %   90.8 %   86.5 %   90.5 %   67.6 %   88.9 %   71.5 %

Other services gross profit margins(1)

   66.5 %   58.5 %   68.0 %   68.6 %   46.0 %   77.9 %   39.4 %

Gross profit margins(2)

   82.4 %   86.1 %   82.3 %   84.2 %   60.5 %   85.5 %   55.9 %

Income from operations margins(3)

   55.0 %   60.3 %   29.2 %   (88.3 )%   15.7 %   68.5 %   31.7 %

Net income margins(4)

   43.5 %   49.6 %   19.2 %   (63.9 )%   8.8 %   46.7 %   30.7 %

 * We believe these measures are important to the evaluation of our financial performance.
(1) Margins equal applicable gross profit divided by applicable total revenues.
(2) Margins equal gross profits divided by total revenues.
(3) Margins equal income from operations divided by total revenues.
(4) Margins equal net income divided by total revenues.

Recent Developments

The following estimated financial results for the three months ended September 30, 2007 are subject to completion of our normal quarter-end closing procedures and may change. See “Recent Developments” for further disclosure on the important limitations with respect to the following.

We estimate that our total revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $19 million to $20 million, which is an increase of 42.4% to 49.8% from $13.3 million in the corresponding period in 2006. We estimate that our software development revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $17.2 to $18.2 million, which is an increase of 62.6% to 72.0% from $10.6 million in the corresponding period in 2006. Because we did not have VSOE or evidence that costs of PCS were immaterial, software development revenues for the three months ended September 30, 2006 included $2.1 million of revenues for services that had been provided in previous periods.

We estimate that the gross margin percentages for our non-outsourcing operations in the three months ended September 30, 2007 will not be less than the 71.5% comparable gross margin percentage for the three months ended June 30, 2007.

We estimate that our net income for the three months ended September 30, 2007 will be no less than the net income of $4.9 million for the three months ended June 30, 2007.

We expect that a smaller percentage of our total revenues will come from our two largest clients, China Construction Bank and Agricultural Bank of China, compared to results from the quarters ended March 31, 2007 and June 30, 2007, with a significant increase in revenues from Bank of China and national and city commercial banks.

An entity controlled by our chairman and largest shareholder previously sold share interests in approximately 5.0 million of our ordinary shares to some of our officers and employees at $4.83 per share in exchange for promissory notes aggregating $23.9 million. Upon consummation of this offering, those promissory notes will be forgiven in full and we will incur a share-based compensation charge of $23.9 million.

 

 

11


Table of Contents

RISK FACTORS

An investment of 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

We focus mostly on the financial services industry. Our growth depends on the growth of financial services companies in China and their IT investment. The recent growth of financial services companies in China and their IT investment may not continue, and our revenues may not grow or may even decline.

We derive substantially all our revenues from the financial services industry, and our recent revenue growth has been driven by growth in both China’s financial services industry and related IT solutions and service spending by industry participants. This growth may not continue at the same rate or at all. We believe substantial changes in the financial services industry, including decreasing profit margins in certain sectors, regulatory and technological changes and other trends, in recent years have led to increased IT solutions and services spending. A reduction in the rate of change could reduce demand for our software solutions and services. The financial services industry is also sensitive to changes in economic conditions and unforeseen events, including political instability, recession, inflation or other adverse occurrences. Any event that results in decreased consumer and corporate use of financial services, or increased pressure on banks to develop, implement and maintain solutions in-house, could harm our results of operations and business prospects.

We depend on a few clients for a significant portion of our revenues and this dependence is likely to continue. If we fail to obtain business from these key existing clients, our revenues will decline.

We depend on two of the four state-controlled national banks, or Big 4 banks, for a significant portion of our revenues. In 2004, 2005, 2006 and for the three months ended March 31, 2007 and June 30, 2007, Big 4 Client A accounted for 50.0%, 51.0%, 42.0%, 45.0% and 30.3% of our revenues, respectively, while Big 4 Client B accounted for 33.0%, 29.0%, 30.0%,22.0% and 19.3% of our revenues, respectively. We do not have long-term contracts with these two banks. We enter into contracts with bank headquarters or branches with independent procurement authority. Each contract is for the provision of solutions or services for the duration of the relevant project or services. As of August 31, 2007, we had provided and contracted to provide solutions under contracts with 32 counterparties, including headquarters and branches, affiliated with Big 4 Client A, and 27 similar counterparties affiliated with Big 4 Client B. We expect that a significant portion of our sales will continue to be generated by a small number of clients.

To anticipate our client’s future IT needs, build their trust and develop suitable solutions, we must maintain a close relationship with our key clients. Any failure to maintain this close relationship, due to unsuccessful sales and marketing efforts, lack of suitable solutions, unsatisfactory performance or other reasons, could result in our losing a client and its business. If we lose a key client, a key client significantly reduces its purchasing levels or delays a major purchase or we fail to attract additional major clients, our revenues could decline, and our operating results could be materially and adversely affected.

 

12


Table of Contents

We may lose our clients and our financial results would suffer if our clients change the decision-making body for their IT procurement or investment, merge with or are acquired by other financial services companies, develop their own in-house capabilities or fail to expand.

Our business may be negatively impacted if our business with our clients is reduced due to the following reasons:

 

  Ÿ  

Our clients may change their decision-making body for making IT investments and key decision makers may change.    The decision to purchase our software solutions and services is in some cases made by bank headquarters and in other cases by local bank branch offices. For each key client, we use a sales team dedicated to maintaining close relationships with the relevant IT procurement decision-makers. We build these extensive relationships over the course of several years. However, IT purchasing authority may become more centralized or transferred to different bodies. If a bank centralizes purchasing decisions or otherwise changes the decision making body or level within the bank at which the purchase decision is made or a key decision-maker is replaced, transferred or leaves the bank, our client relationships may be disrupted and we may be unable to effectively and timely restore these relationships.

 

  Ÿ  

Consolidation of our clients and growth of in-house capabilities. There is a growing trend for financial institutions in China to consolidate. As these institutions grow in size, they may exert pricing pressure on vendors, and/or find it more cost-effective to set up their own IT departments or divisions to meet their IT needs, instead of relying on third-party companies for solutions and services. In addition, as restrictions against foreign ownership in financial and insurance industries ease, more foreign investors may acquire stakes in or form strategic alliances with PRC financial institutions, and may direct or influence management to use IT vendors recommended or favored by the investor, leading to lost or reduced business with these existing clients.

 

  Ÿ  

Our clients fail to expand. The financial services industry in China is becoming increasingly competitive. Our clients may not successfully compete with their domestic and foreign competitors in the future. If our key clients suffer a reduced market share or their results of operations and financial condition are otherwise adversely affected, they may reduce their IT spending and change expansion plans for their IT systems, which in turn may materially and adversely affect our growth and results of operations.

We have transferred intellectual property rights to a number of our customized software solutions and a small number of our standardized solutions to our clients and may not own all the intellectual property rights to our software solutions. We may be subject to intellectual property infringement claims from these clients and others, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially disrupt our business and materially affect our gross margin and net income.

Over half of our contracts for custom-designed projects between December 2006 and September 2007 and some of our contracts for custom-designed projects prior to December 2006 provided that our clients own intellectual property rights to software solutions developed under such contracts. Most of these affected contracts provided that we have the rights to own and commercialize any substantial improvements we make to the software solutions developed for clients under these contracts. A small number of these affected contracts either do not explicitly provide for such rights or provide that we have no such rights. Furthermore, a small number of our existing standardized solutions were based on, and our future standardized solutions may be derived from, at least in part, customized software solutions developed under these contracts.

 

13


Table of Contents

The total contract value of these affected custom-designed projects between December 2006 and September 2007 was $17.1 million and the total contract value of these affected custom-designed projects prior to December 2006 was $2.5 million. The total contract value of our existing standardized solutions based on the affected customized software solutions was $785,000 as of August 31, 2007. We have also sold, and may sell in the future, variations of these software solutions to other clients. As a result of this practice, we may be subject to intellectual property infringement claims from these clients and others (including disputes from clients as to whether we have sufficiently modified the underlying customized software solutions).

Furthermore, due to the lack of clarity in a client contract for one of our important standardized software solutions, it may be interpreted that we have transferred to the client intellectual property rights to this software solution. We have sold the same software solutions to a small number of our clients for $473,000 as of August 31, 2007 and will continue to sell the same solutions to other clients. As a result of this practice, we may be subject to intellectual property right infringement claims from the client to whom we may have transferred the intellectual property rights to this software.

In addition, in a small number of our software sales contracts, our clients and us have joint ownership rights to improvements we subsequently make based on technologies and software solutions developed under these contracts. As a result, these clients may have a profit-sharing claim to our later developed solutions that may arguably be deemed “improvements” to solutions we developed for them earlier.

If we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property rights, or we may incur licensing fees or be forced to develop alternatives. In addition, we typically provide indemnification to clients who purchase our solutions against potential infringement of intellectual property rights underlying those solutions, and are therefore subject to the risk of indemnity claims. We may incur substantial expenses in defending against these third party infringement claims, regardless of their merit. Successful infringement or licensing claims against us may result in substantial monetary liabilities, reputational harm, lost sales and lower gross margins which may materially and adversely affect our business, gross margin and net income.

We may not be able to prevent others from unauthorized use of our intellectual property, which could cause a loss of clients, reduce our revenues and harm our competitive position.

We rely on a combination of patent, copyright, trademark, software registration, anti-unfair competition and trade secret laws, as well as nondisclosure agreements and other methods to protect our intellectual property rights. As of August 31, 2007, we had one pending patent application in China. A patent filing may not result in an issued patent and an issued patent may not sufficiently protect our intellectual property rights. Furthermore, our current lack of patent protection may prevent us from being able to stop any unauthorized use of our software or other intellectual property. To protect our trade secrets and other proprietary information, employees, consultants, advisors and collaborators are required to enter into confidentiality agreements. These agreements might not provide meaningful protection for the trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. Implementation of intellectual property-related laws in China has historically been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, and infringement of intellectual property rights continues to pose a serious risk of doing business in China. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our

 

14


Table of Contents

proprietary technologies could enable third parties to benefit from our technologies without paying us for doing so, which could harm our business and competitive position. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual property may not prove successful and might result in substantial costs and diversion of resources and management attention.

We may be unable to effectively execute projects, maintain, expand or renew existing client engagements and obtain new clients if we fail to attract, train, motivate and retain quality employees, particularly highly skilled engineers and mid-level managers, who can effectively perform the services offered by us.

We depend on highly skilled engineers and mid-level managers, constituting the bulk of our employee base, to effectively develop and deliver our solutions and services. Recently, the growth of our business has been and may continue to be limited by our ability to attract, train and retain these qualified individuals. For the remainder of 2007, we expect to add approximately 70 software development engineers. The market for qualified and experienced engineers throughout China is highly competitive, particularly in the areas of software programming and system engineering. We may be unable to retain our current workforce or hire additional personnel as planned. If we cannot hire these additional employees, or if we fail to provide appropriate training, career opportunities and otherwise motivate and retain our quality employees, we may not be able to execute our growth strategies and our business could suffer.

Increases in wages for IT professionals will increase our net cash outflow and our gross margin and profit margin may decline.

Historically, wages for comparably skilled technical personnel in the Chinese IT services industry have been lower than in developed countries, such as in the U.S. or Europe. In recent years, wages in China’s IT services industry have increased and may continue to increase at faster rates. Wage increases will increase our cost of software solutions and IT services of the same quality and increase our cost of operations. As a result, our gross margin and profit margin may decline. In the long term, unless offset by increases in efficiency and productivity of our work force, wage increases may also result in increased prices for our solutions and services, making us potentially less competitive. Increases in wages, including an increase in the cash component of our compensation expenses, will increase our net cash outflow and our gross margin and profit margin may decline.

Fluctuations in our clients’ annual IT budget and spending cycle and other factors can cause our revenues and operating results to vary significantly from quarter to quarter and from year to year.

Our revenues and operating results will vary significantly from quarter to quarter and from year to year due to a number of factors, many of which are outside of our control. Most of our clients in the financial services industry determine their annual IT investment plans and budgets in the last quarter of each calendar year and do not finalize their annual spending plans until the first quarter of the following year. For our customized solutions, we generally incur costs evenly during the project life while most of the related revenues are generated later in the project as we reach project milestones and complete projects. Also, the Chinese New Year holiday typically falls between late January and February of each year. As a result, relatively few contracts are signed in the first calendar quarter, with an increase in the second calendar quarter and with most of our contracts signed and completed in the third and fourth calendar quarters. Due to the annual budget cycles of most of our clients, we also may be unable to accurately estimate the demand for our solutions and services beyond the immediate calendar year, which could adversely affect our business planning. Moreover, our results will vary depending on our clients’ business needs from year to year. Due to these and other factors, our operating results have fluctuated significantly from quarter to quarter and from year to year. These fluctuations are likely to

 

15


Table of Contents

continue in the future, and operating results for any period may not be indicative of our future performance in any future period.

A significant portion of the software development revenues we generate are fixed amounts according to our sales contracts. If we fail to accurately estimate costs and determine resource requirements in relation to our projects, our margins and profitability could be materially and adversely affected.

A significant portion of the software development revenues we generate are fixed amounts according to our sales contracts or bids we submit. Our projects often involve complex technologies and must often be completed within compressed timeframes and meet increasingly sophisticated client requirements. We may be unable to accurately assess the time and resources required for completing projects and price our projects accordingly. If we underestimate the time or resources required we may experience cost overruns and mismatches in project staffing. Conversely, if we over estimate requirements, our bids may become uncompetitive and we may lose business as a result. Furthermore, any failure to complete a project within the stipulated timeframe could expose us to contractual and other liabilities and damage our reputation.

We may be forced to reduce the prices of our software products due to shortened product life cycles, increased competition and reduced bargaining power with our clients, which could lead to reduced revenues and profitability.

The software and IT services industry in China is developing rapidly and related technology trends are constantly evolving. This results in frequent introduction of new products and services, shortening product life cycles and significant price competition from our competitors. As the life cycle of a software product matures, the average selling price of the same product generally declines. A shortening life cycle of our software products generally could result in price erosion for these products if we are unable to introduce new products, or if our new products are not favorably received by our clients. We may be unable to offset the effect of declining average sales prices through increased sales volumes and/or reductions in our costs. Furthermore, we may be forced to reduce the prices of our software products in response to offerings made by our competitors. Finally, we may not have the same level of bargaining power we have enjoyed in the past when it comes to negotiating for the prices of our software products.

Any decrease in our level of standardized software solutions, including as a result of the unpredictable development cycle of our standardized software solutions, may cause our revenues and gross profit to decline.

Revenues from sales of our standardized software comprised 7.1%, 25.5%, 52.5%, 23.1% and 34.4% of our total revenues for 2004, 2005, 2006 and for the three months ended March 31, 2007 and June 30, 2007, respectively, representing a substantial portion of our total revenues. Almost all of our software development cost of revenue relates to our customized software solutions. The development cycle of our standardized software can be unpredictable. If we experience a change in the sales levels for our standardized software solutions, due to delays in the development process for a significant number of standardized solutions or otherwise, our revenues and gross profit could be materially and adversely affected as a result.

The software and IT-related services market for financial institutions in China is highly competitive, and we may fail to compete successfully, thereby resulting in loss of clients and decline in our revenues and profit margins.

The software and IT-related services market for financial institutions in China is intensely competitive and is characterized by frequent technological changes, evolving industry standards and

 

16


Table of Contents

changing client demands. Our most significant competition comes from the in-house IT departments of our customers. We also face competition from well-funded international platform providers, such as Bearing Point and IBM, domestic IT solution providers for the financial service industry, such as Digital China Holdings Limited, and other targeted solutions providers in certain market segments in which we operate. We expect competition to increase from domestic and international competitors as additional companies compete to meet the IT requirements of financial institutions in China. Increased competition may result in price reductions, reduced margins and inability to gain or hold market share.

Changes in technology could adversely affect our business by increasing our costs, reducing our profit margins and causing a decline in our competitiveness.

The markets for our software and IT-related services change rapidly because of technological innovation, new product introductions, declining prices and evolving industry standards, among other factors. New solutions and new technology often render existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, our success depends on our ability to keep up with the latest technological progress and to develop or acquire and integrate new technologies into our software and IT-related services. Advances in technology also require us to commit substantial resources to developing or acquiring and then deploying new technologies for use in our operations. We must continuously train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies. We may be unable to continue to commit the resources necessary to keep our competitive technological advantages and our ability to effectively compete in the market may suffer as a result.

We are relatively new to the insurance and corporate areas in China and our experience in the banking industry in China may not be transferable to these areas.

We are relatively new to the insurance and corporate areas in China. Our knowledge and experience in the banking industry may not be transferable to the insurance and corporate areas. If we do not possess or if we fail to develop the required expertise in these new areas, our growth may be adversely affected.

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

We have experienced a period of rapid growth and expansion that has placed, and continues to place, 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, all of which require substantial management efforts. We also will need to continue to expand, train, manage and motivate our workforce and manage our client relationships. Moreover, as we introduce new solutions and services or enter into new markets, we may face new market, technological and operational risks and challenges with which we are unfamiliar. All of these endeavors will involve risks and require substantial management effort and skill. We may be unable to manage our growth effectively and any failure to do so may have a material adverse effect on our business.

We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.

Historically, we have added new solutions or services and acquired additional clients through selected acquisitions. We expect selective acquisitions of high-quality financial IT services companies will contribute to our future growth. We may not be able, however, to identify suitable future acquisition candidates. Even if we identify suitable candidates, we may be unable to complete an acquisition on terms commercially acceptable to us. If we fail to identify appropriate candidates or complete desired acquisitions, we may not be able to implement our growth strategies effectively or efficiently. In

 

17


Table of Contents

addition, our management attention may be diverted by the acquisition and integration process. As a result, our earnings, revenues growth and business could be negatively affected.

We face risks once a business is acquired and the acquired companies may not perform to our expectations, either of which may adversely affect our results of operations.

We face risks when we acquire other businesses. These risks include:

 

  Ÿ  

difficulties in the integration of acquired operations and retention of personnel,

 

  Ÿ  

entry into unfamiliar markets,

 

  Ÿ  

unforeseen or hidden liabilities,

 

  Ÿ  

tax and accounting issues, and

 

  Ÿ  

inability to generate sufficient revenues to offset acquisition costs.

Acquired companies may not perform to our expectations for various reasons, including the loss of key personnel or, as a result, key clients, and our strategic focus may change. As a result, we may not realize the benefit we anticipated. If we fail to integrate acquired businesses or realize the expected benefit, we may lose the return on the investment in these acquisitions, incur transaction costs and our operations may be negatively impacted as a result.

Defects in our software, errors in our systems integration or maintenance services or our failure to perform our professional services could result in a loss of clients and decrease in revenues, unexpected expenses and a reduction in market share.

Our software solutions are complex and may contain defects, errors and bugs when first introduced to the market or to a particular client, or as new versions are released. Because we cannot test for all possible scenarios, our solutions may contain errors which are not discovered until after they have been installed and we may not be able to correct these problems on a timely basis. These defects, errors or bugs could interrupt or delay completion of projects or sales to our clients. In addition, our reputation may be damaged and we may fail to obtain new projects from existing clients or new clients. We may make mistakes when we provide systems integration and maintenance services.

We also provide a range of IT services, including ATM maintenance, system integration and other ancillary services, and must meet stringent quality requirements for performing these services. If we fail to meet these requirements, we may be subject to claims for breach of contracts with our clients. Any such claim or adverse resolution of such claim against us may hurt our reputation and have a material adverse effect on our business.

Our costs could increase substantially if we suffer a significant number of warranty claims for third party hardware and software procured on behalf of our clients and the manufacturers or their agents do not provide the back-to-back warranties that they have contracted to provide to us.

With our system integration services, we assist clients with the procurement and installation of hardware and software which best meets their system requirements. We assist our clients in managing the equipment manufacturers, obtaining bids and proposals on their behalf, negotiating terms and where required monitoring the installation and testing, which is normally provided by the manufacturers. In some contracts, we may also provide financing to our clients. Where warranty is required, we obtain, on behalf of our clients, manufacturers’ warranties and support for the third party

 

18


Table of Contents

hardware and software. On behalf of our clients we procure equipment from major international technology companies, including BEA, BMC, Cisco, Dell, Diebold, EMC, IBM, Microsoft, Nortel and Oracle.

Our warranties include service for both hardware and our and third-party software solutions. Although we arrange back-to-back warranties with hardware and software vendors, we have the contractual responsibility to maintain the installed hardware and software. Most of our contracts do not have disclaimers or limitations on liability for special, consequential and incidental damages nor do we cap the amounts recoverable for damages.

We may incur losses due to business interruptions resulting from occurrence of natural catastrophes, acts of terrorism or fires, and we have limited insurance coverage.

We currently do not have insurance against business interruptions. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts of terrorism occur in Xiamen, where our head office is located and most of our employees are based, or elsewhere in China, we might suffer not only significant property damages, but also loss of revenues due to interruptions in our business operations, which could have a material adverse effect on our business, operating results or financial condition. In addition, we may suffer substantial losses due to interruptions caused by a severe fire.

Some of our contracts with clients contain termination clauses and expose us to penalties or other contractual liabilities, which could result in unexpected expenses or declined revenues.

Some of our contracts with clients permit termination in the event our performance is not consistent with the quality and other standards specified in those contracts. The ability of our clients to terminate contracts creates an uncertain revenue stream. If our clients are not satisfied with our level of performance, our reputation in the industry may suffer, which may also materially and adversely affect our business, results of operations and financial condition.

Some of our contracts provide for penalties upon the occurrence of certain events such as if we failed to meet a specified timetable or failed to achieve certain quality or other standards. As a result, we are exposed to the risk that we will incur significant penalties in performing these contracts. In addition, the failure of our technology suppliers to deliver the necessary hardware and components in accordance with our specifications could result in our default under our contracts with our clients, which could have a material adverse effect on our business, results of operations and financial condition.

We depend on third-party technologies and third-party technology suppliers. If these technologies and suppliers are not available to us at reasonable costs or at all, our expenses may increase, our profit margins may decline and any resulting contractual defaults may harm our reputation, result in a loss of clients and decreased revenues.

Our solutions are designed to work on or in conjunction with third-party hardware and software solutions. If any third party were to discontinue making their solutions available to us or our clients on a timely basis, or increase materially the cost of their solutions, or if our solutions failed to properly use or interoperate with their hardware or software solutions, our solutions would have to be redesigned to function with or on alternative third-party solutions, or we may be precluded from selling the solutions. An alternative source of suitable technology may not be available on terms acceptable to us or at all, and we may be unable to develop an alternative product on a timely basis or at a reasonable cost. Our failure or inability to license, acquire or develop alternative technologies or solutions on a timely basis or at a reasonable cost could have a material adverse effect on our business, results of operations and financial condition.

 

19


Table of Contents

In addition, our technology suppliers’ failure to deliver the necessary hardware and components in accordance with our specifications could result in our default under our contracts with our clients, which in turn could materially and adversely affect our business, results of operations and financial condition.

Our business depends substantially on the continuing efforts of our management and other key personnel. If we lose their services, we could incur significant costs in finding suitable replacements and our business may be severely disrupted.

Our future success heavily depends upon the continued services of our management and other key personnel. In particular, we rely on the expertise and experience of Xiaogong Jia, our chairman of the board of directors, Weizhou Lian, our chief executive officer, and Derek Palaschuk, our chief financial officer. If one or more of our management or key personnel were unable or unwilling to continue in their present positions, we might not be able to replace them easily or at all. Our business may be severely disrupted, our financial condition and results of operations may be materially adversely affected, and we may incur additional expenses to recruit, train and retain personnel.

If any of our management or key personnel joins a competitor or forms a competing company, we may lose clients, suppliers, know-how and key professionals and staff members. Our chief executive officer and chief financial officer have signed employment agreements with us and the rest of the executive officers have entered into employment agreements with Longtop System. While the employment agreements with us contain non-competition provisions, the employment agreements with Longtop System do not contain such provisions. Moreover, if any dispute arises between our chief executive officer or chief financial officer and us, the non-competition provisions contained in their employment agreements may not be enforceable, especially in China, where most of these executive officers and key employees reside, on the ground that we have not provided adequate compensation to these executive officers for their non-competition obligations, which is required under the relevant PRC regulations.

Our business benefits from certain government incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase our tax burden and reduce our net income.

The PRC government has provided various incentives to domestic companies in the software industry in order to encourage development of the software industry in China. All of our PRC subsidiaries currently receive rebates, business tax exemptions and government incentives in the form of reduced enterprise income tax at the applicable rate of 15% on taxable profits in China as compared to the statutory rate of 33%. For some of our software solutions, we are entitled to receive a 14% refund on the total VAT payable of 17% if we have registered the copyright for these solutions and met government authorities’ requirements. In addition, we are currently exempted from business tax for revenues generated from technology development, transfer and related consulting services. We receive these government incentives because our PRC subsidiaries are domestic software companies in China, our headquarters are located in Xiamen, a special economic zone in China where special incentives are provided, or our services fall into specified categories. The PRC government authorities may reduce or eliminate these incentives at any time in the future. Additionally, in order to continue to qualify for some of these incentives, we are required to meet stringent requirements on our gross revenues.

On March 16, 2007, the National People’s Congress of the PRC passed the PRC Enterprise Income Tax Law, or the New EIT Law, which will take effect on January 1, 2008. Under the New EIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the currently prevailing tax laws and administrative regulations shall, under the regulations of the State Council, gradually become subject to the New EIT Law rate over a five-year transition period starting from the date of effectiveness of the New EIT Law. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for

 

20


Table of Contents

establishment prior to March 16, 2007, such as our PRC subsidiaries, to be set out in more detailed implementing rules to be adopted in the future. In addition, certain qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% under the new tax law if they meet the definition of “qualifying high-technology enterprise” to be set forth in the more detailed implementing rules when they are adopted. As a result, if our PRC subsidiaries qualify as qualifying high-technology enterprises, they will continue to benefit from a preferential tax rate of 15%, subject to any transitional period rules implemented starting from January 1, 2008. Otherwise, the applicable tax rate of our PRC subsidiaries may gradually increase from its existing tax rate of 15% or less to the unified tax rate of 25% by January 1, 2013 under the new tax law and in accordance with more detailed implementing rules to be adopted in the future. Any increase in our effective tax rate as a result of the above may adversely affect our operating results. However, details regarding implementation of this new law are expected to be provided in the form of one or more implementing regulations to be promulgated by the PRC government and the timing of the issuance of such implementing regulations is currently unclear.

Furthermore, under the New EIT Law, the exemption to the withholding tax on dividends distributed by foreign-invested enterprises to their foreign investors under the current tax laws may no longer be available. See “Risks Related to Doing Business in China—The dividends we receive from our operating subsidiaries and our global income may be subject to PRC tax under the amended PRC Enterprise Income Tax Law, which will increase our expenses and reduce our net income.”

Any significant failure in our information technology systems could subject us to contractual liabilities to our clients, harm our reputation and adversely affect our results of operations.

Our business and operations are highly dependent on the ability of our information technology systems to timely process various transactions across different markets and solutions. The proper functioning of our financial control, accounting, customer service and other data processing systems, together with the communication systems between our various subsidiaries and delivery centers and our main offices in Xiamen, is critical to our business and to our ability to compete effectively. Our business activities may be materially disrupted in the event of a partial or complete failure of any of these primary information technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks, conversion errors due to system upgrading, damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry or other events beyond our control. We could also experience system interruptions due to the failure of their systems to function as intended or the failure of the systems relied upon to deliver services such as ATM networks, the Internet, or the systems of financial institutions, processors that integrate with other systems and networks and systems of third parties. Loss of all or part of the systems for a period of time could have a material adverse effect on our business and business reputation. We may be liable to our clients for breach of contract for interruptions in service. Due to the numerous variables surrounding system disruptions, the extent or amount of any potential liability cannot be predicted.

Our computer networks may be vulnerable to security risks that could disrupt our services and adversely affect our results of operations.

Our computer networks may be vulnerable to unauthorized access, computer hackers, computer viruses and other security problems caused by unauthorized access to, or improper use of, systems by third parties or employees. A hacker who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations. Although we intend to continue to implement security measures, computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems of our customers. Actual or perceived concerns that our systems may be vulnerable to such attacks or disruptions may deter financial services providers and consumers from using our solutions or services. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches.

 

21


Table of Contents

Data networks are also vulnerable to attacks, unauthorized access and disruptions. For example, in a number of public networks, hackers have bypassed firewalls and misappropriated confidential information. It is possible that, despite existing safeguards, an employee could divert our customers’ funds, exposing us to a risk of loss or litigation and possible liability. Losses or liabilities that are incurred as a result of any of the foregoing could have a material adverse effect on our business.

There have been historical deficiencies with our internal controls and there remain areas of our internal and disclosure controls that require improvement. If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may, therefore, be adversely impacted.

We will be subject to reporting obligations under the U.S. securities laws. Beginning with our annual report on Form 20-F for the fiscal year ending March 31, 2009, we will be required to prepare a management report on our internal controls over financial reporting containing our management’s assessment of the effectiveness of our internal controls over financial reporting. In addition, depending on our market capitalization, our independent registered public accounting firm may be required to attest to and report on our management’s assessment of the effectiveness of our internal controls over financial reporting. Our management may conclude that our internal controls over our financial reporting are not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may still decline to attest to our management’s assessment or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. 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 with limited accounting personnel and other resources with which to address our internal controls and procedures. In connection with their audit of our consolidated financial statements for both 2006 and the three months ended March 31, 2007, our auditors, an independent registered public accounting firm, identified and communicated to us one material weakness for 2006 and, for both 2006 and the three months ended March 31, 2007, a significant deficiency and a large number of other deficiencies in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board that could result in more than a remote likelihood that a material misstatement in our annual or interim financial statements would not be prevented or detected on a timely basis by our internal controls. The material weakness for 2006 identified by our independent auditors related to insufficient resources in our accounting department to properly identify and analyze transactions and prepare financial statements in accordance with U.S. GAAP and SEC reporting requirements. The significant deficiency for 2006 and the three months ended March 31, 2007 noted a lack of detailed accounting policies or procedures which define the accounting process to be followed for both routine and non-routine transactions.

To remedy the 2006 material weakness and the remaining significant deficiency and control deficiencies, we have, among other things, begun to adopt measures to improve our internal control over financial reporting. To strengthen our accounting resources, we hired additional accounting personnel in 2007 with U.S.
GAAP experience. We have also developed and are rolling out procedures to address key relevant accounting areas for routine and non-routine transactions. Related efforts also include establishing a U.S. GAAP based accounting system and implementing procedures to more quickly convert our accounts from PRC GAAP to U.S. GAAP.

We will continue to implement measures to remedy these material weaknesses and significant deficiencies to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to

 

22


Table of Contents

timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting. Moreover, effective internal controls over financial reporting are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal controls over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our ordinary shares. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act.

We have granted, and may continue to grant, stock options under our share incentive plan, resulting in increased share-based compensation expenses and, therefore, reduced net income.

We adopted a share incentive plan in 2005 and for the year ended December 31, 2006 recorded $12.9 million as share-based compensation expenses.

Of that total, $2.9 million resulted from the sale by Well Active International Limited, or Well Active, a BVI company owned by three of our employees who act as nominee shareholders at the direction of Xiaogong Jia, our chairman of the board of directors. Upon this offering, we will incur an additional $23.9 million in share-based compensation expenses from the cancellation of the notes issued in connection with the sale by Well Active International Limited of 5.0 million shares to our employees. See “Management—Compensation of Directors and Executive Officers.” As of June 30, 2007, we had $7.7 million in unrecognized share-based compensation.

Under Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” we are required to recognize share-based compensation as compensation expense in the statement of operations based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. The additional expenses associated with share-based compensation may reduce the attractiveness of issuing stock options under our share incentive plan. However, if we do not grant stock options or reduce the number of stock options that we grant, we may not be able to attract and retain key personnel. If we grant more stock options to attract and retain key personnel, the expenses associated with share-based compensation may adversely affect our net income.

Risks Related to Doing Business in China

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

Substantially all of our operations are conducted in China and substantially all of our sales are made in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:

 

  Ÿ  

the amount of government involvement;

 

  Ÿ  

the level of development;

 

  Ÿ  

the growth rate;

 

  Ÿ  

the control of foreign exchange; and

 

  Ÿ  

allocation of resources.

 

23


Table of Contents

While the PRC economy has grown significantly over the past 25 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us.

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of the productive assets in China is still owned by the PRC government. The continued control of these assets and other aspects of the national economy by the PRC government could materially and adversely affect our business. The PRC government also exercises significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Efforts by the PRC government to slow the pace of growth of the PRC economy, which has occurred from time to time, could result in a decrease in the country’s average income level, which in turn could reduce demand for our solutions.

Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our solutions and consequently have a material adverse effect on our business.

Uncertainties with respect to the PRC legal system could limit legal protections available to us.

We conduct substantially all of our business through our operating subsidiaries in China. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference but have no precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

We rely principally on dividends paid by our operating subsidiaries to fund cash and financing requirements, and limitations on the ability of our operating subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business and fund our operations.

We are a holding company and conduct substantially all of our business through our operating subsidiaries, which are limited liability companies established in China. We rely on dividends paid by our subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur and to pay our operating expenses. The payment of dividends by entities organized in China is subject to limitations. In particular, regulations in China currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Our Chinese subsidiaries are also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reaches 50% of their registered capital. These reserves are not distributable as cash dividends. In addition, they are

 

24


Table of Contents

required to allocate a portion of their after-tax profit to their staff welfare and bonus fund at the discretion of their respective boards of directors. Moreover, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends and other distributions to us could materially and adversely limit our ability to make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

The dividends we receive from our operating subsidiaries and our global income may be subject to PRC tax under the amended PRC Enterprise Income Tax Law, which will increase our expenses and reduce our net income.

Under current PRC tax laws, we are exempted from withholding tax on dividends we receive from our PRC subsidiaries. Under the amended PRC Enterprise Income Tax Law, or the New EIT Law, to be effective on January 1, 2008, dividends from our PRC subsidiaries to us will be subject to a withholding tax. Although the New EIT Law provides for a maximum withholding tax rate of 20%, the rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. Given the lack of detailed implementing rules or explanations, we can not assure you that we will qualify for any withholding tax exemption or reduction under the amended tax law. If the withholding tax is levied, our business, financial condition and results of operations could be materially and adversely affected as a result.

In addition, under the New EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. The New EIT Law, however, does not define the term “de facto management bodies.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate of 25%.

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

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC operating subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans to our PRC subsidiaries are subject to PRC regulations. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the SAFE.

We may also decide to finance our subsidiaries by means of capital contributions. These capital contributions must be approved by the PRC Ministry of Commerce or its local counterpart. We cannot assure you that we will be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

25


Table of Contents

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

Substantially all of our revenues and expenses are denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenues will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies.

Foreign exchange transactions by our PRC subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC governmental authorities, including SAFE. In particular, if our PRC subsidiaries borrow foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the National Development and Reform Commission or the NDRC, the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing.

Fluctuation in the value of the Renminbi may reduce the value of your investment.

The change in value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the current policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a greater fluctuation range between Renminbi and the U.S. dollar. From July 21, 2005 to June 30, 2007, the Renminbi cumulatively appreciated approximately 8.0% over the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible and more market-oriented currency policy that allows a greater fluctuation in the exchange rate between the Renminbi and the U.S. dollar. Accordingly, we expect that there will be increasing fluctuations in the Renminbi exchange rate against the U.S. dollar in the near future. Any significant revaluation of the Renminbi may have a material adverse effect on the value of, and any dividends payable on, our ADSs in U.S. dollar terms. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of paying dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents and registration requirements for employee stock ownership plans or share option plans may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise materially and adversely affect us.

SAFE issued a public notice in October 2005, requiring PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or

 

26


Table of Contents

controlling any company outside of China, referred to as an “offshore special purpose company,” for the purpose of acquiring any assets of or equity interest in PRC companies and raising fund from overseas. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend his or her SAFE registration with the local SAFE branch, with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China. To further clarify the implementation of Circular 75, the SAFE issued Circular 124 and Circular 106 on November 24, 2005 and May 29, 2007, respectively. Under Circular 106, PRC subsidiaries of an offshore special purpose company are required to coordinate and supervise the filing of SAFE registrations by the offshore holding company’s shareholders who are PRC residents in a timely manner. If these shareholders fail to comply, the PRC subsidiaries are required to report to the local SAFE authorities. If the PRC subsidiaries of the offshore parent company do not report to the local SAFE authorities, they may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to their offshore parent company and the offshore parent company may be restricted in its ability to contribute additional capital into its PRC subsidiaries. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. Some of our PRC resident beneficial owners have not registered with the local SAFE branch as required under SAFE regulations. The failure or inability of these PRC resident beneficial owners to comply with the applicable SAFE registration requirements may subject these beneficial owners or us to fines, legal sanctions and restrictions described above.

On March 28, 2007, SAFE released detailed registration procedures for employee stock ownership plans or share option plans to be established by overseas listed companies and for individual plan participants. Any failure to comply with the relevant registration procedures may affect the effectiveness of our employee stock ownership plans or share option plans and subject the plan participants, the companies offering the plans or the relevant intermediaries, as the case may be, to penalties under PRC foreign exchange regime. These penalties may subject us to fines and legal sanctions, 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.

In addition, the NDRC promulgated a rule in October 2004, or the NDRC Rule, which requires NDRC approvals for overseas investment projects made by PRC entities. The NDRC Rule also provides that approval procedures for overseas investment projects of PRC individuals must be implemented with reference to this rule. However, there exist extensive uncertainties in terms of interpretation of the NDRC Rule with respect to its application to a PRC individual’s overseas investment, and in practice, we are not aware of any precedents that a PRC individual’s overseas investment has been approved by the NDRC or challenged by the NDRC based on the absence of NDRC approval. Our current beneficial owners who are PRC individuals did not apply for NDRC approval for investment in us. We cannot predict how and to what extent this will affect our business operations or future strategy. For example, the failure of our shareholders who are PRC individuals to comply with the NDRC Rule may subject these persons or our PRC subsidiary to certain liabilities under PRC laws, which could adversely affect our business.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain prior CSRC approval could delay this offering, and a failure to obtain this approval, if required, could have a material adverse effect on our business, operating results, reputation and trading price of our ADSs, and may also create uncertainties for this offering.

On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission of the State Council, or SASAC, the State

 

27


Table of Contents

Administration of Taxation, the State Administration for Industry and Commerce, or SAIC, the CSRC, and the SAFE, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. On September 21, 2006, the CSRC issued a clarification that sets forth the criteria and process for obtaining any required approval from the CSRC.

Our PRC counsel, Global Law Office, has advised us that, based on their understanding of the current PRC laws, regulations and rules and the procedures announced on September 21, 2006, because we have completed our restructuring before September 8, 2006, the effective date of the new regulation, the new regulation does not require an application to be submitted to the CSRC for the approval of the listing and trading of our ADSs on the New York Stock Exchange, unless we are clearly required to do so by possible later rules of the CSRC, and if an application for the CSRC approval is required, we have a justifiable basis to request a waiver from the CSRC, if and when such procedures are established to obtain such a waiver.

A copy of Global Law Office’s legal opinion regarding this new PRC regulation is being filed as an exhibit to our registration statement on Form F-1, which is available at the website of the United States Securities and Exchange Commission, or the SEC, at www.sec.gov.

If the CSRC requires that we obtain its approval prior to the completion of this offering, this offering will be delayed until we obtain CSRC approval, which may take several months. If prior CSRC approval is required but not obtained, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take 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 CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur.

Also, if the CSRC subsequently requires that we obtain its approval, we may be unable to obtain a waiver of the CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding this CSRC approval requirement could have a material adverse effect on the trading price of our ADSs.

Any health epidemics and other outbreaks could severely disrupt our business operations.

Our business could be materially and adversely affected by the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, or another epidemic. In recent years, there have been reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of avian influenza, SARS or other adverse public health developments in China could require the temporary closure of our offices or prevent our staff from traveling to our clients’ offices to provide on site services. Such closures could severely disrupt our business operations and adversely affect our results of operations.

 

28


Table of Contents

Risks Related to Our ADSs and This Offering

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

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have been approved to list our ADSs on the New York Stock Exchange. Our ordinary shares will not be listed on any exchange. 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.

The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs 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 may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

  Ÿ  

actual or anticipated fluctuations in our quarterly operating results;

 

  Ÿ  

changes in financial estimates by securities research analysts;

 

  Ÿ  

announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;

 

  Ÿ  

addition or departure of key personnel;

 

  Ÿ  

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

 

  Ÿ  

intellectual property litigation;

 

  Ÿ  

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

 

  Ÿ  

general economic or political conditions in China.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $11.45 per ADS (assuming no exercise by the underwriters of options to acquire additional ADSs), representing the difference between our pro forma adjusted net tangible book value per ADS as of June 30, 2007, after giving effect to this offering and an assumed initial public offering price of $15.00 per ADS, the midpoint of the range shown on the front cover page of this prospectus. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

 

29


Table of Contents

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

Additional sales of our ordinary shares 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 49,277,600 ordinary shares outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933. 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 closing of this offering, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

In addition, certain holders of our ordinary shares after the completion of this offering will have the right to cause us to register the sale of those shares under the Securities Act. Registration of these shares under the Securities Act would result in 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 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 evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote. The deposit agreement provides that if the depositary does not timely receive valid voting instructions from the ADS holders, then the depositary shall, with certain limited exceptions, give a discretionary proxy to a person designated by us to vote such shares.

We may be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

We do not expect to be considered a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our current taxable year ending December 31, 2007. However, the application of the PFIC rules is subject to ambiguity in several respects, and in addition, we must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2007 or any future taxable year. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) at least 75% of its gross income is passive income or (2) at least 50% of the value of its assets (based on the average of the quarterly values of the assets during the taxable year) is attributable to assets that produce or are held for the production of passive income. The market value of our assets may be determined in large part by the market price of our ADSs and ordinary shares, which is likely to fluctuate after this offering. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. If we were treated as a PFIC for any taxable year during which a U.S. person held an ADS or an ordinary share, certain adverse U.S. federal income tax consequences could apply to such U.S. person. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

 

30


Table of Contents

You may not be able to participate in rights offerings and may experience dilution of 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. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act of 1933, as amended, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

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

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

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

Our existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other holders of our ordinary shares and ADSs.

A small number of our existing shareholders, namely, Mr. Xiaogong Jia, our co-founder and chairman of our board of directors, Mr. Weizhou Lian, our co-founder and chief executive officer, Cathay ITfinancial Services Ltd., or Cathay ITfinancial, Tiger Global Private Investment Partners III, L.P. and Tiger Global Private Investment Partners IV, L.P., or Tiger, currently beneficially own a total of 94.2% of our outstanding share capital and collectively will beneficially own approximately 74.6% of our outstanding share capital immediately before completion of this offering. As such, these shareholders have substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. Alternatively, our controlling shareholders may cause a merger, consolidation or change of control transaction even if it is opposed by our other shareholders, including those who purchase shares in this offering.

 

31


Table of Contents

We currently do not intend to follow the New York Stock Exchange requirements that a majority of our directors consist of independent directors or that we implement a nominating committee. This may afford less protection to our holders of ordinary shares and ADSs.

Section 303A of the Corporate Governance Rules of the New York Stock Exchange requires listed companies to have, among others, a majority of its board members be independent and a nominating committee. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirement. The corporate governance practice in our home country, the Cayman Islands, does not require a majority of our board to consist of independent directors or the implementation of a nominating committee. Since a majority of our board of directors will not consist of independent directors and we will not have a separate nominating committee to identify individuals qualified to become board or committee members or set corporate governance guidelines as long as we rely on the foreign private issuer exemption, there will be fewer board members exercising independent judgment and the level of board oversight on the management of our company may decrease as result. The board members who are not independent may cause a merger, consolidation or change of control transactions without the consent of the independent directors, which may lead to a conflict of interest with the interest of holders of our ordinary shares and ADSs.

Our articles of association contain anti-takeover provisions, and we may adopt additional anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our post-offering articles of association create a board of directors pursuant to which our directors are elected for staggered terms, which means that shareholders can only elect, or remove, a limited number of directors in any given year. Our post-offering articles of association also contain provisions that authorize our board of directors, without further action by our shareholders, to issue shares whether pursuant to a shareholder rights agreement or otherwise in one or more series and to designate the price, rights, preferences, privileges and restrictions of shares. Under these anti-takeover provisions, shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. Furthermore, we may in the future amend our articles of association to adopt additional provisions that limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These anti-takeover provisions may have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. If our board of directors decides to issue shares in reliance of the provisions described above, or adopt additional anti-takeover provisions, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

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, conduct substantially all of our operations in China and all of our officers reside outside the United States.

We are incorporated in the Cayman Islands and substantially all of our assets are located outside of the United States. We conduct substantially all of our operations in China through our wholly-owned subsidiaries in China. The majority of our officers and directors reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it may be difficult 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, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or

 

32


Table of Contents

the assets of our directors and officers. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state, and it is uncertain whether such Cayman Islands or PRC courts would be competent to hear original actions brought in the Cayman Islands or the PRC against us or such persons predicated upon the securities laws of the United States or any state. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

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

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than they would as shareholders of a public company of the United States.

Our management will have considerable discretion as to the use of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree.

We have not specifically allocated most 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. Such proceeds from this offering may also be placed in investments that do not produce income or that may lose value.

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 new rules subsequently implemented by the SEC and the New York Stock Exchange, have detailed requirements concerning corporate governance practices of public companies including Section 404 relating to internal controls over financial reporting. We expect these new rules and regulations to increase our director and officer liability insurance, accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. 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.

 

33


Table of Contents

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,” “Recent Developments,” “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 and financial trends 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 expansion plans;

 

  Ÿ  

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

 

  Ÿ  

our estimated financial results for the three months ended September 30, 2007;

 

  Ÿ  

the expected growth of the financial services, software development and IT services market in China and internationally;

 

  Ÿ  

our expectations regarding demand for our products and services;

 

  Ÿ  

our expectations regarding keeping and strengthening our relationships with key clients;

 

  Ÿ  

our ability to stay abreast of market trends and technological advances;

 

  Ÿ  

our ability to effectively protect our intellectual property rights and not infringe on the intellectual property rights of others;

 

  Ÿ  

our ability to implement our know-how, modules and design;

 

  Ÿ  

our ability to attract and retain quality employees;

 

  Ÿ  

our ability to pursue strategic acquisitions and alliances;

 

  Ÿ  

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

 

  Ÿ  

competition in our industry in China and internationally;

 

  Ÿ  

general economic and business conditions in the regions and countries we provide our solutions and services;

 

  Ÿ  

relevant government policies and regulations relating to our industry; and

 

  Ÿ  

market acceptance of our solutions and services.

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

 

34


Table of Contents

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 “Summary—Our Challenges,” “Risk Factors,” “Recent Developments,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should read thoroughly 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. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance.

This prospectus contains statistical data that we obtained from various government and private publications. We have not independently verified the data in these reports. Statistical data in these publications also include projections based on a number of assumptions. The IT market for the financial 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 IT and financial services industry results in significant uncertainties in any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

Unless otherwise indicated, information in this prospectus concerning economic conditions and our industry is based on information from independent industry analysts and publications, as well as our estimates. Except where otherwise noted, our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. None of the independent industry publication market data cited in this prospectus was prepared on our or our affiliates’ behalf.

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

 

35


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $116.3 million, or approximately $122.9 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 offering price of $15.00 per ADS (the midpoint of the range shown on the front cover page of this prospectus). A $1.00 increase (decrease) in the assumed initial public offering price per ADS would increase (decrease) the net proceeds to us from this offering by $7.9 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.

We plan to use the net proceeds of this offering as follows:

 

  Ÿ  

approximately $25 million to acquire an office building in Xiamen;

 

  Ÿ  

approximately $10 to $20 million for acquisitions of IT service companies, including approximately $3.4 million in cash and potentially an additional $2.6 million in cash earn-out payment in connection with the acquisition of FEnet. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Acquisitions and Strategic Alliances.” Other than the FEnet acquisition, we currently do not have any agreements or understandings to make any material acquisitions of, or investments in, any business;

 

  Ÿ  

approximately $30 million to pay a previously declared dividend. See “Dividend Policy;” and

 

  Ÿ  

the balance of the proceeds for general corporate purposes.

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 bank deposits. These investments may have a material adverse effect on the U.S. federal income tax consequences of your investment in our ADSs. These consequences are described in more detail in “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

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 subsidiaries only through loans or capital contributions and to other entities only through loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their 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 Doing Business in China—PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC operating subsidiaries, 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.

 

36


Table of Contents

DIVIDEND POLICY

We declared and paid dividends to holders of our ordinary shares in the amount of $0.08 and $0.03 per share, respectively, for 2004 and 2005. We recently made dividend distributions to our shareholders totalling approximately $4.0 million in cash and 729,107 of our ordinary shares in connection with our disposition of LTI. See “Related Party Transactions—The LTI Spin-off and Related Arrangements.” On October 5, 2007, we declared a $30 million cash dividend payable to our shareholders on that date, subject to completion of this offering. However, we do not have any present plan to pay any cash dividends on our ordinary shares in the near future and you will not participate in the recently declared cash dividend. 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 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.

 

37


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2007:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect (i) dividend distributions to our existing shareholders in connection with the disposition of LTI and its outsourcing business; (ii) the payment of a $30 million cash dividend declared to our existing shareholders and payable upon the closing of this offering; and (iii) the issuance of an additional 95,856 series B preferred shares on September 5, 2007 to reflect our intended capitalization at the time we initially issued our series B preferred shares in December 2006. See “Dividend Policy” and Note 2 to our unaudited consolidated financial statements for the three months ended June 30, 2007.

 

  Ÿ  

on a pro forma as adjusted basis to reflect (i) the pro forma adjustments above, (ii) the automatic conversion of all of our outstanding preferred shares into 10,313,862 ordinary shares automatically upon the closing of this Offering; and (iii) the sale of 8,529,500 ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of $15.00 per share, the midpoint of the estimated range of the initial public offering price after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us.

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 June 30, 2007
     Actual    Pro Forma    Pro Forma,
As Adjusted
    

($ in thousands)

Debt:

        

Secured

   178    178    178

Mezzanine equity:

        

Series A convertible redeemable preferred shares ($0.01 par value, 6,360,001 shares authorized, issued and outstanding)

   23,214    23,214   

Series B convertible redeemable preferred shares ($0.01 par value, 3,858,005 and 3,953,861 shares authorized, issued and outstanding, respectively)

   24,673    24,673   

Shareholders’ equity:

        

Ordinary shares ($0.01 par value, 68,640,000 shares authorized, 29,705,267 shares issued and outstanding, and 47,500,377 shares issued and outstanding on a pro forma basis)

   297    304    493

Additional paid-in capital

   19,382    12,118    176,128

Retained earnings

   26,749      

Accumulated other comprehensive income

   3,339    3,339    3,339
              

Total shareholders’ equity

   49,767    15,761    179,960
              

Total capitalization

   97,832    63,826    180,138
              

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 would increase (decrease) each of additional paid-in capital, total shareholders equity and total capitalization by $7,931,970.

Information in the above table excludes 8,550,000 ordinary shares reserved for issuance under our 2005 long-term incentive plan.

 

38


Table of Contents

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 convertible 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.

Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Our net tangible book value as of June 30, 2007 was approximately $90.0 million, or $3.03 per ordinary share and ADS as of that date.

Adjusted net tangible book value as of June 30, 2007 was approximately $56.0 million, or $1.88 per share and ADS being our net book value as of that date adjusted to reflect (i) dividend distributions to our existing shareholders in connection with the disposition of LTI and its outsourcing business; (ii) the payment of a $30 million cash dividend declared and payable to our shareholders upon the closing of this offering and (iii) the issuance of an additional 95,856 series B preferred shares on September 5, 2007 to reflect our intended capitalization at the time we initially issued our series B preferred shares in December 2006. See “Dividend Policy” and Note 2 to our unaudited consolidated financial statements for the three months ended June 30, 2007.

Dilution is determined by subtracting adjusted net tangible book value per ordinary share, after giving effect to the conversion of all outstanding convertible preferred shares into ordinary shares 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, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in adjusted net tangible book value after June 30, 2007, other than to give effect to the conversion of all outstanding series A and B redeemable, convertible preferred shares into ordinary shares upon the completion of this offering and our sale of the ADSs offered in this offering at the initial public offering price of $15.00 per ADS after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma adjusted net tangible book value as of June 30, 2007 would have been $172.3 million, or $3.55 per outstanding ordinary share and ADS. This represents an immediate increase in adjusted net tangible book value of $1.66 per ordinary share and ADS, to the existing shareholders and an immediate dilution in adjusted net tangible book value of $11.45 per ordinary share and ADS, to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Ordinary Share/ADS

Assumed initial public offering price

   $ 15.00

Adjusted net tangible book value per share as of June 30, 2007

   $ 1.88

Pro forma adjusted net tangible book value per share after giving effect to the conversion of our preferred shares

   $ 1.40

Pro forma adjusted net tangible book value per share after giving effect to the conversion of our preferred shares and this offering

   $ 3.55

Amount of dilution in adjusted net tangible book value per share to new investors in the offering

   $ 11.45

 

39


Table of Contents

The following table summarizes, on a pro forma basis as of June 30, 2007, the differences between existing shareholders, including holders of our 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 by the underwriters of their option to purchase additional ADSs.

 

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

Existing shareholders

   40,019,128 (1)   82.4 %   $ 49,767    30.0 %   $ 1.24

New investors

   8,529,500     17.6 %   $ 116,312    70.0 %   $ 13.64
                           

Total

   48,548,628     100.0 %   $ 166,079    100.0 %  
                           

(1) Includes 95,856 series B preferred shares issued on September 5, 2007 to reflect our intended capitalization at the time we initially issued our series B preferred shares in December 2006.

A $1.00 increase (decrease) in the assumed public offering price of $15.00 per ADS would increase (decrease) our pro forma adjusted net tangible book value after giving effect to the offering by $7.9 million, the pro forma adjusted net tangible book value per ordinary share and per ADS after giving effect to the automatic conversion of our preferred shares and this offering by $0.16 per ordinary share and ADS and the dilution in pro forma adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by $0.84 per ordinary share and ADS, assuming no charge 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 adjusted 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 3,580,740 ordinary shares issuable upon exercise of outstanding stock options at a weighted average exercise price of $5.17 per share, and there were 4,427,610 ordinary shares available for future issuance upon the exercise of future grants under our 2005 share incentive plan. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

40


Table of Contents

EXCHANGE RATE INFORMATION

Our business is conducted in China and substantially all of our revenues are denominated in RMB. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This prospectus contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of RMB into U.S. dollars in this prospectus is 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. 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 RMB7.6120 to $1.00, the noon buying rate in effect as of June 29, 2007. 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, 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 October 18, 2007, the noon buying rate was RMB7.5148 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 source of these rates is the Federal Reserve Bank of New York.

 

     Noon Buying Rate

Period

   Period
End
   Average(1)    Low    High
     (RMB Per $1.00)

2002

   8.2800    8.2772    8.2800    8.2700

2003

   8.2767    8.2771    8.2800    8.2765

2004

   8.2765    8.2768    8.2774    8.2764

2005

   8.0702    8.1826    8.2765    8.0702

2006

   7.8041    7.9579    8.0702    7.8041

2007

           

April

   7.7090    7.7247    7.7345    7.7090

May

   7.6516    7.6773    7.7065    7.6463

June

   7.6120    7.6333    7.6680    7.6120

July

   7.5720    7.5757    7.6055    7.5580

August

   7.5462    7.5734    7.6181    7.5420

September

   7.4928

   7.5196    7.5540    7.4928

October (through October 18)

   7.5148

   7.5103    7.5158    7.5000

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

 

41


Table of Contents

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 that 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 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 4th Floor, 400 Madison Avenue, 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.

Conyers Dill & Pearman, our counsel as to Cayman Islands law, and Global Law Office, 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.

Conyers Dill & Pearman has further advised us that the courts of the Cayman Islands would recognize as a valid judgment, a final and conclusive personal judgment obtained in the federal or state courts in the United States under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based on such judgment of the U.S. court provided that (i) such courts had proper jurisdiction over the parties subject to such judgment, (ii) such courts did not contravene the rules of natural justice of the Cayman Islands, (iii) such judgment was not obtained by fraud, (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands, (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands, and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

Global Law Office 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

 

42


Table of Contents

based either on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. China does not have any treaties or other agreements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. 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. So, it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States.

 

43


Table of Contents

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 selected consolidated financial data presented below for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007 and our balance sheet data as of December 31, 2005 and 2006 and as of March 31, 2007 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, and have been audited by Deloitte Touche Tohmatsu CPA Ltd., an independent registered public accounting firm. The report of Deloitte Touche Tohmatsu CPA Ltd. on those consolidated financial statements is included elsewhere in this prospectus.

Our selected consolidated balance sheet data as of December 31, 2004 is derived from our audited consolidated financial statements that are not included in this prospectus. Our selected consolidated statement of operations data for the three months ended March 31, 2006, June 30, 2006 and June 30, 2007 have been derived from our unaudited consolidated financial statements. We have prepared the unaudited consolidated financial information on the same basis as our audited consolidated financial statements. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. Our historical results do not necessarily indicate results expected for any future periods.

Effective April 1, 2007, we have changed our fiscal year from a calendar year to a fiscal year ending March 31. We prepared audited financial statements for the three months ended March 31, 2007. Because we changed our fiscal year to end on March 31, we have not combined our financial information for the three months ended March 31, 2006 and 2007 and our financial information for the three months ended June 30, 2006 and 2007 and have instead presented those periods separately. The three months ended June 30, 2007 correspond to the first fiscal quarter of our fiscal year ended March 31, 2008.

We have not included financial information for the years ended December 31, 2002 and December 31, 2003, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007, and cannot be provided on a U.S. GAAP basis without unreasonable effort or expense.

 

44


Table of Contents
    For the Year Ended    

For the Three Months Ended

 
    December 31,     March 31,     June 30,  
    2004     2005     2006     2006     2007     2006     2007  
    ($ in thousands, except share, per share and per ADS data)  

Consolidated Statement of Operations Data

         

Revenues:

             

Software development

  13,263     21,568     33,312     4,545     5,869     7,554     8,240  

Other services(1)

  1,968     3,718     9,868     1,825     2,887     3,387     7,833  
                                         

Total revenues

  15,231     25,286     43,180     6,370     8,756     10,941     16,073  

Less: Business taxes

  (111 )   (204 )   (534 )   (90 )   (105 )   (125 )   (117 )
                                         

Net revenues

  15,120     25,082     42,646     6,280     8,651     10,816     15,956  
                                         

Cost of revenues:

             

Software development(2)

  1,921     1,804     4,092     370     1,831     753     2,285  

Other services

  646     1,515     3,037     548     1,523     709     4,691  
                                         

Total cost of revenues

  2,567     3,319     7,129     918     3,354     1,462     6,976  
                                         

Gross profit

  12,553     21,763     35,517     5,362     5,297     9,354     8,980  
                                         

Operating expenses:

             

Research and development(2)

  918     1,072     1,797     344     341     317     437  

Sales and marketing(2)

  833     1,451     3,170     801     711     7     926  

General and administrative(2)

  2,431     3,999     17,954     9,841     2,874     1,540     2,526  
                                         

Total operating expenses

  4,182     6,522     22,921     10,986     3,926     1,864     3,889  
                                         

Income from operations

  8,371     15,241     12,596     (5,624 )   1,371     7,490     5,091  
                                         

Other (loss) income (expense):

             

Interest income

  29     71     343     43     100     69     281  

Interest expense

  (459 )   (532 )   (703 )   (229 )   (102 )   (168 )   (172 )

Other income (expense), net

  (4 )   20     86     6     (22 )   11     38  
                                         

Total other income (expense)

  (434 )   (441 )   (274 )   (180 )   (24 )   (88 )   147  
                                         

Income before income taxes and equity in an associate

  7,937     14,800     12,322     (5,804 )   1,347     7,402     5,238  

Income tax (expense)/recovery

  (1,316 )   (2,260 )   (3,751 )   1,764     (579 )   (2,250 )   (309 )
                                         

Income (loss) before equity in an associate

  6,621     12,540     8,571     (4,040 )   768     5,152     4,929  

Loss from investment in an associate

          (263 )   (30 )       (43 )    
                                         

Net income (loss)

  6,621     12,540     8,308     (4,070 )   768     5,109     4,929  
                                         

Net income (loss) per share/ADS:

             

Basic

  0.29     0.42     0.25     (0.14 )   0.02     0.17     0.12  

Diluted

  0.29     0.41     0.22     (0.14 )   0.02     0.14     0.12  

Shares used in computation of net income per share:

             

Basic

  23,125,000     30,000,000     29,761,901     30,000,000     29,705,267     29,909,334     29,705,267  

Diluted

  23,125,000     37,920,822     37,874,254     30,000,000     40,326,495     35,297,191     40,496,633  

Cash dividends declared per ordinary share

  0.08     0.03                      

 

45


Table of Contents

 

    

For the Year Ended

December 31,

   

For the Three Months Ended

 
      

March 31,

   

June 30,

 
     2004     2005     2006     2006     2007     2006     2007  
     ($ in thousands)  

(1)    Outsourcing revenue recognized by LTI, which we spun off on July 1, 2007

                   1.0         4.5  

(2)    Includes share-based compensation expenses as follows:

      

Cost of revenues:

              

Software development

           839     1     3     2     3  

Operating expenses:

              

Research and development expenses

       8     147                  

Sales and marketing expenses

           530     4     11     12     11  

General and administrative expenses

       29     11,367     7,819     221     373     248  

Consolidated Balance Sheet Data

              

Cash and cash equivalents

   9,385     24,894     81,319       69,920       79,444  

Restricted cash

   98     369     4,484       3,395       3,353  

Accounts receivable, net

   8,746     9,120     17,294       19,495       19,131  

Inventories

   609     746     1,220       1,081       1,692  

Fixed assets, net

   4,257     10,734     4,521       4,835       5,074  

Total assets

   32,905     52,937     122,426       120,432       134,774  

Short-term borrowings

   10,439     12,323     11,916       8,669       12,889  

Accounts payable

   1,723     3,256     3,483       4,581       1,913  

Total current liabilities

   23,177     29,371     31,621       27,689       35,945  

Long-term liabilities

   111     116     492       836       1,175  

Total mezzanine equity

           47,887       47,887       47,887  

Total shareholders’ equity

   9,617     23,450     42,426       44,020       49,767  

Total liabilities, mezzanine equity and shareholders’ equity

   32,905     52,937     122,426       120,432       134,774  
    

For the Year Ended

December 31,

   

For the Three Months Ended

 
       March 31,     June 30,  
     2004     2005     2006     2006     2007     2006     2007  
Other Selected Financial Data*               

Software development gross profit margins(1)

   84.8 %   90.8 %   86.5 %   90.5 %   67.6 %   88.9 %   71.5 %

Other services gross profit margins(1)

   66.5 %   58.5 %   68.0 %   68.6 %   46.0 %   77.9 %   39.4 %

Gross profit margins(2)

   82.4 %   86.1 %   82.3 %   84.2 %   60.5 %   85.5 %   55.9 %

Income from operations margins(3)

   55.0 %   60.3 %   29.2 %   (88.3 )%   15.7 %   68.5 %   31.7 %

Net income margins(4)

   43.5 %   49.6 %   19.2 %   (63.9 )%   8.8 %   46.7 %   30.7 %

 * We believe these measures are important to the evaluation of our financial performance.
(1) Margins equal applicable gross profit divided by applicable total revenues.
(2) Margins equal gross profits divided by total revenues.
(3) Margins equal income from operations divided by total revenues.
(4) Margins equal net income divided by total revenues.

 

46


Table of Contents

RECENT DEVELOPMENTS

The following estimated financial results for the three months ended September 30, 2007 are subject to completion of our normal quarter-end closing procedures and may change. For additional information regarding the various risks and uncertainties inherent in estimates of this type, see “Forward-looking Statements.” In addition, our results for the three months ended September 30, 2007 may not be indicative of our results for the full year or future quarterly periods. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus for information regarding trends and other factors that may influence our results of operations.

We estimate that our total revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $19 million to $20 million, which is an increase of 42.4% to 49.8% from $13.3 million in the corresponding period in 2006. We estimate that our software development revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $17.2 to $18.2 million, which is an increase of 62.6% to 72.0% from $10.6 million in the corresponding period in 2006. Because we did not have VSOE or evidence that costs of PCS were immaterial, software development revenues for the three months ended September 30, 2006 included $2.1 million of revenues for services that had been provided in previous periods.

We estimate that the gross margin percentages for our non-outsourcing operations in the three months ended September 30, 2007 will not be less than the 71.5% comparable gross margin percentage for the three months ended June 30, 2007.

We estimate that our net income for the three months ended September 30, 2007 will be no less than the net income of $4.9 million for the three months ended June 30, 2007.

We expect that a smaller percentage of our total revenues will come from our two largest clients, China Construction Bank and Agricultural Bank of China, compared to results from the quarters ended March 31, 2007 and June 30, 2007, with a significant increase in revenues from Bank of China and national and city commercial banks.

Well Active International, or Well Active, was funded by Bloomwell International Limited, an entity affiliated with our chairman and largest shareholder, Mr. Xiaogong Jia, with 6,000,000 of our ordinary shares owned by Bloomwell prior to the funding. At Bloomwell’s discretion, some of these shares are available for providing equity incentives to our officers and employees. In November 2006, Well Active granted share interests in approximately 5.0 million of these shares to our officers, employees and consultants at a cost of $4.83 per share in exchange for promissory notes totaling $23.9 million. The ordinary shares subject to those share interests continue to be held by Well Active and are subject to a proxy and other arrangements. In connection with this offering, Well Active has agreed to forgive, in full, upon consummation of this offering the notes totaling $23.9 million and Well Active has received instructions from holders of the share interests to sell 1,650,000 ordinary shares in this offering on their behalf. In connection with the forgiveness of those notes, we will incur a $23.9 million related compensation charge in the quarter in which the offering closes. See “Management—Compensation of Directors and Executive Officers.”

 

47


Table of Contents

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 software developer and IT services provider targeting the financial services industry in China. We develop and deliver a comprehensive range of software solutions with a focus on meeting the rapidly growing IT needs of financial institutions in China. According to IDC, an independent market research company, we were the third largest “banking IT solution provider” in China measured by market share in 2006.

Our software solutions may be broadly classified into four categories: channel-related solutions, business-related solutions, management-related solutions and other value-added solutions, covering major categories of information technology requirements for financial institutions in China. We sell both custom-designed and standardized software solutions that are integrated into our clients’ existing IT hardware and software infrastructure. We additionally provide IT and maintenance services to our clients.

Our clients are primarily leading banks in China. We have extensive client relationships with three of the four largest state-controlled national banks, or Big 4 banks, namely, China Construction Bank, Agricultural Bank of China and, as a result of our acquisition of ABS, Bank of China. We have completed, or contracted to complete, projects with 32 and 27 branches and entities affiliated with our largest client and our second largest client, respectively. We also provided services to eight of the 13 national commercial banks, China Postal Savings Bank, leading city commercial banks, and two of the largest life insurance companies in China, namely, New China Life Insurance and China Pacific Insurance Group.

Our total revenues grew from $15.2 million in 2004 to $43.2 million in 2006 and our net income grew from $6.6 million in 2004 to $8.3 million in 2006. Our total revenues and net income for the three months ended March 31, 2007 were $8.8 million and $768,000, respectively. Our total revenues and net income for the three months ended June 30, 2007 were $16.1 million and $4.9 million, respectively. Included in our revenues for the three months ended March 31, 2007 and June 30, 2007 are $1.0 million and $4.5 million in revenues from our outsourcing business which we disposed of in July 2007 through a dividend in kind to our existing shareholders. Our total share-based compensation costs in 2005 and 2006 and for the three months ended March 31, 2007 and June 30, 2007 were $37,000, $12.9 million, $235,000 and $262,000, respectively.

Our growth has been and will continue to be driven in large part by the sales of software solutions to banks and other clients. In evaluating our performance, we consider the following factors:

 

  Ÿ  

Our ability to timely provide solutions meeting the IT needs of our two largest clients.    Revenues from our two largest clients increased from $12.0 million in 2004 to $25.0 million in 2006, as a result of our offering new software solutions to existing clients.

 

  Ÿ  

Our ability to increase our client base within the financial industry and outside the financial industry.    In 2006, we were able to increase our software development revenues from other banks and clients from $1.3 million in 2004 to $7.9 million in 2006. In the latter part of 2006, we

 

48


Table of Contents
 

introduced our first suite of software solutions targeting the insurance industry. Our revenues from the insurance industry contributed $404,000, $18,000 and $387,000, respectively, to our total revenues in 2006 and three months ended March 31, 2007 and June 30, 2007.

 

  Ÿ  

The portion of our overall revenues attributable to standardized software solutions which deliver substantially higher gross margins.    We introduced our first suite of standardized software solutions in 2003 and are in the process of developing our next generation of standardized software solutions. These standardized solutions contributed substantially to our revenue growth from 2004 to 2006 and for the six months of calendar 2007. In the near term, we expect our revenue growth to be driven by our customized software solutions in response to changes in client demands.

 

  Ÿ  

Expansion of our research capabilities.    Our research headcount increased from 24 as of December 31, 2004 to 89 as of September 25, 2007. Our research abilities directly affect our ability to develop customized and standardized solutions as drivers for our revenue growth.

 

  Ÿ  

Attracting and retaining sufficient software development engineers to ensure our solutions can be delivered efficiently and effectively.    Our software development headcount increased from 168 as of December 31, 2004 to 634 as of September 25, 2007 and we intend to add approximately 70 software development engineers in the remainder of calendar 2007 (excluding the FEnet engineers to be hired after the completion of the FEnet acquisition).

Factors Affecting Our Results of Operations

Our operating results in any period are subject to general conditions typically affecting the IT market for the financial services industry including:

 

  Ÿ  

growth of the financial services industry in China;

 

  Ÿ  

amount and seasonality of IT spending by banks and other financial services companies;

 

  Ÿ  

procurement process of banks and other financial services companies, including their decision whether to meet their IT needs in-house or through third-party developers;

 

  Ÿ  

competition and related pricing pressure from other IT software and service providers to the financial services industry; and

 

  Ÿ  

increases in headcount and other operating costs and expenses due to competition, inflation and other factors.

Unfavorable changes in any of these general conditions could negatively affect the number and size of customized projects we undertake, the number of standardized software solutions we sell, the amount of services we provide, the price of our solutions and services and otherwise adversely affect our results of operations.

Our operating results in any period are more directly affected by company-specific factors including:

 

  Ÿ  

our revenue growth and solution and service mix;

 

  Ÿ  

our ability to successfully develop, introduce and market new solutions and services, including standardized software solutions, to the financial services industry;

 

  Ÿ  

our ability to attract, train and retain skilled software engineers and mid-level personnel;

 

  Ÿ  

our ability to effectively manage our operating costs and expenses;

 

49


Table of Contents
  Ÿ  

our acquisitions and strategic alliances; and

 

  Ÿ  

seasonal and unpredictable nature of our revenues. See “Risk Factors—Risks Related to Our Business and Industry—Fluctuations in our clients’ annual IT budget and spending cycle and other factors can cause our revenues and operating results to vary significantly from quarter to quarter and from year to year.”

Revenues

In 2004, 2005 and 2006 and for the three months ended March 31, 2007 and June 30, 2007, we generated total revenues of $15.2 million, $25.3 million, $43.2 million, $8.8 million and $16.1 million, respectively. We currently derive our revenues from two sources: software development and other services. Software development revenues consist of revenues from the sale of software, assistance in implementation and customization of that software, and post-contract customer support, or PCS. Other services revenues include revenues from ATM maintenance services, ancillary services and outsourcing. Due to our customer’s contracting and purchasing practices, we do not have a significant amount of software development backlog at any time such that our software development backlog at any one time would be typically less than the next three months’ revenue.

The following table sets forth the revenues generated by each of the two sources:

 

     2004     2005     2006  

Revenues by source:

   Revenues    % of
Total
Revenues
    Revenues    % of
Total
Revenues
    %
Changes
from 2004
    Revenues    % of
Total
Revenues
    %
Changes
from 2005
 
     ($ in thousands, except percentages)  

Software development

   13,263    87.1 %   21,568    85.3 %   62.6 %   33,312    77.1 %   54.5 %

Other services

   1,968    12.9 %   3,718    14.7 %   88.9 %   9,868    22.9 %   165.4 %
                                     

Total revenues

   15,231    100.0 %   25,286    100.0 %   66.0 %   43,180    100.0 %   70.8 %
                                     

 

    For the Three Months Ended March 31,     For the Three Months Ended June 30,  
    2006     2007     2006     2007  

Revenues by source:

  Revenues   % of
Total
Revenues
    Revenues   % of
Total
Revenues
    %
Changes
From 2006
    Revenues   % of
Total
Revenues
    Revenues   % of
Total
Revenues
    %
Changes
From 2006
 
    ($ in thousands, except percentages)  

Software development

  4,545   71.4 %   5,869   67.0 %   29.1 %   7,554   69.0 %   8,240   51.3 %   9.1 %

Other services

  1,825   28.6 %   2,887   33.0 %   58.2 %   3,387   31.0 %   7,833   48.7 %   131.3 %
                                               

Total revenues

  6,370   100.0 %   8,756   100.0 %   37.5 %   10,941   100.0 %   16,073   100.0 %   46.9 %
                                           

Software Development

Software development revenues comprised 87.1%, 85.3%, 77.1%, 67.0% and 51.3% of our total revenues for 2004, 2005, 2006 and the three months ended March 31, 2007 and June 30, 2007, respectively.

Categorization of software development revenues

Our software development revenues can be categorized by:

 

  Ÿ  

development methodology,

 

  Ÿ  

type of solutions and services, and

 

  Ÿ  

client type.

Development Methodology.    Depending on the development methodology, our software solutions can be categorized as “custom-designed” software and “standardized” software. We also enter into stand-alone

 

50


Table of Contents

maintenance contracts for a portion of our custom-designed software covering the period after the initial PCS period has expired, with this revenue recorded as “software maintenance.”

 

  Ÿ  

Custom-designed software development.    We provide a broad range of custom-designed software development services primarily to large national banks. These projects usually take approximately six months to complete and involve design and implementation of new solutions or significant customization of our software and, in some cases, third party software to meet our clients’ needs. We typically receive a lump sum fee payable according to negotiated payment schedules. Each project’s fee is based on our assessment of the man-hours involved, the size and complexity of the project, competitive pressure, strategic value of the project, cross-selling opportunities and our relationship with the client. The contract value less amounts deferred for the provision of PCS services based on vendor specific evidence of the value, or VSOE, is recognized as revenue over the customization and implementation period using the percentage of completion method based on the efforts expended. We recognize the deferred PCS portion of the contract value on a straight line basis over the PCS term, normally one year.

 

  Ÿ  

Standardized software development.    We leverage our customized-software development efforts, including the related platforms, modules and elements, and our internal research and development efforts to develop standardized software solutions. We made our first significant sales in 2003. Our standardized solutions do not require significant customization and require limited implementation time, generally one to two months. Compared to similar custom-designed solutions, the price of standardized solutions does not vary significantly. Our standardized solutions typically include PCS, normally for one year. If we have VSOE of the PCS, we recognize, upon customer acceptance, as revenue the difference between the total contract value and the fair value of the PCS. If we do not have VSOE, costs related to PCS are insignificant and the PCS period is less than one year, we recognize the entire contract value upon customer acceptance. Prior to January 1, 2006, we did not have VSOE for PCS on our standardized software solutions or evidence that the costs of providing the related PCS were insignificant. As a result, 2006 software development revenues included $5.7 million for standardized software development services provided in previous years which were deferred to 2006, all of which amount contributed to the gross profit for 2006, as the related cost of revenues in 2006 was negligible.

 

       In determining their IT spending with us, our clients purchase our solutions based on the functionality offered and not on whether the solution is customized or standardized. Consequently, we elect to provide a customized or standardized offering based on our software development status. We prefer to deliver a standardized solution where possible as standardized solutions command pricing similar to customized solutions with significantly less customization and implementation requirements. However, our suites of standardized solutions are limited, take time to develop and can become outdated over time.

 

       When addressing for the first time a specific IT need, we normally first develop a custom-designed solution. In some cases, through our own research and development activities or additional modifications to the customized solution, we are able to develop a standardized solution available for sale to other clients. Our decision to develop a standardized solution is based on our assessment of whether sufficient broader market demand exists for that solution and the level of additional customization required to implement the solution for different clients. A typical standardized software solution normally takes one to two years to develop. Once developed, a standardized solution “replaces” custom development revenues for that solution for one to two years until the standardized solution itself becomes outdated, due to banking systems changes or changes in market requirements. At that time, the development cycle begins again and we offer clients a customized solution or we need to start developing through our own research and development activities a new product.

 

51


Table of Contents
       We are currently developing our next suite of standardized solutions. We expect to rely on our customized software solutions for revenue growth given the lead-times to either develop or improve customized solutions into a standardized solution and uncertainties around whether a particular customized solution can be developed into a standardized solution.

 

  Ÿ  

Software maintenance.    In addition to our standard PCS, we offer stand-alone maintenance contracts, primarily for the custom-designed solutions, typically for a one-year period and renewable annually. Revenues from software maintenance are recognized ratably over the contract service period.

The table below sets forth our revenues categorized based on development methodology:

 

     2004     2005     2006  

Software development revenues by
development methodology *:

   Revenues    % of
Applicable
Revenues
    Revenues    % of
Applicable
Revenues
    %
Changes
from 2004
    Revenues    % of
Applicable
Revenues
    %
Changes
from 2005
 
     ($ in thousands, except percentages)  

Customized

   11,944    90.1 %   15,352    71.2 %   28.5 %   13,485    40.5 %   (12.2 )%

Standardized

   942    7.1 %   5,507    25.5 %   484.6 %   17,503    52.5 %   217.8 %

Maintenance

   377    2.8 %   709    3.3 %   88.1 %   2,324    7.0 %   227.8 %
                                     

Total software development

   13,263    100.0 %   21,568    100.0 %   62.6 %   33,312    100.0 %   54.5 %
                                     

 

Software development
revenues by

development

methodology *:

  For the Three Months Ended March 31,     For the Three Months Ended June 30,  
  2006     2007     2006     2007  
  Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
    %
Changes
From 2006
    Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
    %
Changes
From 2006
 
    ($ in thousands, except percentages)  

Customized

  1,676   36.9 %   3,856   65.7 %   130.1 %   3,823   50.6 %   4,803   58.3 %   25.6 %

Standardized

  2,525   55.5 %   1,353   23.1 %   (46.4 )%   3,202   42.4 %   2,835   34.4 %   (11.5 )%

Maintenance

  344   7.6 %   660   11.2 %   91.9 %   529   7.0 %   602   7.3 %   13.8 %
                                           

Total software development

  4,545   100.0 %   5,869   100.0 %   29.1 %   7,554   100.0 %   8,240   100.0 %   9.1 %
                                           

* In 2006, total revenues and the percent change from 2005 reflected $5.7 million in revenues from standardized software contracts deferred from previous years. For the three months ended March 31, 2006 and June 30, 2006, total revenues included $938,000 and $1.7 million, respectively, in revenues from standardized software contracts deferred from previous periods. Revenues from 2004 and 2005 would have been increased by $437,000 and $4.0 million, respectively, had we had VSOE or evidence that costs of PCS had been immaterial. As described above, beginning in 2006, sales of standardized software solutions were recognized in the period of delivery and acceptance by the client and not deferred to future periods.

Type of Software Solutions.    Our software solutions can be broadly classified as: “channel-related,” “business-related,” “management-related” and “other value-added.” Among management-related solutions we offer, our business intelligence software solutions focus on supporting banks’ decision making processes. The table below sets forth our revenues from these solution categories with business intelligence-related solutions presented as a separate line item:

 

     2004     2005     2006  

Software development

revenues by solution*:

   Revenues    % of
Applicable
Revenues
    Revenues    % of
Applicable
Revenues
    %
Changes
from 2004
    Revenues    % of
Applicable
Revenues
    %
Changes
from 2005
 
     ($ in thousands, except percentages)  

Channel

   2,845    21.5 %   4,381    20.3 %   54.0 %   8,035    24.1 %   83.4 %

Business

   6,062    45.7 %   6,564    30.4 %   8.3 %   7,551    22.7 %   15.0 %

Management †

   2,589    19.5 %   5,339    24.8 %   106.2 %   10,645    31.9 %   99.4 %

Business Intelligence

   632    4.8 %   1,458    6.8 %   130.6 %   3,227    9.7 %   121.3 %

Others

   1,135    8.5 %   3,826    17.7 %   237.4 %   3,854    11.6 %   0.7 %
                                     

Total software development

   13,263    100.0 %   21,568    100.0 %   62.6 %   33,312    100.0 %   54.5 %
                                     

 

52


Table of Contents
     For the Three Months Ended March 31,     For the Three Months Ended June 30,  

Software development
revenues by

solution *:

   2006     2007     2006     2007  
   Revenues   

% of

Applicable
Revenues

    Revenues    % of
Applicable
Revenues
   

%
Changes

From 2006

    Revenues   

% of

Applicable
Revenues

    Revenues   

% of

Applicable
Revenues

   

%

Changes

From 2006

 
     ($ in thousands, except percentages)  

Channel

   1,335    29.4 %   923    15.7 %   (30.9 )%   2,659    35.2 %   1,069    13.0 %   (59.8 )%

Business

   1,189    26.2 %   1,616    27.5 %   35.9 %   1,935    25.6 %   1,484    18.0 %   (23.3 )%

Management †

   1,080    23.8 %   1,985    33.8 %   83.8 %   1,812    24.1 %   3,116    37.8 %   72.0 %

Business Intelligence

   361    7.9 %   687    11.7 %   90.3 %   614    8.1 %   1,555    18.9 %   153.3 %

Others

   580    12.7 %   658    11.3 %   13.4 %   534    7.0 %   1,016    12.3 %   90.3 %
                                                

Total software development

   4,545    100.0 %   5,869    100.0 %   29.1 %   7,554    100.0 %   8,240    100.0 %   9.1 %
                                                

 

* In 2006, total revenues and the percent change from 2005 reflected $5.7 million in revenues from standardized software contracts deferred from previous years. For the three months ended March 31, 2006 and June 30, 2006, total revenues reflected $938,000 and $1.7 million, respectively, in revenues from standardized software contracts deferred from previous periods. Revenues from 2004 and 2005 would have been increased by $437,000 and $4.0 million, respectively, had we had VSOE or evidence that costs of PCS had been immaterial. Revenues from channel, business and management solutions (including business intelligence) in 2006 included $2.5 million, $2.5 million and $711,000, respectively, for services provided in previous years which were deferred to 2006. As described above, beginning in 2006, sales of these standardized software solutions were recognized in the period of delivery and acceptance by the client and not deferred and recorded as revenue in future periods.

 

Does not include business intelligence.

As our clients sought to improve their internal systems, they invested more in management-related software solutions and services. These solutions (excluding business intelligence) constituted 23.8% and 33.8% of our total software development revenues in the three months ended March 31, 2006 and 2007, respectively, and 24.1% and 37.8% of our total software development revenues in the three months ended June 30, 2006 and 2007, respectively. Management-related solutions include solutions for enterprise resource management and credit and risk management. As the market matures and we face greater competition, we do not expect our future growth rates for these solutions to be as high as our historical growth rates.

Beginning in 2005, our clients sought to improve their data mining and data analysis capabilities by implementing better business intelligence systems. Our revenues from business intelligence solutions constituted 7.9% and 11.7% of our total software development revenues during the three months ended March 31, 2006 and 2007, respectively, and 8.1% and 18.9% of our total software development revenues during the three months ended June 30, 2006 and 2007, respectively. We expect business intelligence solutions to be one of our highest growth areas in 2007.

 

53


Table of Contents

Client Type.    Our software development revenues can be categorized by client type. We provide software solutions and post-implementation solution support services primarily to leading financial institutions in China, with Big 4 Client A and Big 4 Client B being our largest software development clients in each of the last three years. Excluding PCS, our contracts for providing software development services are generally less than one year. Our contracts for providing stand-alone solution support services are generally for one year, renewable on an annual basis. As of August 31, 2007, we had provided solutions or services pursuant to contracts signed with 32 counterparties, including headquarters and branches affiliated with Big 4 Client A, and 27 similar counterparties affiliated with Big 4 Client B. We expect overall sales to these two banks to continue to increase. However, we expect revenue contribution from sales to these two banks to decrease as a percentage of our revenues and believe our future growth will be increasingly attributed to growth in sales to other banks and clients and insurance clients. The following table sets forth our software development revenues by client:

 

    2004     2005     2006  

Software development

revenues by client*:

  Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
   

%

Changes
from 2004

    Revenues   % of
Applicable
Revenues
    %
Changes
from 2005
 
    ($ in thousands, except percentages)  

Big 4 Client A

  7,035   53.1 %   11,953   55.4 %   69.9 %   14,587   43.8 %   22.0 %

Big 4 Client B

  4,936   37.2 %   6,259   29.0 %   26.8 %   10,378   31.2 %   65.8 %
Other banks and non-insurance clients   1,292   9.7 %   3,356   15.6 %   159.8 %   7,943   23.8 %   136.7 %

Insurance clients

                  404   1.2 %    
                                 

Total software development

  13,263   100.0 %   21,568   100.0 %   62.6 %   33,312   100.0 %   54.5 %
                                 

 

    For the Three Months Ended March 31,     For the Three Months Ended June 30,  
    2006     2007     2006     2007  

Software development
revenues by client:*

  Revenues  

% of

Applicable
Revenues

    Revenues   % of
Applicable
Revenues
   

%

Changes
From
2006

    Revenues   % of
Total
Revenues
    Revenues   % of
Total
Revenues
   

%
Changes

From
2006

 
    ($ in thousands, except percentages)  

Big 4 Client A

  2,484   54.7 %   3,035   51.7 %   22.2 %   3,416   45.2 %   3,076   37.3 %   (10.0 )%

Big 4 Client B

  1,611   35.4 %   1,699   28.9 %   5.5 %   2,839   37.6 %   2,733   33.2 %   (3.7 )%

Other banks and non-insurance clients

  450   9.9 %   1,117   19.0 %   148.2 %   1,190   15.8 %   2,044   24.8 %   71.8 %

Insurance clients

        18   0.4 %       109   1.4 %   387   4.7 %   255.0 %
                                           

Total software development

  4,545   100.0 %   5,869   100.0 %   29.1 %   7,554   100.0 %   8,240   100.0 %   9.1 %
                                           

* In 2006, total revenues and the percent change from 2005 reflected $5.7 million in revenues from standardized software contracts deferred from previous years. For the three months ended March 31, 2006 and June 30, 2006, total revenues included $938,000 and $1.7 million, respectively, in revenues from standardized software contracts deferred from previous periods. Had we had VSOE or evidence that costs of PCS had been immaterial, revenues from 2004 and 2005 would have been increased by $437,000 and $4.0 million, respectively. As described above, beginning in 2006, sales of these standardized software solutions were recognized in the period of delivery and acceptance by the client and not deferred and recorded as revenue in future periods.

Factors affecting our software development revenues

Our revenues from software development and operating results are significantly affected by the following factors:

 

  Ÿ  

Mix of software sales.    From 2004 to 2006, our revenue growth has been driven primarily by sales of standardized software which increased as a percentage of software development revenues from 7.1% in 2004, to 25.5% in 2005, to 52.5% in 2006. Standardized software solutions as a percentage of software development revenues were 23.1% and 34.4% for the three months ended March 31, 2007 and June 30, 2007, respectively. As standardized software involves significantly less development and implementation time while commanding similar prices, the increased standardized

 

54


Table of Contents
 

software sales increase our gross margin and allow us to more efficiently utilize our software development, delivery and sales resources. In the near term, we expect standardized software revenue as a percentage of total software development revenue and the corresponding year-on-year growth rate to be significantly lower than 2006 for two reasons: (1) beginning in January 2007, we will not include significant revenue from prior-year contracts as compared to 2006 which included deferred revenue from previous years due to the absence of VSOE or evidence that the costs of providing PCS were immaterial for those years; and (2) we are currently developing our next suite of standardized solutions and the related development and improvement will involve significant lead time, requiring greater reliance on customized software for our revenue growth during that period.

 

  Ÿ  

Ability to anticipate need for and develop relevant solutions.    Our continued revenue growth depends on our ability to timely anticipate and respond to market demand for software solutions meeting the needs of China’s financial institutions. Recently, our highest growth area has been our business management and business intelligence software solutions. As noted above, we expect this trend to continue as our clients seek to improve their data mining and data analysis capabilities. Our other solutions are more mature and we expect they will continue to grow, but at slower rates.

 

  Ÿ  

Addition and retention of clients.    The retention and growth of our existing key clients and the addition of new clients contribute to our revenue growth by providing a growing market for our solutions and by expanding cross-selling opportunities. A significant portion of our revenues are generated from sales to our two largest Big 4 bank clients. We plan to continue to diversify our client base of financial institutions and increase our sales to more national and city commercial banks and insurance companies, while maintaining the sales to our existing key clients. We also plan to sell some of our treasury function and financial control solutions to companies in other industries, including the tobacco and oil industry. As we diversify our client base, our aggregate revenues and percentage contributions of revenues from our two largest clients may decline.

 

  Ÿ  

Seasonality.    Most financial industry clients plan and budget for their IT investment on an annual basis in the last quarter of each calendar year and do not finalize their annual budget until the first quarter of the following calendar year. Also, the Chinese New Year holiday typically falls between late January and February of each year. As a result, relatively few contracts are signed in the first calendar quarter, with an increase in the second calendar quarter and with most of our contracts getting signed and completed in the third and fourth calendar quarters. These factors result in the first and second calendar year quarters generally being our lowest revenue quarters. Due to the annual budget cycles of most of our clients, effective April 1, 2007, we changed our fiscal year end to March 31 in order to better estimate demand for our solutions and services in a given fiscal year.

 

55


Table of Contents

Other Services.    Other services revenues include revenues from the ATM maintenance services segment and the ancillary services segment, consisting of system integration services and other miscellaneous services. These revenues comprised 12.9%, 14.7%, 22.9%, 33.0% and 48.7% of our total revenues for 2004, 2005, 2006, and the three months ended March 31, 2007, and June 30, 2007, respectively. We recognize these revenues as the services are performed or ratably over the contract period. Contract periods are typically within one year. The following table illustrates the revenue growth in these different service areas:

 

      2004     2005     2006  

Other services revenues:

   Revenues    % of
Applicable
Revenues
    Revenues    % of
Applicable
Revenues
   

%
Changes

from
2004

    Revenues    % of
Applicable
Revenues
    %
Changes
from
2005
 
     ($ in thousands, except percentages)  

ATM maintenance

   665    33.8 %   1,096    29.5 %   64.8 %   2,856    28.9 %   160.6 %

System integration

   913    46.4 %   1,176    31.6 %   28.8 %   2,413    24.5 %   105.2 %

Ancillary services

   390    19.8 %   1,446    38.9 %   270.8 %   4,599    46.6 %   218.0 %

Outsourcing

                             
                                     

Total other services

   1,968    100.0 %   3,718    100.0 %   88.9 %   9,868    100.0 %   165.4 %
                                     

 

    For the Three Months Ended March 31,     For the Three Months Ended June 30,  
    2006     2007     2006     2007  

Other services revenues:

  Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
    %
Changes
From
2006
    Revenues   % of
Total
Revenues
    Revenues   % of
Total
Revenues
    %
Changes
From
2006
 
    ($ in thousands, except percentages)  

ATM maintenance

  554   30.4 %   846   29.3 %   52.7 %   688   20.3 %   1,202   15.3 %   74.7 %

System integration

  95   5.2 %   257   8.9 %   170.5 %   1,536   45.3 %   1,111   14.2 %   (27.7 )%

Ancillary services

  1,176   64.4 %   778   27.0 %   (33.8 )%   1,163   34.4 %   977   12.5 %   (16.0 )%

Outsourcing

        1,006   34.8 %             4,543   58.0 %    
                                           

Total other services

  1,825   100.0 %   2,887   100.0 %   58.2 %   3,387   100.0 %   7,833   100.0 %   131.3 %
                                           

 

  Ÿ  

ATM maintenance.    We provide ATM maintenance services to banks. The increase in ATM services revenues corresponds with the expansion of our service network as we added ATMs under maintenance contract both through acquisitions and our increased sales efforts. We expect to rely on both organic business development and strategic acquisitions for future ATM services revenue growth.

 

  Ÿ  

System integration.    Our system integration services involve assisting clients in procuring hardware and software solutions designed to meet their system requirements. We record our revenue from system integration services net of amounts paid to suppliers. On behalf of our clients, we obtain manufacturers’ warranties and support on the hardware and software. Most of the growth in system integration revenues from 2005 to 2006 was due to our acquisition of ABS, an IT provider with an existing relationship with Bank of China. Although we will continue to provide system integration services to our clients, we do not consider this to be key area of focus nor do we expect our system integration revenues to grow in the future.

 

  Ÿ  

Ancillary services.    These include miscellaneous consulting services, ATM leasing services and various other services. Prior to September 2006, we leased ATMs to a bank client. In September 2006, we sold these ATMs to that client. Our ATM leasing revenues were $841,000 and $1.7 million in 2005 and 2006, respectively. We do not consider our miscellaneous services to be a key area of focus.

 

  Ÿ  

Outsourcing.    Until July 2007, we conducted our outsourcing business through Longtop International Holdings Limited, or LTI, and Minecode LLC, or Minecode. Our outsourcing clients included multinational corporations primarily based in the United States with our outsourcing

 

56


Table of Contents
 

services consisting mostly of IT support services billed based on labour time and cost of materials. We formed LTI in 2006 with three other partners. In January 2007, we acquired the remaining balance of LTI and LTI acquired Minecode in March 2007. Prior to 2007, we accounted for LTI under the equity method with results reflected in loss from investment in an associate. Beginning in the quarter ended March 31, 2007, we consolidated LTI’s and Minecode’s operating results. In July 2007, we disposed of our outsourcing business by way of a dividend in kind of all the stock of LTI, which in turn owned Minecode, to our existing shareholders. In September 2007, we made a related distribution to our shareholders. In connection with these distributions, we expect to incur an expense of approximately $1.2 million in the three months ended September 30, 2007. See “Related Party Transactions—The LTI Spin-Off and Related Arrangements.” We made the strategic decision to dispose of these entities for two reasons: Firstly, compared to our core business which we have operated in China for over 10 years we had little experience operating an outsourcing business and no prior experience operating outside of China. Secondly, both LTI and Minecode had significantly lower profit margins relative to those of our core business. Our gross margin for our outsourcing business during the three months ended March 31, 2007 and June 30, 2007 were 5.3% and 16.1%, respectively, and our gross margin for business operations other than outsourcing during the same period were 68.6% and 71.5%, respectively.

Growth in other services revenues is also affected by client relationships. We plan to continue to diversify our client base, decrease our dependence on existing key clients and increase our total revenues from other services.

 

     2004     2005     2006  

Other services revenue by
client:

  Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
    %
Changes
from
2004
    Revenues   % of
Applicable
Revenues
    Changes
from
2005
 
   

($ in thousands, except percentages)

 

Big 4 Client A

  581   29.5 %   943   25.4 %   62.3 %   3,548   36.0 %   276.2 %

Big 4 Client B

  148   7.5 %   1,074   28.9 %   625.7 %   2,505   25.4 %   133.2 %

Other banks and non-insurance clients

  1,239   63.0 %   1,678   45.1 %   35.4 %   3,142   31.8 %   87.2 %

Insurance clients

        23   0.6 %   *     673   6.8 %   *  
                                         

Total other services

  1,968   100.0 %   3,718   100.0 %   88.9 %   9,868   100.0 %   165.4 %
                                         

* not meaningful.

 

  For the Three Months Ended March 31,
 
  For the Three Months Ended June 30,  
     2006     2007     2006     2007  

Other services
revenue by client:

  Revenues   % of
Applicable
Revenues
    Revenues   % of
Applicable
Revenues
    %
Changes
From
2006
    Revenues   % of
Total
Revenues
    Revenues   % of
Total
Revenues
    %
Changes
From
2006
 
    ($ in thousands, except percentages)  

Big 4 Client A

  446   24.4 %   881   30.5 %   97.5 %   1,858   54.9 %   1,797   22.9 %   (3.3 )%

Big 4 Client B

  800   43.8 %   267   9.3 %   (66.6 )%   755   22.3 %   375   4.8 %   (50.3 )%

Other banks and non-insurance clients

  366   20.1 %   1,670   57.8 %   356.3 %   504   14.8 %   5,563   71.0 %   1003.8 %

Insurance clients

  213   11.7 %   69   2.4 %   (67.6 )%   270   8.0 %   98   1.3 %   (63.7 )%
                                                   

Total software development

  1,825   100.0 %   2,887   100.0 %   58.2 %   3,387   100.0 %   7,833   100.0 %   131.3 %
                                                   

 

57


Table of Contents

Cost of Revenues and Operating Expenses

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

 

     For the Year Ended December 31,    

For the Three Months Ended

 
   2004     2005     2006     March 31, 2007     June 30, 2007  
           %           %           %               %               %  
     ($ in thousands, except percentages)  

Total revenues

   15,231     100.0     25,286     100.0     43,180     100.0     8,756     100.0     16,073     100.0  

Less: Business taxes

   (111 )   (0.7 )   (204 )   (0.8 )   (534 )   (1.2 )   (105 )   (1.2 )   (117 )   (0.7 )
                                                            

Net revenues

   15,120     99.3     25,082     99.2     42,646     98.8     8,651     98.8     15,956     99.3  
                                                            

Cost of revenues:

                    

Software development

   1,921     12.6     1,804     7.1     4,092     9.5     1,831     20.9     2,285     14.2  

Other services

   646     4.2     1,515     6.0     3,037     7.0     1,523     17.4     4,691     29.2  
                                                            

Total cost of revenues

   2,567     16.8     3,319     13.1     7,129     16.5     3,354     38.3     6,976     43.4  
                                                            

Gross profit

   12,553     82.5     21,763     86.1     35,517     82.3     5,297     60.5     8,980     55.9  
                                                            

Operating expenses:

                    

Research and development

   918     6.0     1,072     4.2     1,797     4.2     341     3.9     437     2.7  

Sales and marketing

   833     5.5     1,451     5.7     3,170     7.3     711     8.1     926     5.8  

General and administrative

   2,431     16.0     3,999     15.8     17,954     41.6     2,874     32.8     2,526     15.7  
                                                            

Total operating expenses

   4,182     27.5     6,522     25.7     22,921     53.1     3,926     44.8     3,889     24.2  
                                                            

Income from operations

   8,371     55.0     15,241     60.4     12,596     29.2     1,371     15.7     5,091     31.7  
                                                            

Cost of revenues.    Our cost of revenues includes costs directly attributable to our software development and other services.

 

  Ÿ  

Software development costs.    These consist of costs for the design, implementation, delivery and maintenance of our software solutions and amortization of intangibles related to our software development revenues. Software development costs are primarily headcount-related costs that include payroll, employee benefits, bonuses, travel and entertainment and share-based compensation to our development staff, and overhead costs that are allocated based on headcount. Allocated overhead primarily includes office rental, communication costs and depreciation. We consider most of our software development costs to be variable and will increase as our sales grow. Of our total software development cost, substantially all relates to the cost of developing and implementing our customized software solutions. In addition, as our next series of standardized software solutions are currently under development, we expect revenues from our customized software solutions to increase as a percentage of total software development revenues. We also expect to hire more software development engineers at potentially higher costs per person. As a result, we expect our gross margins to decline in the next few years.

 

  Ÿ  

Other services costs.    Costs associated with ATM maintenance include headcount-related costs for our maintenance staff and spare parts inventory costs. Costs related to ancillary services include headcount-related expenses, amortization of backlog arising on the acquisition of ABS and depreciation on leased ATMs. We expect other services costs to increase proportionately with revenues from these services.

 

58


Table of Contents

Operating expenses.    Operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative expenses.

 

  Ÿ  

Research and development expenses.    These include expenses related to our research and development center and supporting departments that are not otherwise attributed to software development. They are primarily headcount-related expenses that include payroll, employee benefits, bonuses, travel and entertainment and share-based compensation to our research and development staff, and overhead costs that are allocated based on headcount. Allocated overhead primarily includes office rental, communication costs and depreciation. We also incur expenses for training our research and development staff and for professional fees of consultants in connection with our research and development activities. We generally expense research and development costs when incurred. To enhance our solution pipeline, we plan to double in calendar 2008 our investment in research and development from calendar 2007 levels.

 

  Ÿ  

Sales and marketing expenses.    Sales and marketing expenses include headcount-related expenses, allowance for doubtful accounts and, to a lesser extent, third party advertising and promotional expenses related to our sales and marketing functions. As we do not undertake significant advertising or promotion activities, these expenses are primarily headcount-related expenses that include payroll, employee benefits, commissions paid to our employees, travel and entertainment, share-based compensation to our sales and marketing staff and overhead costs that are allocated based on headcount. Allocated overhead primarily includes office rental, communication costs and depreciation. We expect our sales and marketing expenses as a percentage of revenues to increase as we seek to develop new customers and as the market becomes more competitive.

 

  Ÿ  

General and administrative expenses.    General and administrative expenses primarily include costs related to our finance, legal, human resources and executive office functions, gains or losses on fixed assets and provisions for other receivables. These departmental costs are primarily professional fees and expenses related to headcount. Headcount-related expenses include payroll, bonuses, employee benefits, share-based compensation, travel and entertainment and overhead costs that are allocated based on headcount. Allocated overhead primarily includes office rental, communication costs and depreciation. After we become a public company, we would expect our general and administrative expenses, excluding share-based compensation, to increase significantly on an absolute amount and as a percentage of our revenues due to expected increases in professional fees, board of directors’ compensation and costs related to investor relations and director and officer insurance. Our general and administrative share-based compensation expenses were $11.4 million in 2006 and $221,000 and $248,000 during the three months ended March 31, 2007 and June 30, 2007, respectively. We expect these share-based compensation expenses will increase significantly in the future from the June 30, 2007 levels since: (i) as of June 30, 2007, we had $7.7 million in deferred share-based compensation expenses that will be recognized over the next four years; (ii) we will incur share-based expenses in connection with the restricted share grants and option grants contingent on the completion of this offering; (iii) we intend to grant additional equity in the future which will give rise to more share-based compensation charges; and (iv) we expect to incur $23.9 million in share-based compensation expenses as a result of Well Active’s decision to forgive upon this offering the debt evidenced by the notes related to the approximately 5.0 million shares sold by Well Active to employees.

Our 2006 operating expenses include $12.0 million in share-based compensation expenses of which we recognized $7.8 million and $385,000 in the three months ended March 31, 2006 and June 30, 2006, respectively. As of June 30, 2007, we had $7.7 million in unrecognized share-based compensation expenses.

 

59


Table of Contents

Share-based Compensation Expenses

We adopted our 2005 long-term incentive plan in November 2005 and have granted a total of 3,580,740 stock options and 541,650 restricted share units as of the date of this prospectus. We have reserved 8,550,000 ordinary shares as of the date of this prospectus for issuance of our stock options and restricted share units under our 2005 long-term incentive plan. For a description of our 2005 long-term incentive plan, see “Management—2005 Share Incentive Plan.” Since the adoption of the 2005 long-term incentive plan, we have made various stock option grants to our directors, employees and consultants.

We have adopted Statement of Financial Accounting Standard, or SFAS, No. 123 (revised 2004), “share-based Payment”, or SFAS No. 123 (R), under which we generally recognize share-based compensation expenses over the vesting period of the award based on the fair value of the award on the grant date. Of our 2006 share-based compensation expenses of $12.9 million:

 

  Ÿ  

$7.7 million resulted from the transfer without consideration of 2.25 million of our ordinary shares to Concentra, an entity controlled by our chief executive officer, by Bloomwell International Limited, or Bloomwell, an entity controlled by our chairman. Because the share transfer was made by a major shareholder to our employee, we incurred a related expense;

 

  Ÿ  

$2.9 million resulted from the sale by Well Active International Limited, or Well Active, of approximately 5.0 million of our ordinary shares to our officers and employees at a price of $4.83 per share, paid for with a promissory note. The $2.9 million charge related to the difference between the total amount paid for the shares and the total fair value of the transferred shares on the transfer date. $0.8 million resulted from the transfer of 150,000 shares for no consideration from Well Active to our chief financial officer. Well Active was initially funded with 6,000,000 ordinary shares available for grant to our employees by Bloomwell. Currently, Well Active is owned by three of our employees who act as nominee shareholders;

 

  Ÿ  

$0.7 million resulted from the repurchase by us from Bloomwell of 1,260,000 ordinary shares having a fair value of $6.0 million for cash totaling $6.7 million;

 

  Ÿ  

$0.2 million resulted from the issuance of 150,000 ordinary shares to our chief financial officer at a price of $3.68 per share; and

 

  Ÿ  

$0.6 million resulted from equity grants to other employees of the company.

During the three months ended March 31, 2007, we granted a total of 2,522,100 options with vesting terms from two to 4 1/2 years and recorded share-based compensation expense of $235,000. These options included options granted to a member of our board of directors for the purchase of 112,500 ordinary shares at an exercise price of $6.43 per share, vesting over two years, and 300,000 options granted to our chief executive officer at an exercise price of $6.43 per share, vesting over four years. These options can only be exercised when our ordinary shares or American Depositary Shares representing our ordinary shares become publicly tradable upon the completion of this offering. Accordingly, no share-based compensation expense was recorded during the three months ended March 31, 2007 and June 30, 2007 related to these options, as the completion of this offering is a performance condition which is not considered probable until it occurs. Please see Note 15 to our consolidated financial statements for the years ended December 31, 2004, 2005 and 2006 and the three months ended March 31, 2007 and 2006 (unaudited). We recorded $262,000 in share-based compensation expenses for the three months ended June 30, 2007 and had $7.7 million in deferred share-based compensation expenses as of June 30, 2007, compared to $1.7 million as of December 31, 2006. Please see Note 13 to our unaudited consolidated financial statements for the three months ended June 30, 2007 and 2006.

 

60


Table of Contents

Our board of directors granted to our employees, on September 12, 2007, 514,650 restricted share units and options to acquire 112,500 ordinary shares at an exercise price of $6.43 a share, and granted to our employees 27,000 restricted share units on September 28, 2007. These grants were contingent upon the completion of this offering. In connection with these grants, upon the completion of this offering, we will have additional deferred shared-based compensation of $8.4 million which will be recognized over a weighted average period of four years. In addition, we expect to incur $23.9 million in share-based compensation expenses upon this offering when Well Active forgives, contingent upon this offering, debt equal to this amount owed by employees as a result of the approximately 5.0 million shares sold by Well Active to these employees.

Determination of Fair Value of Share-based Compensation

We are responsible for estimating the fair value of the options we granted and other share-related transactions. The determination of fair value requires us to make complex and subjective judgments about the projected financial and operating results. It also requires making certain assumptions such as cost of capital, general market and macroeconomic conditions, industry trends, comparable companies, price volatility of our shares, expected lives of options and discount rates. These assumptions are inherently uncertain. Changes in these assumptions could significantly affect the amount of employee share-based compensation expense we recognize in our consolidated financial statements.

We determined the fair value of the ordinary shares underlying the options and transferred shares by employing two valuation methods: the discounted cash flow method under the income approach and the guideline companies method under the market approach. The discounted cash flow method is a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate. The “guideline companies method” incorporates certain assumptions, including the market performance of comparable listed companies as well as our financial results and growth trends, to derive our total equity value. Other assumptions used in deriving the fair values include the following: (i) no material changes in the existing political, legal, fiscal and economic conditions in China; (ii) no material changes in tax law in China or the tax rates applicable to our subsidiaries; and (iii) no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain.

November 28, 2005.    On November 28, 2005, we granted 900,000 stock options and 4.8 million restricted stock units, or RSUs. We performed a retrospective valuation analysis and estimated the fair value of our ordinary shares as of November 30, 2005 to be $3.22 per share using the discounted cash flow method under the income approach. Under the discounted cash flow method, we forecasted our net cash flows for five years subsequent to the valuation date and determined a terminal value which assumed a constant growth rate of 3%. The net cash flow was then discounted to the present value using a risk-adjusted discount rate of 15.57% which represents our estimated cost of equity capital. The risk-free rate, industry average beta, the risks associated with achieving our forecasts and the customer concentration risk were assessed in selecting the appropriate discount rates. Although we also considered the market approach, which was used as a reasonableness test to support our conclusion of value, we decided to rely upon the income approach as the sole means of valuation since the income approach better captured our financial situation as of the valuation date, which witnessed high customer concentration with our revenues derived primarily from two customers.

March 1, 2006.    On March 1, 2006, we granted 372,300 stock options and 117,750 RSUs. In determining the fair value of our ordinary shares on this date, we performed a retrospective valuation analysis, employing the same valuation method, discount rate and terminal value growth rate used in the November 30, 2005 valuation, together with updated financial forecasts. Based on this analysis, we determined the fair value of our ordinary shares to be $3.42 per share.

 

61


Table of Contents

The March 1, 2006 valuation was also utilized to value the following equity transactions given the relatively short time lag and that there were no significant transactions or events that would have had a material impact on the valuation of our ordinary shares:

 

  Ÿ  

February 2006.    Bloomwell, a significant shareholder controlled by our chairman, Jia Xiaogong, transferred 2.25 million ordinary shares to Concentra, a company controlled by Lian Weizhou, our chief executive officer, for no consideration.

 

  Ÿ  

May 2006.    We granted 75,840 stock options and 85,500 RSUs. We determined that a new valuation for these grants was not necessary given the relatively small size of the grants.

June 16, 2006.    On June 16, 2006, we purchased 510,000 ordinary shares from Bloomwell. This purchase coincided with the sale of 6,360,001 series A convertible preferred shares for an aggregate purchase price of $23.4 million. We performed a retrospective valuation analysis and used an option-based methodology to allocate our estimated aggregate equity value among our convertible preferred shares and ordinary shares. The estimated aggregate equity value was based upon the sales price of the series A preferred shares of $3.68 per share. We considered the rights and privileges of each security, including such factors as liquidation rights, conversion rights and the manner in which each security affects the others. An ordinary share valuation of $3.21 per share was determined, which represented a 13% discount to the series A preferred shares.

September 12, 2006.    On September 12, 2006, we granted 390,000 stock options and, at the purchase price of $3.68 per share, issued 150,000 ordinary shares to our chief financial officer. Our chief financial officer received an additional 150,000 ordinary shares from Well Active for no consideration. We determined the fair value of our ordinary shares to be $5.11 per share using the discounted cash flow method under the income approach and guideline public company method under the market approach and placed a 70% and 30% weighting on the respective approach. We began utilizing the market approach in conjunction with this valuation, as we foresaw a reduction in the level of customer concentration, had successfully raised capital via the issuance of preferred securities and had recently hired a chief financial officer. The weightings of the valuation methodologies incorporated our assumptions regarding the relative reliability of the valuation methodologies employed. While the market approach was useful, the fact that the risk factors inherent in the comparable companies were not identical to ours made adjusting multiples based on these risk factors difficult. Specific company cash flow projections, which incorporated industry and economy factors as verified through industry research, were considered more relevant than market based methods using publicly traded companies. As such, the income approach was more heavily weighted for purposes of the valuation analysis.

For the market approach, we considered the profile and performance of three publicly traded IT service providers operating mainly in China that we deemed reasonable guideline companies. We gave equal weighting in applying an enterprise-value (“EV”)-to-earnings before interest and taxes (“EBIT”) and enterprise-value-to-earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple as the metric. The selection of an appropriate EV/EBIT multiple took into consideration several factors, including the differences between the guideline companies and us in terms of revenue growth rate, operating margins, profitability and the customer concentration risks facing us given that 72% of our 2006 revenues were derived from two customers.

For the income approach, we forecasted our net cash flow for five years subsequent to the valuation date and applied a multiple to the terminal EBITDA value after five years. The net cash flow was then discounted to present value using a risk-adjusted discount rate of 16.0%, which was based on market inputs using a capital asset pricing model that reflected the risks associated with achieving our forecasts and the customer concentration risk. Our total equity value was then allocated among our preferred shares and ordinary shares. The valuation model allocated the equity value between the

 

62


Table of Contents

ordinary shares and the preferred shares and calculated the fair value of ordinary shares based on the option-pricing method. Under this method, the ordinary shares have value only if the funds available for distribution to shareholders exceed the value of the liquidation preference at the time of a liquidity event (for example, merger or sale). The ordinary shares are considered to be a call option with claim on the equity above the exercise price equal to the liquidation preferences of the preferred shares.

November 6, 2006.    On November 6, 2006, Well Active granted interests in 5.0 million of our ordinary shares to our employees at a cost of $4.83 per ordinary share. We performed a retrospective valuation analysis and estimated the fair value of our ordinary shares to be $5.41 per share using the discounted cash flow method under the income approach and guideline public company method under the market approach. The weighting of the methodologies, discount rate and terminal value assumption was the same as the weighting used in the September 12, 2006 valuation, using updated financial forecasts.

December 19, 2006.    On December 19, 2006, we purchased 750,000 ordinary shares from Bloomwell. This purchase coincided with the sale of 3,858,005 Series B convertible preferred shares for an aggregate purchase price of $24.8 million. We performed a contemporaneous valuation analysis and used an option-based methodology to allocate our estimated aggregate equity value among our preferred shares and ordinary shares. The estimated aggregate equity value was based upon the sales price of the series B preferred shares of $6.43 per share. We considered the rights and privileges of each security, including such factors as liquidation rights, conversion rights and the manner in which each security affects the others. An ordinary share valuation of $5.83 per share was determined, which represented a 9% discount from the value of series B preferred shares.

Given the relatively short time lag and the fact that no significant events transpired that impacted the valuation of our ordinary shares, we adopted the fair value of ordinary shares as of December 19, 2006 as the fair value of ordinary shares as of January 5, 2007 for purposes of calculating the share-based compensation with respect to 112,500 stock options issued to a member of our Board of Directors.

March 17, 2007.    We issued stock options and shares to employees on March 12, March 17 and March 28, 2007. We performed a contemporaneous valuation analysis and estimated the fair value of our ordinary shares on March 17, 2007 to be $5.96 by using the same methods used for the September 12, 2006 and November 6, 2006 valuations, together with updated financial forecasts. Given the relatively short time lag and the fact that no significant events transpired that may impact the valuation of our ordinary shares, we adopted the fair value of ordinary shares as of March 17, 2007 as the fair value of ordinary shares as of March 12 and March 28, 2007.

September 2007.    We issued stock options and restricted share units on September 12, 2007 and September 28, 2007. We used the mid-point of the range indicated on the cover of this prospectus as the fair value of these grants.

In addition to the above, to reflect the fact that we were a private company at the time of each of our valuations performed prior to March 31, 2007, a 25% “lack of marketability discount,” or LOMD, was applied to the derived equity value. The LOMD was supported with reference to both qualitative studies and quantitative analysis. The qualitative studies examine prices paid in private transactions for shares of companies that subsequently became publicly-traded through an IPO. We also considered empirical studies based on prices paid for restricted stock. The restricted stock studies analyze transactions in restricted shares where marketability at the end of the required holding period was virtually assured, since the subject companies’ shares were already publicly traded. We also used two quantitative valuation methods including the option pricing method (implied from a put option) and the Longstaff Regression Analysis, which resulted in a LOMD range of 19.4% to 26.8%. Given the transaction costs necessary to implement the put options, the restricted stock regression analysis and the qualitative factors, we determined that 25% was the proper LOMD.

 

63


Table of Contents

During 2006, we determined the fair value of the options on the date of grant by using the binomial option-pricing method under the following assumptions: average risk-free rate of return of 4.80%, 54.33% volatility, no dividends and a weighted average expected option life between 2.58 to 4.54 years. If different assumptions were used, our share-based compensation expenses, net income and income per share could have been significantly different. Total unrecognized compensation expense from the grants made in 2006 as of the date of this prospectus is expected to be recognized over the remaining vesting period of the options from two to four years.

During the three months ended March 31, 2007, we determined the fair value of the options on the date of grant by using the binomial option- pricing method under the following assumptions: average risk-free rate of return of 3.0%, 55.0% volatility, no dividends and an weighted-average expected option life between 2.90 to 4.84 years. If different assumptions were used, our share-based compensation expenses, net income and income per share could have been significantly different. Total unrecognized compensation expense from the grants made in three months ended March 31, 2007 as of the date of this prospectus is expected to be recognized over the remaining vesting period of the options from two to 4 1/2 years.

The table below sets forth certain information concerning options and restricted share units granted to, and shares sold to or (purchased) from, our directors, officers and employees on the dates indicated:

 

Date

  Options   Restricted
Share
Units
  Ordinary
Shares
    Purchase
Price/
Exercise
Price ($) (B)
  Fair Value
($) (C)
  Mid-Point
of Estimated
IPO Price ($)
(A)
  Intrinsic
Value
($ in millions)*

November 2005

  900,000         2.33   3.22   15.00   11.4
    4,800,000         3.22   15.00   56.5

March 2006

  372,300         3.00   3.42   15.00   4.5
    117,750         3.42   15.00   1.4

February 2006

      2,250,000     -0-   3.42   15.00   33.8

May 2006

  75,840         3.68   3.42   15.00   0.9
    85,500         3.42   15.00   1.0

June 2006

      (510,000 )   3.68   3.22   15.00  

September 2006

  390,000         3.68   5.11   15.00   4.4
      150,000     -0-   5.11   15.00   2.3

November 2006

      4,950,750     4.83   5.41   15.00   50.3

December 2006

      (750,000 )   6.43   5.83   15.00  

January 2007

  112,500         6.43   5.83   15.00   1.0

March 2007

  2,409,600         6.43   5.96   15.00   20.7

September 2007

  112,500         6.43   13.00   15.00   1.0
    541,650         13.00   15.00   1.1
               
            Total   190.3
               

* Intrinsic Value equals (A) - (B) for options and shares and (A) - (C) for restricted share units, multiplied by the respective quantity of the award.

The increase in the fair value of our ordinary shares from $3.22 in November 2005 to $5.96 in March 2007 was primarily attributable to the following developments of our company during the period:

 

  Ÿ  

There was relatively little increase in value from November 2005 to the time of the sale of series A preferred shares in June of 2006.

 

  Ÿ  

From June 2006 until September 2006, our ordinary share value increased from $3.21 to $5.11, an increase of 60%, primarily as a result of: (i) improvements to our business operations resulting in our raising expectations for future cash flows, (ii) the successful integration of ABS, the first significant acquisition we completed, (iii) our estimate that our dependence on our two

 

64


Table of Contents
 

largest customers will decrease from the 2005 level and (iv) the hiring of an experienced chief financial officer.

 

  Ÿ  

From September 2006 until December 2006, our ordinary share value increased from $5.11 to $5.83, an increase of 14%, as our forecasted revenues increased due to the strong growth in demand for our products as well as interest from the insurance industry in our products.

 

  Ÿ  

From December 2006 until March 2007, our ordinary share value increased from $5.83 to $5.96, an increase of 2%, as there were no significant changes in our business, forecasted outlook or in the market EBIT/EBITDA multiples.

We believe the increase in the fair value of our ordinary shares form $5.96 in March 2007 to $15.00, the estimated initial public offering price, being the mid-point of the range shown on the front cover page of this prospectus, is primarily attributable to the following factors. Although it is difficult to assign with precision the portion of the fair value increase to a particular factor, the following is our approximate estimate of the increase between $8.04 and $10.04 based on the range of the estimated initial public offering price between $14.00 and $16.00:

 

    

Percentage
Fair Value
Increase

  

Amount of
Contribution
to Fair Value
Increase

Market Factors

     

Ÿ The 25% discount for lack of marketability previously used to value our ordinary shares was no longer applicable.

   21-25%    $1.25-1.49

Ÿ Other, including the increase in valuations from March 1, 2007 to September 28, 2007 for a broad selection of Chinese listed securities increased, driven by demand from investors.

   74-86%    $4.39-5.10

 

Business Factors

     

Ÿ We entered into asset transfer agreements to acquire the business of FEnet and its subsidiary in May 2007, which acquisition is expected to be completed in October 2007.

   10-15%    $0.60-0.89

Ÿ In recent months, we successfully developed a treasury management product for a non-financial services client.

   12-18%    $0.72-1.07

Ÿ Estimated revenues for the three months ended September 30, 2007 increased significantly over the same period during 2006 as demand for our services from our largest customer and other banks and clients was higher than previously anticipated. See “Recent Developments.”

   18-25%    $1.08-1.49
         

Total

   135-169%    $8.04-10.04
         

 

65


Table of Contents

Acquisitions and Strategic Alliances

We began our operations as a provider of general IT services to the financial services industry in 1996 and began focusing on software development for the financial services industry in 2001. The primary driver of our revenue growth since inception has been organic business development, supplemented to a lesser extent by strategic acquisitions. We have completed seven strategic transactions since 2003. The following are some of our recent acquisitions and strategic alliances:

 

  Ÿ  

In February 2006, we entered into the outsourcing business by establishing Longtop International, with three other shareholders, and later acquired the interests from the other shareholders in January 2007. We subsequently disposed of our interest in LTI through a dividend in kind to our existing shareholders in July 2007;

 

  Ÿ  

In March 2006, we assumed certain aspects of the China business of S1 Corporation (S) Pte. Ltd., or S1, by assuming certain customer contracts of S1, becoming S1’s non-exclusive distributor of its retail software and providing relevant maintenance and upgrading services in China;

 

  Ÿ  

In May 2006, we acquired Advanced Business Services (Beijing) Co., Ltd., or ABS, and its parent company, Grand Legend Holdings Limited. ABS is an integration solutions provider based in Beijing;

 

  Ÿ  

In March 2007, we acquired Minecode, which provided technology outsourcing services in the United States primarily for Microsoft. Minecode became a subsidiary of LTI and was disposed of in July 2007 as part of the LTI disposition in which we distributed LTI and its subsidiaries to our shareholders; and

 

  Ÿ  

In May 2007, we entered into asset transfer agreements to acquire the business of FEnet Co., Ltd, or FEnet, and its subsidiary, Guangzhou FEnet Software Co., Ltd., for a purchase price of approximately $3.4 million in cash and 396,350 ordinary shares. Additional purchase price consideration of up to approximately $2.6 million is contingently payable upon FEnet’s achievement of certain financial milestones for the period from June 1, 2007 to December 31, 2007. We expect to complete the acquisition in October 2007. FEnet provides business intelligence software development services in China.

Through these acquisitions and strategic alliances we acquired additional development and service capabilities, broadened the scope of our offerings and expanded our client base. We currently plan to conduct further acquisitions and form additional strategic alliances to maintain or grow our revenues.

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. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Longtop BVI, our subsidiary organized under the laws of the British Virgin Islands, is not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the British Virgin Islands.

Our subsidiary in Hong Kong is subject to a profit tax at the rate of 17.5% on assessable profit determined under relevant Hong Kong tax regulations.

Our subsidiaries in China are subject to business tax and related surcharges by various local tax authorities at rates ranging from 5% to 6% on revenues generated from providing services and are

 

66


Table of Contents

subject to a 17% VAT on revenues from sales of third party hardware and software to clients. For some of our software solutions, we are entitled to receive a 14% refund on the total VAT payable of 17% if we have registered the copyrights for the software and have met other requirements of government authorities. In addition, according to a notice issued by the Ministry of Finance and the State Administration of Taxation in November 2005, an entity that develops software products on commission may be entitled to a waiver of VAT if, according to the contractual arrangement, the copyright of the products developed by it is owned by the commissioning party or jointly owned by the developer and commissioning party.

Our subsidiaries in China are subject to enterprise income tax on their taxable income. Pursuant to PRC laws, enterprise income tax is generally assessed at the statutory rate of 33%, except the enterprise income tax rate is lowered to 15% when an enterprise is located in a special economic zone or is classified as a “high- technology enterprise.” In addition, an enterprise qualified as a “software enterprise” is entitled to a two-year income tax exemption for the first two profitable years and a 50% reduction of its applicable income tax rate for the subsequent three years. Except for Guangzhou FEnet Information Technologies Co., Ltd., which is subject to an enterprise income tax rate of 33%, all of our subsidiaries in China were subject to the enterprise income tax at the reduced applicable rate of 15% for the years 2004, 2005 and 2006 and for the three months ended March 31, 2007 and June 30, 2007, as they were located in special economic zones or classified as “software enterprises” or “high-technology enterprises.”

In March 2007, the National People’s Congress of China enacted a new Enterprise Income Tax Law, or the New EIT Law, which will become effective on January 1, 2008. Under the New EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will normally be subject to the enterprise income tax at the rate of 25% on its global income. The New EIT Law, however, does not define the term “de facto management bodies.” If the PRC tax authorities subsequently determine that we or any of our non-PRC subsidiaries should be classified as a resident enterprise, then such entity’s global income will be subject to PRC income tax at a tax rate of 25%. In addition, under the New EIT Law, dividends from our PRC subsidiaries to us may be subject to a withholding tax. Although the New EIT Law provides for a maximum withholding tax rate of 20%, the rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. The New EIT Law imposes a unified income tax rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain limited exceptions, but permits companies to continue to enjoy their existing preferential tax treatment until such treatment expires in accordance with its current terms.

Critical Accounting Policies and Estimates

We prepare our financial statements in conformity with U.S. GAAP, which require us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could material impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of

 

67


Table of Contents

judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

Revenue recognition

Our revenue is derived from two primary sources: (i) software development revenue represents revenue from the development and licensing of software, assistance in implementation and customization, and PCS and, (ii) other services represents revenue from the maintenance of ATMs, providing system integration services which includes assisting customers with the procurement and installation of hardware and software, and professional services for IT service management, design and consulting. We recognize revenue using the guidance from AICPA Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, Modification of SOP 97-2, “Software Revenue Recognition, with Respect to Certain Transactions.” SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), Accounting Research Bulletin (“ARB”) No. 45, “Long-Term Construction-Type Contracts” (“ARB 45”) and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition.” Under these guidelines, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is reasonably assured or, in the case of software arrangements, when collectibility is probable.

Software development.    Where the software development contracts include multiple element arrangements, we allocate revenues to the various elements based on vendor-specific objective evidence, or VSOE, of fair value. Our VSOE of fair value is determined based on the price charged when the same element is sold separately, or for elements not yet being sold separately, the price established by management having the relevant authority which, once established, will not change before being sold separately. We defer revenue for the fair value of its undelivered elements and recognize revenue for the remainder of the contractual arrangement fee attributable to the delivered elements when the basic criteria of SOP 97-2 have been met. We recognize revenue on delivered elements only if: (a) any undelivered solutions or services are not essential to the functionality of the delivered solutions or services, (b) we have an enforceable claim to receive the amount due in the event we do not deliver the undelivered solutions or services, (c) there is evidence of the fair value for each undelivered solution or service, and (d) the revenue recognition criteria otherwise have been met for the delivered elements. Otherwise, revenue on delivered elements is recognized when the undelivered elements are delivered. If the only undelivered element is PCS for which we have established VSOE, we recognize the difference between the total arrangement fee and the amount deferred for PCS as revenue upon delivery (the residual method). Where PCS revenue is deferred, the PCS revenue is recognized ratably over the PCS term.

We periodically negotiate the sale of upgrades and enhancements with our customers. Such arrangements are accounted for separately from the initial sale given that (i) they are not negotiated within a short time frame of each other, (ii) the products from the initial sale are not dependent on delivery of the upgrades or enhancements, (iii) neither the fees for the initial or subsequent sale are subject to refund if one or the other contracts is not fulfilled nor are payment terms for either sale tied to the performance of the other and (iv) the arrangements are not considered a single project.

Standardized Solutions—Prior to January 1, 2006, for software development contracts that did not involve significant modification (“standardized solutions”), we did not have VSOE of PCS or evidence that the cost of providing PCS was immaterial. Accordingly, after the standardized solution was implemented and customer acceptance was received, the entire arrangement fee was recognized ratably over the PCS period. Subsequent to January 1, 2006, we were able to establish that the cost of

 

68


Table of Contents

providing PCS on the standardized solution arrangements was immaterial and, as a result, began recognizing the entire arrangement fee after the software was implemented and customer acceptance was received, assuming all other revenue recognition criteria had been met. Subsequent to January 1, 2006, we accrue the estimated cost of providing PCS at the time the revenue is recorded.

Customized Solutions—For software development contracts that require significant modification or customization of the core software (“customized solutions”), revenues from the software license and development services are recognized over the customization and implementation period using the percentage of completion method. We measure progress toward completion by comparing direct labor hours incurred to total estimated direct labor hours for the project. Where revisions in estimated contract profits are necessary, they are made in the period in which the circumstances requiring the revision become known. Provisions for estimated losses, if any, on uncompleted contracts are recorded in the period in which such losses become probable based on the current contract estimates.

Prior to April 2004, we did not have VSOE of PCS for its customized solutions. Accordingly, the entire arrangement fee was deferred and recognized ratably over the PCS period. Subsequent to April 2004, we were able to establish VSOE of PCS and, as a result, only VSOE of PCS was deferred and recognized over the PCS period.

Other services.    Revenues from ATM maintenance and ancillary services are recognized as such services are performed or ratably over the contractual period. Costs associated with these contracts are expensed as incurred. Contract periods are generally within one year. Revenue from system integration services, a component of ancillary services, is recorded on a net basis of amounts paid to suppliers under the provisions of EITF No. 99-19, “Reporting Revenue Gross as Principal versus Net as an Agent.” On behalf of our clients, we obtain manufacturers’ warranties and support for the third party hardware and software. No warranty costs have been accrued at December 31, 2005 or 2006 or the three months ended March 31, 2007 and June 30, 2007.

Our management must determine whether to record our system integration revenues using the gross or net method of reporting. With our system integration services we assist clients with the procurement and installation of hardware and software that best meet their system requirements. Determining whether revenue should be reported gross or net is based on an assessment of various factors, principally whether we are acting as the principal in offering services to the customer or whether we are acting as an agent in the transaction. The determination of whether we are serving as principal or agent in a transaction is judgmental in nature and based on an evaluation of the terms of an arrangement. Based on our assessment, our system integration revenues are recorded on a net basis because we do not take general inventory risk, we do not make changes to third-party products, we have limited involvement in the determination of product or services or supplier selection and in substance the original equipment manufacturers are the primary obligors as the product quality and warranty is provided by the original equipment manufacturer.

Allowance for Doubtful Accounts Receivables

Our management must make estimates of the collectibility of our accounts receivables. Management specifically analyzes accounts receivables, historical bad debts, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Our accounts receivable balances on December 31, 2006, March 31, 2007 and June 30, 2007 were $17.3 million, net of allowance for doubtful accounts of $380,000, $19.5 million, net of allowance for doubtful accounts of $410,000, and $19.1 million, net of allowance for doubtful accounts of $540,000, respectively. If the financial condition of our client’s were to deteriorate, resulting in their inability to make payments, an additional allowance might be required.

 

69


Table of Contents

Share-based compensation

We account for our share-based compensation arrangements using the fair value recognition provision of SFAS 123R. Under this method, compensation cost related to employee stock option or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized as expense over the employee’s requisite service period. Total share-based compensation costs in 2005 and 2006 and the three months ended March 31, 2007 and June 30, 2007 were $37,000, $12.9 million and $235,000 and $262,000, respectively. We did not issue any share-based awards prior to 2005.

We are responsible for estimating the fair value of the options granted by us and other share-related transactions. The determination of fair value requires us to make complex and subjective judgments about the projected financial and operating results. It also requires making certain assumptions such as cost of capital, general market and macroeconomic conditions, industry trends, comparable companies and our share price volatility, expected lives of options and discount rates. These assumptions are inherently uncertain. Changes in these assumptions could significantly affect the amount of employee share-based compensation expense it recognizes in its consolidated financial statements.

We determined the fair value of the ordinary shares underlying the options and transferred shares by considering a number of factors to determine our aggregate equity value. This analysis included the discounted cash flow method, a method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate, and the guideline companies approach, which incorporates certain assumptions including the market performance of comparable listed companies as well as our financial results and growth trends, to derive our total equity value. Other assumptions used in deriving the fair values include: no material changes in the existing political, legal, fiscal and economic conditions in China; no material changes in tax law in China or the tax rates applicable to our subsidiaries and; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain.

Determination of the fair value of share-based compensation is further discussed in “—Factors Affecting Our Results of Operations—Share Based Compensation Expenses—Determination of Fair Value of Share-based Compensation.”

 

70


Table of Contents

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 may be expected for any future period.

 

    For the Year Ended
December 31,
    For the Three Months Ended  
      March 31,     June 30,  
     2004       2005       2006       2006       2007       2006       2007   
    ($ in thousands)  

Consolidated Statement of Operations Data

             

Revenues:

             

Software development

  13,263     21,568     33,312     4,545     5,869     7,554     8,240  

Other services(1)

  1,968     3,718     9,868     1,825     2,887     3,387     7,833  
                                         

Total revenues

  15,231     25,286     43,180     6,370     8,756     10,941     16,073  

Less: Business taxes

  (111 )   (204 )   (534 )   (90 )   (105 )   (125 )   (117 )
                                         

Net revenues

  15,120     25,082     42,646     6,280     8,651     10,816     15,956  
                                         

Cost of revenues:

             

Software development(2)

  1,921     1,804     4,092     370     1,831     753     2,285  

Other services

  646     1,515     3,037     548     1,523     709     4,691  
                                         

Total cost of revenues

  2,567     3,319     7,129     918     3,354     1,462     6,976  
                                         

Gross profit

  12,553     21,763     35,517     5,362     5,297     9,354     8,980  
                                         

Operating expenses:

             

Research and development(2)

  918     1,072     1,797     344     341     317     437  

Sales and marketing(2)

  833     1,451     3,170     801     711     7     926  

General and administrative(2)

  2,431     3,999     17,954     9,841     2,874     1,540     2,526  
                                         

Total operating expenses

  4,182     6,522     22,921     10,986     3,926     1,864     3,889  
                                         

Income (loss) from operations

  8,371     15,241     12,596     (5,624 )   1,371     7,490     5,091  
                                         

Other income (expense):

             

Interest income

  29     71     343     43     100     69     281  

Interest expense

  (459 )   (532 )   (703 )   (229 )   (102 )   (168 )   (172 )

Other income (expense), net

  (4 )   20     86     6     (22 )   11     38  
                                         

Total other income (expense)

  (434 )   (441 )   (274 )   (180 )   (24 )   (88 )   147  
                                         

Income before income taxes and equity in an associate

  7,937     14,800     12,322     (5,804 )   1,347     7,402     5,238  

Income tax (expense)/recovery

  (1,316 )   (2,260 )   (3,751 )   1,764     (579 )   (2,250 )   (309 )
                                         

Income (loss) before equity in an associate

  6,621     12,540     8,571     (4,040 )   768     5,152     4,929  

Loss from investment in an associate

          (263 )   (30 )      

(43


)

   
                                         

Net income (loss)

  6,621     12,540     8,308     (4,070 )   768     5,109     4,929  
                                         

    For the Year Ended
December 31,
  For the Three Months Ended
      March 31,   June 30,
     2004     2005     2006     2006     2007     2006     2007 
    ($ in thousands)

(1)   Outsourcing revenue recognized by LTI, which we spun off on July 1, 2007

            1.0   4.5

(2)   Includes share-based compensation expenses as follows:

             

Cost of revenues:

             

Software development

      839   1   3   2   3

Operating expenses:

             

Research and development expenses

    8   147        

Sales and marketing expenses

      530   4   11   12   11

General and administrative expenses

    29   11,367   7,819   221   373   248

 

71


Table of Contents

Reportable Segments

For 2006, we had three reportable segments: software development, ATM maintenance services and ancillary services. In the three months ended March 31, 2007 and June 30, 2007, we had a fourth operating segment, outsourcing. Revenues from the software development, ATM maintenance services and ancillary services segments accounted for 77.1%, 6.7% and 16.2%, respectively, of our total revenues for 2006, 67.0%, 9.7% and 11.8%, respectively, for the three months ended March 31, 2007 and 51.3%, 7.4% and 13.0%, respectively, for the three months ended June 30, 2007. In the three months ended March 31, 2007 and June 30, 2007, outsourcing accounted for 11.5% and 28.3%, respectively, of our total revenues. Revenues from ATM maintenance services, ancillary services and outsourcing (in the three months ended March 31, 2007 and June 30, 2007) comprise 100% of revenues from other services. The software development segment is responsible for the development, maintenance and integration of software in accordance with clients’ specifications. The ATM maintenance services segment is responsible for the maintenance of ATMs. The ancillary services segment is responsible for the procurement of software and hardware on behalf of clients and providing IT management, consulting and supplementary technology related services. We disposed of our outsourcing segment in July 2007. The outsourcing segment was responsible for providing IT support services to multinational clients located primarily in North America. We allocate a portion of shared facilities costs to the segments cost of revenue based on headcount and review the performance of segments based on segment gross profit. We do not allocate operating expenses to the segments.

 

    Year Ended December 31,
   

2004

 

2005

 

2006

Reportable segments:

  Segment
Revenues
  Segment
Gross
Profit
  Segment
Revenues
  Segment
Gross
Profit
  Segment
Revenues
  Segment
Gross
Profit
   

($ in thousands)

Software development

  13,263   11,245   21,568   19,590   33,312   28,809

ATM maintenance services

  665   294   1,096   358   2,856   1,614

Ancillary services

  1,303   1,014   2,622   1,815   7,012   5,094

Outsourcing

           
                       

Total

  15,231   12,553   25,286   21,763   43,180   35,517
                       

 

    For the Three Months Ended March 31,    For the Three Months Ended June 30,
    2006   2007    2006    2007

Reportable segments:

  Segment
Revenues
  Segment
Gross
Profit
  Segment
Revenues
  Segment
Gross
Profit
   Segment
Revenues
   Segment
Gross
Profit
   Segment
Revenues
   Segment
Gross
Profit
    ($ in thousands)    ($ in thousands)

Software development

  4,545   4,111   5,869   3,968    7,554    6,715    8,240    5,895

ATM maintenance services

  554   370   846   424    694    449    1,201    750

Ancillary services

  1,271   881   1,035   852    2,693    2,190    2,089    1,602

Outsourcing

      1,006   53          4,543    733
                                   

Total

  6,370   5,362   8,756   5,297    10,941    9,354    16,073    8,980
                                   

 

72


Table of Contents

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Total Revenues.    Our total revenues increased by $5.2 million, or 46.9%, from $10.9 million for the three months ended June 30, 2006 to $16.1 million for the same period in 2007 primarily due to the reasons below.

 

  Ÿ  

Outsourcing segment.    Revenues from our outsourcing segment were $4.5 million for the three months ended June 30, 2007, compared to nil for the three months ended June 30, 2006. For the three months ended June 30, 2006, our outsourcing business was accounted for under the equity method. In July 2007, we disposed of our interest in the outsourcing business through a dividend in kind to our existing shareholders.

 

  Ÿ  

Software development services segment.    Revenues from software development services segment increased by 9.1% from $7.6 million for the three months ended June 30, 2006 to $8.2 million for the same period in 2007.

The increase in our software development revenues reflects:

 

  Ÿ  

from a development methodology perspective, primarily an increase in our customized software solution offerings. Compared to the three months ended June 30, 2006, our customized software solution revenues for the same period in 2007 grew 25.6% from $3.8 million to $4.8 million. Customized software solutions revenues represented 58.3% of software development revenues for the three months ended June 30, 2007, compared to 50.6% for the same period in 2006. Growth in our customized software solution revenues was due to increased demand primarily from Big 4 Client B, other banks and clients and, to a lesser extend, our insurance clients. Of our total customized software revenues during the three months ended June 30, 2006 and 2007, Big 4 Client A accounted for $1.9 million for each period, Big 4 Client B accounted for $1.3 million and $1.6 million, respectively, other banks and clients accounted for $560,000 and $931,000, respectively, and insurance clients accounted for $113,000 and $371,000, respectively. Pricing for our customized products was relatively stable during these periods.

In contrast, our standardized software solution revenues declined by 11.5%, from $3.2 million for the three months ended June 30, 2006 to $2.8 million for the same period in 2007. Standardized software revenues for the three months ended June 30, 2006 included $1.7 million in revenues deferred from prior years due to a lack of VSOE for certain standardized software solutions. Excluding the impact of this revenue deferral, standardized software revenues would have been $1.5 million in the three months ended June 30, 2006 resulting in an increase of $1.3 million and a year-on-year growth rate of 89.1%. This increase was due to increased demand from our other banks and clients and Big 4 Client A for our management and business intelligence related products. Of our total standardized software revenues during the three months ended June 30, 2006 and 2007, Big 4 Client A accounted for $1.4 million and $908,000, respectively, Big 4 Client B accounted for $1.3 million and $951,000, respectively, and other banks and clients accounted for $522,000 and $976,000, respectively.

For the three months ended June 30, 2007, maintenance revenues of $0.6 million represented 7.3% of total software development revenues, representing an increase of 13.8% compared to the three months ended June 30, 2006.

 

  Ÿ  

from a solutions perspective, growth in demand for our management solutions, as our clients sought to improve their internal systems, and our business intelligence solutions,

 

73


Table of Contents
 

as our clients sought to improve their data mining and data analysis capabilities. Our revenues from management-related solutions and business-intelligence solutions for the three months ended June 30, 2007 increased by 72.0% and 153.3%, respectively, compared to the same period in 2006.

 

  Ÿ  

ATM maintenance services segment.    Revenues from our ATM maintenance services segment increased by 74.7%, growing from $688,000 for the three months ended June 30, 2006 to $1.2 million for the same period in 2007. This growth was primarily attributable to the expansion of our sales network and an increased number of ATM machines under contract for maintenance from 2,614 as of June 30, 2006 to 5,830 as of June 30, 2007.

 

  Ÿ  

Ancillary services segment.    Revenues from our ancillary services segment decreased by 22.4%, from $2.7 million for the three months ended June 30, 2006 to $2.1 million for the same period in 2007. This decline was primarily attributable to our ATM leasing business, which contributed $0.6 million in revenues to the three months ended June 30, 2006 and was subsequently disposed of in September 2006, and was partially offset by revenue from our consulting services.

Gross Margin; Cost of Revenues.    Our gross margins declined from 85.5% for the three months ended June 30, 2006 to 55.9% for the same period in 2007. The decline in gross margin was primarily due to the factors explained below.

 

  Ÿ  

Outsourcing segment.    Gross margins from our outsourcing segment, which constituted 28.3% of our revenues, were 16.1% during the three months ended June 30, 2007. We did not have outsourcing revenue in the corresponding period for 2006. Excluding our outsourcing business, our gross margin for the three months ended June 30, 2007 was 71.5% as compared to 85.5% for the corresponding period in 2006.

 

  Ÿ  

Software development services segment.    Gross margins from the software development services segment were 88.9% for the three months ended June 30, 2006 compared to 71.5 % for the same period in 2007. The decline was primarily due to two factors: First, software development revenues for the three months ended June 30, 2006 included $1.7 million in revenues from standardized software contracts deferred from previous periods with no corresponding costs. This resulted in an approximate 3% increase in the gross margins for the three months ended June 30, 2006.

Second, as a result of increase in demand for customized solutions for 2007, which typically involve more manpower in development and implementation. In the three months ended June 30, 2007, we hired a significant number of new personnel in preparation for our busy season in the quarters ended September 30 and December 31, 2007 and in anticipation of future increased demand for our customized solutions. As of June 30, 2007, we had 499 software development engineers, compared to 228 as of June 30, 2006, and we hired 97 software development engineers during the three months ended June 30, 2007, compared to 42 software development engineers for the same period in 2006. The gross margins on customized software are substantially lower than that of standardized software. Also, as these new hires were in training for part of the period, they did not contribute substantially to revenues during the three months ended June 30, 2007.

 

  Ÿ  

ATM maintenance services segment.    Gross margins from our ATM maintenance services segment of 64.7% for the three months ended June 30, 2006 were similar to the same period in 2007 when gross margins were 62.4%.

 

74


Table of Contents
  Ÿ  

Ancillary services segment.    Gross margins from our ancillary services segment of 81.3% for the three months ended June 30, 2006, were similar to the same period in 2007 when gross margins were 76.7%.

Research and Development Expenses.    Our research and development expenses increased from $317,000 for the three months ended June 30, 2006 to $437,000 for same period in 2007, primarily as a result of fees paid to third parties to assist us with our research and development activities.

Sales and Marketing Expenses.    Our sales and marketing expenses increased from $7,000 for the three months ended June 30, 2006 to $926,000 for same period in 2007. The 2006 sales and marketing expense includes a $396,000 reversal of a previously made for a provision for doubtful debts, without which sales and marketing expenses for the three months ended June 30, 2006 would have been $407,000. The remaining increase from 2006 was due to an increase in sales and marketing headcount from 58 at June 30, 2006 to 72 at June 30, 2007 and a $130,000 allowance for doubtful accounts made during the three months ended June 30, 2007.

General and Administrative Expenses.    Our general and administrative expenses increased from $1.5 million for the three months ended June 30, 2006 to $2.5 million for same period in 2007. This increase was primarily due to $674,000 in general and administrative expenses related to our outsourcing business which we began to include in our consolidated results of operations in 2007 and a $252,000 increase in professional fees mainly related to our US GAAP audits.

Income Tax Expenses.    Our income tax expenses for the three months ended June 30, 2007 was $0.3 million which resulted in an effective tax rate of 5.9%, compared to $2.3 million which resulted in an effective tax rate of 30.4% for the corresponding period in 2006. The difference between the 2007 effective rate of 5.9% and the statutory rate of 15% was primarily due to an income tax refund received during the three months ended June 30, 2007. The difference between the 2006 effective rate of 30.4% and the statutory rate of 15% was primarily due to the inclusion in the 2006 operating income of share-based compensation expenses which were not deductible for income tax purposes.

Loss from investment in an associate.    Loss from investment decreased from $43,000 for the three months ended June 30, 2006 to nil for the same period in 2007, since we acquired 100% of the associate’s equity in the first quarter of 2007.

Net Income.    As a result of the foregoing, we had net income of $5.1 million for the three months ended June 30, 2006, compared to a net income of $4.9 million for the same period in 2007.

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Total Revenues.    Our total revenues increased by 37.5% from $6.4 million for the three months ended March 31, 2006 to $8.8 million for the same period in 2007 primarily due to the reasons below.

 

  Ÿ  

Software development services segment.    Revenues from software development services segment increased by 29.1% from $4.5 million for the three months ended March 31, 2006 to $5.9 million for the same period in 2007.

The increase in our software development revenues reflects:

 

  Ÿ  

from a development methodology perspective, primarily an increase in our customized software solution offerings. Compared to the three months ended March 31, 2006, our customized software solution revenues for the same period in 2007 grew 130.1% from $1.7 million to $3.9 million. Customized software solutions revenues represented 65.7% of revenues for the three months ended March 31, 2007 as compared to 36.9% for the same period of 2006. Growth in our customized software

 

75


Table of Contents
 

solution revenues was due to increased demand from Big 4 Client A and Big 4 Client B. Of our total customized software revenues during the three months ended March 31, 2006 and 2007, Big 4 Client A accounted for $822,000 and $2.4 million and Big 4 Client B accounted for $782,000 and $1.2 million, respectively. Pricing for our customized products was relatively stable during these periods.

In contrast, our standardized software solution revenues declined by 46.4%, from $2.5 million for the three months ended March 31, 2006 to $1.4 million for the same period in 2007. Standardized software revenues for the three months ended March 31, 2007 included $938,000 in revenue deferred from prior years due to a lack of VSOE for certain standardized software solutions. Excluding the impact of this revenue deferral, standardized software revenues were flat at $1.6 million in the three months ended March 31, 2006 and 2007. Of our total standardized software revenues during the three months ended March 31, 2006 and 2007, Big 4 Client A accounted for $1.5 million and $523,000 and Big 4 Client B accounted for $660,000 and $367,000, respectively. Pricing for our standardized software solutions was relatively stable during these periods.

For the three months ended March 31, 2007, maintenance revenues of $0.7 million represented 11.2% of total software development revenues, representing an increase of 91.9% compared to the three months ended March 31, 2006. As the PCS expired for many customized solutions, more of our customers required stand-alone maintenance, which contributed to our revenue growth for the period.

 

  Ÿ  

from a solutions perspective, growth in demand for our management solutions, as our clients sought to improve their internal systems, and our business intelligence solutions, as our clients sought to improve their data mining and data analysis capabilities. Our revenues from management-related solutions and business-intelligence solutions for the three months ended March 31, 2007 increased by 83.8% and 90.3%, respectively, compared to the same period in 2006.

 

  Ÿ  

from a client-type perspective, from the three months ended March 31, 2006 to the same period in 2007, our software development revenues increased by $1.3 million primarily due to revenues from Big 4 Client A increasing from $2.5 million to $3.0 million and revenue from other banks and non-insurance clients increasing from $0.4 million to $1.1 million.

 

  Ÿ  

ATM maintenance services segment.    Revenues from our ATM maintenance services segment increased by 52.7%, growing from $0.6 million for the three months ended March 31, 2006 to $0.8 million for the same period in 2007. This growth was primarily attributable to the expansion of our sales network and an increased number of ATM machines under contract for maintenance from 3,050 as of March 31, 2006 to 5,716 as of March 31, 2007.

 

  Ÿ  

Ancillary services segment.    Revenues from our ancillary services segment decreased by 33.8%, from $1.2 million for the three months ended March 31, 2006 to $0.8 million for the same period in 2007. This decline was primarily attributable to our ATM leasing business, which contributed $0.5 million in revenues to the three months ended March 31, 2006, and was subsequently disposed of in September 2006.

 

  Ÿ  

Outsourcing segment.    Revenues from our outsourcing segment were $1.0 million for the three months ended March 31, 2007. For 2006, our outsourcing business was accounted for under the equity method and reflected in loss from an investment in an associate. In July 2007,

 

76


Table of Contents
 

we disposed of our interest in the outsourcing business through a dividend in kind to our existing shareholders.

Gross Margin; Cost of Revenues.    Our gross margins declined from 84.2% for the three months ended March 31, 2006 to 60.5% for the same period in 2007. The decline in gross margin was primarily due to the factors explained below.

 

  Ÿ  

Software development services segment.    Gross margins from the software development services segment were 90.5% for the three months ended March 31, 2006 compared to 67.6 % for the same period in 2007. The decline was primarily due to an increase from 36.9% in the three months ended March 31, 2006 to 65.7% in the same period of 2007 of contributions to total revenues from customized software solutions. As customized software requires more manpower in implementation, the gross margin on customized software is substantially lower than that of standardized software. As a result of anticipated increase in demand for customized solutions for 2007, which typically involves more manpower in development and implementation, we hired additional software development engineers in the three months ended March 31, 2007. As these new hires were in training for part of the period, they did not contribute substantially to revenues during the three months ended March 31, 2007. As of March 31, 2007, we had 402 software development engineers compared to 186 as of March 31, 2006 and we hired 135 software development engineers during the three months ended March 31, 2007, compared to six software development engineers for the same period in 2006.

 

  Ÿ  

ATM maintenance services segment.    Gross margins from our ATM maintenance services segment were 66.8% for the three months ended March 31, 2006, compared to 50.1% for the same period in 2007. The decline in gross margin from the three months ended March 31, 2006 to the same period of 2007 was primarily due to additional investment in our maintenance network during the period.

 

  Ÿ  

Ancillary services segment.    Gross margins from our ancillary services segment were 69.3% for the three months ended March 31, 2006, compared to 82.3% for the same period in 2007. The increase in gross margin was primarily due to the disposal of the ATM leasing business with lower gross margins.

 

  Ÿ  

Outsourcing segment.    Gross margins from our outsourcing segment were 5.3% during the three months ended March 31, 2007.

Research and Development Expenses.    Our research and development expenses remained substantially the same for the three months ended March 31, 2006 and the same period in 2007.

Sales and Marketing Expenses.    Our sales and marketing expenses decreased from $801,000 for the three months ended March 31, 2006 to $711,000 for same period in 2007, as a result of a $347,000 reduction in our allowance for doubtful accounts, partially offset by costs associated with increasing our sales and marketing headcount from 58 at March 31, 2006 to 76 at March 31, 2007.

General and Administrative Expenses.    Our general and administrative expenses decreased from $9.8 million for the three months ended March 31, 2006 to $2.9 million for same period in 2007, $7.6 million of which was attributed to a decrease in stock compensation charges during the first three months of 2007 compared to the same period in 2006. The decline was partially offset by additional professional fees for the three-month 2007 audit and costs associated with increasing our general and administrative headcount from 93 at March 31, 2006 to 124 at March 31, 2007.

Income Tax Expenses.    Our income tax expenses was $0.6 million for the three months ended March 31, 2007. We had a tax credit of $1.8 million for the three months ended March 31, 2006 due to recognition of deferred tax benefits in respect of losses for the period.

 

77


Table of Contents

Loss from investment in an associate.    Loss from investment decreased from $30,000 for the three months ended March 31, 2006 to nil for the same period in 2007, since we acquired 100% of the associate’s equity in the first quarter of 2007.

Net Income.    As a result of the foregoing, we had net loss of $4.0 million for the three months ended March 31, 2006, compared to a net income of $768,000 for the same period in 2007.

Year Ended December 31, 2004, 2005 and 2006

Total Revenues.    Our total revenues increased by 66.0% from $15.2 million in 2004 to $25.3 million in 2005, and increased by 70.8% to $43.2 million in 2006 due to the reasons below.

 

  Ÿ  

Software development services segment.    Revenues from software development services segment increased by 62.6% from $13.3 million in 2004 to $21.6 million in 2005, and increased by 54.5% to $33.3 million in 2006. Prior to January 1, 2006, we did not have VSOE for PCS on our standardized software solutions or evidence that the costs of providing the related PCS were insignificant. As a result, 2006 software development revenues included $5.7 million in revenues for standardized software contracts deferred from previous years. Revenues from 2004 and 2005 would have been $437,000 and $4.0 million higher had we had VSOE or evidence our costs of providing PCS had been immaterial. The increase in our software development revenues reflects:

 

  Ÿ  

from a development methodology perspective, primarily an increase in our standardized software solution offerings. From 2004 to 2006, our standardized software solution revenues grew at a 331.1% CAGR, growing by 484.8% from $942,000 in 2004 to $5.5 million in 2005 and by 217.8% to $17.5 million in 2006. Standardized software solutions revenue represented 7.1%, 25.5% and 52.5% of total software revenues in 2004, 2005 and 2006, respectively. Growth in our standardized software solution revenues reflected our ability to leverage our research and development and customized software development efforts to bring to market standardized software. Pricing for our standardized products was relatively stable and was not a factor for changes in revenue from 2004 to 2006. The increase in standardized software revenues from 2004 to 2005 reflects, in significant part, our introduction of new standardized software solutions including solutions which facilitated our client’s operation of ATMs, facilitate the bank’s internal approvals of trade finance transactions and software to assist our client’s in managing their sales staff.

The increase from 2005 to 2006 benefits from $5.7 million in sales of Intelliflow products and VSOE-related deferrals new standardized software solutions that enable our clients to connect different brands of ATMs, provide information on foreign exchange transactions to their customers and monitor the operation of their ATMs. Of our total standardized software development revenues, Big 4 Client A and Big 4 Client B accounted for $25,000 and $228,000 in 2004, $2.7 million and $830,000 in 2005, and $7.5 million and $5.0 million in 2006, respectively.

In contrast, from 2004 to 2006 our customized software revenue grew at a 6.3% CAGR, growing by 28.5% from $11.9 million in 2004 to $15.4 million in 2005 and declining by 12.2% to $13.5 million in 2006. Pricing for our products was relatively stable and was not a factor for changes in revenue from 2004 to 2006. Like our standardized products, our client’s IT demand and needs are the primary driver for our customized revenues. The decline of 12.2% from 2005 to 2006 was due primarily to a reduction in the Big 4 Client A’s and Big 4 Client B’s spending on customized projects. Of our total customized software development revenues, Big 4 Client A and Big 4 Client B accounted for $7.0 million and $4.4 million in 2004, $8.7 million and $5.4 million in 2005 and $5.7 million and $4.6 million in 2006.

 

78


Table of Contents

In 2006, maintenance revenue of $2.3 million represented 7.0% of total software development revenue, with a CAGR of 148.3% from 2004 to 2006 with maintenance revenue growing by 88.1% from 2004 to 2005 and 227.8% from 2005 to 2006. As our customized solutions matured and the first year of PCS was completed, more of our customers required stand-alone maintenance, which contributed to our revenue growth in both 2005 and 2006. As our clients seek to replace our existing solutions, we expect the growth rate related to maintenance revenues to decrease.

 

  Ÿ  

from a solutions perspective, growth in demand for our management-related solutions, as our clients sought to improve their internal systems, channel related solutions and business intelligence solutions as they sought to improve data mining and data analysis capabilities. Our management-related solutions increased by 106.2% from $2.6 million in 2004 to $5.3 million in 2005 and by 99.4% to $10.6 million in 2006, driven, in part, by sales of the following management-related solutions: IntelliFlow (work-flow management), customer information and trade finance management, and risk management systems. Our channel solutions increased by 54.0% from $2.8 million in 2004 to $4.4 million in 2005 and by 83.4% to $8.0 million in 2006 primarily related to our ATM related solutions. Our business intelligence solutions increased by 130.6% from $0.6 million in 2004 to $1.5 million in 2005 and by 121.3% to $3.2 million in 2006.

 

  Ÿ