UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
_______________________
FORM
20-F
UNDER
THE
SECURITIES ACT OF 1933
_______________________
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE
ACT OF 1934
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OR
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|X|
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended December 31,
2006.
Commission file number: 000-51025
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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OR
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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Date
of
event requiring this shell company report
___________________________.
For
the transition period from __________________ to
____________________.
Commission
file number ________________________________________________.
Ninetowns
Internet Technology Group Company Limited
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|
(Exact
name of Registrant as specified in its
charter)
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Cayman
Islands
(Jurisdiction
of incorporation or
organization)
5th
Floor, Union Plaza
20
Chaowai Street, Chaoyang District
Beijing
100020, The People’s Republic of China
telephone:
(86 10) 6588-7788
facsimile:
(86 10) 6588-2290
e-mail:
ir@ninetowns.com
(Address
of principal executive offices)
_______________________
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SEC
1852 (12-05)
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Persons
who respond to the collection of information contained in this form
are
not required to respond unless the form displays a currently valid
OMB
control number.
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American
Depositary Shares,
each
representing one ordinary share, par value HK$0.025 per share
_______________________
Indicate
the number of outstanding shares of each of the Issuer’s class of capital or
common stock as of the close of the period covered by this Annual Report:
34,991,834 ordinary shares, par value HK$0.025 per share.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
|_| No |X|
If
this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of
the Securities Exchange Act of 1934.
Yes
|_| No |X|
Note
–
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
|X| No |_|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
|_| Accelerated
filer
|X| Non-accelerated
filer |_|
Indicate
by check mark which financial statement item the registrant has elected to
follow.
Item
17
|_| Item 18 |X|
If
this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes
|_| No |X|
i
Introduction
This
annual report on Form 20-F includes our audited consolidated financial
statements for the years ended December 31, 2004, 2005 and 2006, and as of
December 31, 2005 and 2006. References to “2004,” “2005,” “2006,”
“2007” and “2008” are, where appropriate, references to the
years ended or ending December 31, 2004, 2005, 2006, 2007 and 2008,
respectively.
Discrepancies
in tables between totals and sums of the amounts listed are due to
rounding.
References
to “China” or the “PRC” are to the People’s Republic of China, excluding Taiwan,
Hong Kong and Macau. Facts and statistics in this annual report relating to
the
enterprise software and related services market, the PRC import/export industry
and economic data are derived from various government and research
publications.
Forward-looking
statements
This
annual report contains forward-looking statements that relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,”
“potential,” “predict,” “project,” “should,” or “will,” or the negative of such
terms or other comparable terminology. These statements involve known and
unknown risks, uncertainties, and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or
achievements expressed or implied by such forward-looking statements. These
risks, uncertainties and other factors include, among other things, those listed
under “Risk factors” as well as those included elsewhere in this annual
report.
These
forward-looking statements include, but are not limited to, statements relating
to:
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·
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our
anticipated capital expenditures and our ability to fund such
expenditures;
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·
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our
expectations about growth in demand for our products and
services;
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·
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acquisitions
or investments in businesses, products or technologies that are
complementary to our own;
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·
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our
ability to adjust to technological change;
and
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·
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our
belief about the effects of government regulation on our
business.
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You
should not place undue reliance on forward-looking statements and you should
read these statements in conjunction with the risk factors disclosed in Item
3
of this annual report, “Key Information – Risk factors.” We undertake no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events or otherwise. In light of these
risks, uncertainties and assumptions the forward-looking events discussed in
this annual report might not occur and our actual results could differ
materially from those anticipated in these forward-looking
statements.
Item
1. Identity of Directors, Senior
Management and Advisors.
Not
applicable.
Item
2. Offer Statistics and Expected
Timetable.
Not
applicable.
Item
3. Key
Information.
A. Selected
financial information and other data
The
following table shows selected consolidated financial information and other
data
for our business. You should read the following information in conjunction
with
Item 5 of this annual report, “Operating and Financial Review and Prospects.”
The statement of operations data and cash flow data for the years ended December
31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005
and
2006, are derived from our audited consolidated financial statements and related
notes thereto, which are included in this annual report beginning on page F-1.
These audited consolidated financial statements and the related notes thereto
have been prepared in accordance with accounting principles generally accepted
in the United States, or U.S. GAAP.
The
statement of operations data for 2002 and 2003, and the balance sheet data
as of
December 31, 2002 and 2003, are derived from our audited consolidated financial
statements which have not been included in this annual report.
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In
thousands, except per share, per ADS and
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For
the year ended December 31,
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|||||||||||||||||||||||
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operating
data and percentages
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2002
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2003
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2004
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2005
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2006
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2006(1)
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||||||||||||||||||
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Statement
of operations data
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||||||||||||||||||||||||
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Total
net revenues:
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||||||||||||||||||||||||
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Enterprise
software
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RMB 93,375
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RMB 113,791
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RMB
188,720
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RMB
203,488
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RMB
116,833
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US$
14,971
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||||||||||||||||||
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Software
development services
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14,400
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19,045
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12,723
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35,700
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36,017
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4,615
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||||||||||||||||||
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Computer
hardware sales
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258
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72
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104
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678
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398
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51
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||||||||||||||||||
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108,033
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132,908
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201,547
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239,866
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153,248
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19,637
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Cost
of revenues:
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Enterprise
software
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(1,115 | ) | (1,532 | ) | (1,528 | ) | (495 | ) |
-
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-
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||||||||||||||
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Software
development services
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(3,534 | ) | (4,939 | ) | (2,970 | ) | (18,192 | ) | (16,805 | ) | (2,153 | ) | ||||||||||||
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Computer
hardware sales
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(216 | ) | (48 | ) | (9 | ) | (482 | ) | (134 | ) | (17 | ) | ||||||||||||
| (4,865 | ) | (6,519 | ) | (4,507 | ) | (19,169 | ) | (16,939 | ) | (2,170 | ) | |||||||||||||
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Gross
profit
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103,168
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126,389
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197,040
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220,697
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136,309
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17,467
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Operating
expenses:
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Selling
expenses
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(13,604 | ) | (13,674 | ) | (15,977 | ) | (25,752 | ) | (13,604 | ) | (1,743 | ) | ||||||||||||
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General
and administrative expenses
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(12,195 | ) | (56,911 | ) | (36,572 | ) | (49,538 | ) | (65,928 | ) | (8,448 | ) | ||||||||||||
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Research
and development expenses
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(4,108 | ) | (2,691 | ) | (4,819 | ) | (11,249 | ) | (29,825 | ) | (3,822 | ) | ||||||||||||
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Total
operating expenses
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(29,907 | ) | (73,276 | ) | (57,368 | ) | (86,539 | ) |
(109,357
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) |
(14,013
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) | ||||||||||||
| Government subsidies | 458 | 211 | 1,340 | 447 | 705 | 90 | ||||||||||||||||||
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Income
from operations
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73,719
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53,324
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141,012
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134,605
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27,657
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3,544
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||||||||||||||||||
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Interest
income
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619
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1,220
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3,768
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17,625
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19,302
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2,473
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||||||||||||||||||
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Other
income
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458
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211
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1,340
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447
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705
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90
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In
thousands, except per share, per ADS and
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For
the years ended December 31,
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|||||||||||||||||||||||
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operating
data and percentages
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2002
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2003
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2004
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2005
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2006
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2006(1)
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Income
before provision for income taxes minority interests and equity in
earnings of an affilliate
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RMB 74,338
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RMB 54,544
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RMB
144,780
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RMB
152,230
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RMB
46,959
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US$
6,017
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||||||||||||||||||
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Provision
for income taxes
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(2,061 | ) | (4,116 | ) | (1,823 | ) | (626 | ) | (1,031 | ) | (132 | ) | ||||||||||||
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Income
before minority interest and equity in earnings of an
affiliate
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72,277
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50,428
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142,957
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151,604
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45,928
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5,885
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||||||||||||||||||
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Minority
interest
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(7,299 | ) | (9,239 | ) | (9,006 | ) |
—
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-
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-
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|||||||||||||||
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Equity
in earnings of an affiliate
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79
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—
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—
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—
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-
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-
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||||||||||||||||||
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Net
income
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65,057
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41,189
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133,951
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151,604
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45,928
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5,885
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||||||||||||||||||
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Net
income per share and ADS(2):
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||||||||||||||||||||||||
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Basic
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2.96
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1.82
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4.96
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4.39
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1.31
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0.17
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||||||||||||||||||
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Diluted
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2.96
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1.82
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4.74
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4.25
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1.29
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0.17
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||||||||||||||||||
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Cash
flow data:
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||||||||||||||||||||||||
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Net
cash provided by operating activities
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56,984
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87,244
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143,270
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146,372
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40,832 | 5,232 | ||||||||||||||||||
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Depreciation
and amortization
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1,126
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874
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2,120
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5,293
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9,137
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1,171
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||||||||||||||||||
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Net
cash provided by (used in) investing activities
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15,613
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(39,629
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) | (179,405 | ) | (110,851 | ) | (176,483 | ) | (22,614 | ) | |||||||||||||
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Net
cash provided by (used in) financing activities
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(30,531 | ) |
70,250
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565,597
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2,044
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6,328
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811
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|||||||||||||||||
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As
of December 31,
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||||||||||||||||||||||||
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2002
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2003
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2004
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2005
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2006
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2006(1)
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|||||||||||||||||||
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Balance
sheet data:
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||||||||||||||||||||||||
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Cash
and cash equivalents
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RMB 49,666
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RMB167,531
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RMB696,993
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RMB731,474
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RMB598,648
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US$76,709
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||||||||||||||||||
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Trade
receivables, net of allowance for doubtful debts, from:
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||||||||||||||||||||||||
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external
customers
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28,179
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31,096
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38,190
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17,459
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17,943
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2,299
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||||||||||||||||||
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related
parties
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9,000
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31,885
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30,940
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29,752
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3,963
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508
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||||||||||||||||||
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Term
deposits
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24,832
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65,664
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150,913
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207,000
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307,209
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39,365
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||||||||||||||||||
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Total
assets
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133,287
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323,975
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1,222,182
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1,345,773
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1,365,289
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174,945
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||||||||||||||||||
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Deferred
revenue
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44,420
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70,608
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97,230
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67,886
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26,383
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3,381
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||||||||||||||||||
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Total
liabilities
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56,581
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94,234
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131,130
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98,808
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60,309
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7,728
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||||||||||||||||||
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Mezzanine
equity
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—
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46,937
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—
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—
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-
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-
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||||||||||||||||||
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Total
shareholders’ equity
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68,671
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165,530
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1,090,452
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1,246,365
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1,304,980
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167,217
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||||||||||||||||||
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Number
of ordinary shares outstanding
|
—
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22,780,000
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34,391,834
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34,991,834
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34,991,834
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34,991,834
|
||||||||||||||||||
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For
the convenience of the reader, the RMB amounts are expressed in U.S.
dollars at the rate of RMB7.8041 to US$1.00, the noon buying rate
in
effect on December 29, 2006 as quoted by the Federal Reserve Bank
of New
York.
|
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(2)
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On
November 9, 2004, our shareholders approved a 4-for-1 share split.
All
shares and per share data have been restated to give retroactive
effect to
this share split. One ADS represents one ordinary
share.
|
Exchange
rate information
Our
business is primarily conducted in China and denominated in Renminbi. This
annual report contains translations of Renminbi amounts into U.S. dollars at
a
specific rate solely for the convenience of the reader. The conversion of
Renminbi into U.S. dollars in this annual report is based on the noon buying
rate in The City of New York for cable transfers of Renminbi as certified for
customs purposes by the Federal Reserve Bank of New York. Unless otherwise
noted, all translations from Renminbi to U.S. dollars and from U.S. dollars
to
Renminbi in this annual report were made at a rate of RMB7.8041 to US$1.00,
the
noon buying rate in effect as of December 29, 2006. We make no representation
that any Renminbi or U.S. dollar amounts could have been, or could be, converted
into U.S. dollars or Renminbi, as the case may be, at any particular rate,
the
rates stated below, or at all. In addition, such translations should not be
construed to be the amounts that would have been reported under U.S. GAAP.
The
PRC government imposes controls over its foreign currency reserves in part
through direct regulation of the conversion of Renminbi into foreign exchange
and through restrictions on foreign trade.
The
following table sets forth information concerning exchange rates between
Renminbi and U.S. dollars for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that
we
used in this annual report or will use in the preparation of our periodic
reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Bank of New York.
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Noon
Buying Rate
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||||
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Period
End
|
Average
(1)
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Low
|
High
|
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(RMB
per US$1.00)
|
||||
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2002
|
8.2800
|
8.2770
|
8.2800
|
8.2669
|
|
2003
|
8.2767
|
8.2771
|
8.2880
|
8.2765
|
|
2004
|
8.2765
|
8.2768
|
8.2774
|
8.2764
|
|
2005
|
8.0702
|
8.1940
|
8.0702
|
8.2765
|
|
2006
|
7.8041
|
7.9723
|
7.8041
|
8.0702
|
|
2007
|
||||
|
January
|
7.7714
|
7.7876
|
7.7705
|
7.8127
|
|
February
|
7.7410
|
7.7502
|
7.7410
|
7.7632
|
|
March
|
7.7232
|
7.7369
|
7.7232
|
7.7454
|
|
April
|
7.7090
|
7.7247
|
7.7090
|
7.7345
|
|
May
|
7.6516
|
7.6773
|
7.6463
|
7.7065
|
|
June
|
7.6120
|
7.6333
|
7.6120
|
7.6680
|
|
July(2)
|
7.5690
|
7.5908
|
7.5660
|
7.6055
|
|
(1)
|
Annual
and monthly averages are calculated using the average of the daily
rates
during the relevant period.
|
|
(2)
|
For
the period to and including July 12,
2007.
|
B. Capitalization
and indebtedness
Not
applicable.
C. Reasons
for the offer and use of proceeds
Not
applicable.
D. Risk
factors
Risks
related to our business
We
currently generate substantially all of our total net revenues from either
PRC
government agencies or in connection with PRC government agency filings, and
our
failure to maintain a continued working relationship with certain PRC government
agencies and, in particular, the PRC Inspections Administration, would result
in
the reduction or loss of substantially all of our total net
revenues.
Sales
of
our enterprise software and software development services that are either used
by the State Administration for Quality Supervision and Inspection and
Quarantine of the PRC, or PRC Inspections Administration, or by Beijing iTowNet
Cyber Technology Ltd., or iTowNet, the operator of the PRC Inspections
Administration’s data exchange platforms and electronic processing systems, have
accounted for substantially all of our total net revenues. We expect that,
in
the near future, we will continue to generate a substantial portion of our
total
net revenues through sales of enterprise software and software development
services that will be used in connection with PRC Inspections Administration
filings. Net revenues from sales of enterprise software for PRC
Inspections Administration filings accounted for 93.6%, 84.8% and
76.2% of our total net revenues in 2004, 2005 and 2006, respectively. Net
revenues from software development services provided, directly or indirectly,
to the PRC Inspections Administration and iTowNet accounted for 5.7%,
11.7% and 10.7% of our total net revenues in 2004, 2005 and 2006,
respectively.
We
cannot
assure you that we will be able to maintain our working relationship with the
PRC Inspections Administration or other PRC government agencies in connection
with new enterprise software or in relation to the continued use of our existing
enterprise software. If the PRC Inspections Administration ceases to cooperate
with us in researching and developing new enterprise software; ceases to use
the
electronic
infrastructure that we helped develop and build; reduces its spending on, or
commitment to, or ceases or slows down the implementation of, the digitization
of its processes for data collection and administration; encourages our
competitors or alternate means of data collection; or requires us to lower
the
prices of our products and services; then our market position, revenues and
profitability would be materially and adversely affected. Furthermore, such
a
change in our relationship with the PRC Inspections Administration could result
in the loss of what we perceive to be our first mover advantage in developing
software products compatible with the systems implemented by the PRC Inspections
Administration. The loss of such an advantage would result in slower growth
and/or reduced sales, which would require us to increase our research and
development and sales and marketing expenditures.
Our
revenues would be adversely affected if the PRC Inspections Administration,
or
any other government agency to which our products relate, develops, endorses
or
adopts an alternative to our enterprise software.
Our
business would be adversely affected if the PRC Inspections Administration,
its
affiliated company iTowNet or any other government agency or affiliate to which
our products relate decides to develop its software and platform internally,
endorses software provided by others or permits filings to be made online
without independently produced software. In such case, we would not only face
enhanced competition, but our software products and services relating to the
PRC
Inspections Administration, iTowNet or any such government agency or affiliate
could become obsolete, which would result in the reduction or loss of
substantially all of our revenues.
In
August
2005, the PRC Inspections Administration selected our company as the winning
bidder in connection with the PRC Inspections Administration’s request for
proposals for the development of a software product that has certain basic
functionalities similar to those of iDeclare.CIQ and
iProcess.CIQ. The PRC Inspections Administration agreed to pay a
one-time fee of RMB3.3 million (US$423,000) to purchase the ownership of the
software product that we developed. In February 2006, the PRC
Inspections Administration commenced the distribution of the software products
that our company developed, free-of-charge to end-users. As certain
basic functionalities of the newly developed software products are similar
to
those of iDeclare.CIQ and iProcess.CIQ, the provision of such software products
free-of-charge by the PRC Inspections Administration will likely have a material
adverse effect on our results of operations in the short-term and on our future
profitability. For example, we sold, together with our franchisees,
approximately 1,500 and 2,200 software packages of iDeclare.CIQ during the
first
quarter of 2006 and 2007, respectively, which is significantly lower than the
approximately 8,000 software packages of iDeclare.CIQ sold by our company and
our former distributors and franchisees during the first quarter of
2005. In May 2007, the PRC Inspections Administration selected our
company as one of the winning bidders in connection with the PRC Inspections
Administration’s request for proposals for servicing the free import/export
e-filing software provided by the PRC Inspections Administration.
We
are in the process of diversifying our business focus to include other
businesses in addition to the sales of our enterprise software and the provision
of software development services. Our new potential business ventures
and limited operating history in such potential business ventures may make
it
difficult for you to evaluate our business, and our limited resources may affect
our ability to manage the growth we expect to
achieve.
We
generated substantially all of our total net revenues from the sales of our
enterprise software and the provision of software development services in
2006. Currently, we are in the process of expanding our business
focus from the development of software products and the provision of software
development services to other potential business ventures. We
anticipate that a material portion of our net revenue in
the
future will be derived from businesses that are not directly related to sales
of
our enterprise software or the provision of software development
services.
We
are
still in the process of evaluating and market-testing potential business
ventures, including potential investments in the business-to-business, or
B2B, industry in China. Accordingly, we have no operating history in
respect to such potential business ventures upon which you can evaluate our
business and prospects in such area. Furthermore, as part of our operation
expansion, we need to continue to develop and improve our staff training,
financial and management controls and our reporting systems and procedures.
We
cannot assure you that we will be able to efficiently or effectively manage
or
grow our operations, and any failure to do so may limit our future growth and
materially adversely our business, financial condition and results of
operations.
Our
significant shareholders, related parties and management personnel have
potential conflicts of interest with us, which may result in their taking
corporate actions which you may not believe to be in your best interests or
in
the best interests of our company.
As
of May
31, 2007, Shuang Wang, our Chief Executive Officer and a director of our
company, or Mr. Wang, and Min Dong, our Senior Vice President of Legal Affairs,
Administration and Human Resources and the spouse of Mr. Wang, or Ms. Dong,
beneficially own 17.99% of our ordinary shares. Mr. Wang and Ms. Dong will
have
substantial influence over the management and policies of our company and the
outcome of most corporate actions. In addition, Mr. Yong Ping Duan, or Mr.
Duan,
and Technology Pioneer Corp., or Technology Pioneer, beneficially own 13.26%
and
8.77% of our American Depositary Shares, or ADSs, respectively. Mr.
Duan will have substantial influence over the outcome of most corporate
actions. As a result, Mr. Wang, Ms. Dong and Mr. Duan have the power
to take corporate actions which other shareholders may not believe are in their
best interests or in the best interests of our company. There can be no
assurance that Mr. Wang, Ms. Dong and Mr. Duan will not cause our company to
take such corporate actions.
Mr.
Wang
and Ms. Dong beneficially own 100.0% of Ninetowns Import & Export e-Commerce
Co., Ltd., or Import & Export, which in turn owns a 49.0% equity interest in
iTowNet. iTowNet is 51.0% owned by the PRC Inspections Administration and is
the
ultimate user of a substantial portion of all the software development services
we provide and operates the data exchange platforms that interface between
international trade enterprises using our enterprise software and the PRC
Inspections Administration’s internal electronic processing systems. iTowNet
receives a fee of RMB5 from the end-users for each submission made over its
data
exchange platforms. Mr. Wang is a non-executive director and the vice-chairman
of the board of directors of iTowNet. Due to their ownership interest in iTowNet
and Mr. Wang’s position as a director of iTowNet, the interests of Mr. Wang and
Ms. Dong may also differ from those of our other shareholders.
Mr.
Xiaoguang Ren, who is our President, or Mr. Ren, is also a non-executive
director of iTowNet. Mr. Bolin Wu, who is our General Manager, Research and
Development and Chief Technology Officer, or Mr. Wu, is the sole supervisor
of
iTowNet. As the supervisor of iTowNet, Mr. Wu is responsible for overseeing
the
financial operations of iTowNet, the actions of its board of directors and
senior management and their compliance with relevant laws and iTowNet’s charter
documents.
We
derived RMB22.9 million, RMB17.3 million and nil, or 11.4%, 7.2% and nil of
our
total net revenues in 2004, 2005 and 2006, respectively, from iTowNet, which
is
our related party and a major customer for our software development
services.
In
addition, we derived RMB24.2 million and RMB16.4 million (US$2.1 million),
or
10.1% and 10.7%, of our total net revenues in 2005 and 2006, respectively,
from
eGrid Technology Ltd., or eGrid, (formerly
known
as
Beijing Regard Technology Co., Ltd., or Beijing Regard), which is our related
party and another major customer for our software development services. We
did
not derive any of our total net revenues in 2004 from eGrid. We derived RMB25.2
million, RMB47.5 million and RMB21.2 million (US$2.7 million), or 13.4%, 19.8%
and 13.9% of our total net revenues in 2004, 2005 and 2006, respectively, from
Shenzhen Ninetowns Enke Software Technology Co., Ltd., or Ninetowns Enke, which
is our related party and also one of our franchisees.
We
cannot
assure you that our transactions with iTowNet, eGrid and Ninetowns Enke would
have occurred on their current terms, or at all, had these relationships not
existed; nor can there be any assurance as to the effect these relationships
will have on our future business dealings with iTowNet, eGrid and Ninetowns
Enke. See Item 7 of this annual report, “Major Shareholders and Related Party
Transactions — Related party transactions.”
Since
a significant part of the growth of our total net revenues in 2004, 2005 and
2006 was generated from software development services, a decline in demand
for
those services or a change in our relationship with the primary purchasers
of
those services may result in a significant reduction in our total net revenues
and our net revenues from the provision of software development
services.
We
have
provided software development services to iTowNet since April 2002. In addition,
we provide software development services either directly, or indirectly as
a
sub-contractor for eGrid, to iTowNet. See Item 7 of this annual report, “Major
Shareholders and Related Party Transactions — Related party transactions — eGrid
Technology Ltd.”. Net revenues from the provision of software development
services, either directly to iTowNet or indirectly to iTowNet through eGrid,
accounted for approximately 4.8%, 11.7% and 8.4% of our total net revenues,
and
75.4%, 78.7% and 35.9% of our net revenues from the provision of software
development services, in 2004, 2005 and 2006, respectively. We intend to
continue to offer these services to iTowNet and eGrid, but if we are unable
to
obtain additional software development contracts from iTowNet or from eGrid,
we
may cease to provide software development services or experience a significant
reduction in our total net revenues and our net revenues from the provision
of
software development services.
A
significant portion of our total net revenues are generated by our major
customers, and the loss of all or part of our net revenues from any of these
customers would result in a decline in our total net revenues and a significant
increase in our sales and marketing expenditures.
As
of May
31, 2007, we have franchise agreements with our four franchisees including
(i)
Beijing Ninetowns Zhi Fang Software Technology Co., Ltd., or Ninetowns Zhi
Fang,
(ii) Beijing Ninetowns Xin He Software Technology Co., Ltd., or Ninetowns Xin
He, (iii) Guangzhou Ninetowns Wang Li Software Co., Ltd., or Ninetowns Wang
Li,
and (iv) Ninetowns Enke, who as a result of their purchases of enterprise
software for distribution to end-users, are also four of our largest customers.
We currently do not have any distributor. Our net revenues from sales
of our enterprise software from Ninetowns Zhi Fang were RMB3.3
million and RMB10.0 million (US$1.3 million), which represented 6.5% of our
total net revenues for 2006. Our net revenues from sales of our
enterprise software from Ninetowns Xin He were RMB9.2 million (US$1.2 million),
which represented 6.0% of our total net revenues for 2006. Our net
revenues from sales of our enterprise software from Ninetowns Wang Li were
RMB0.5 million (US$61,000), which represented 0.3% of our total net revenues
for
2006. Our net revenues from sales of our enterprise software from Ninetowns
Enke
were RMB25.2million, RMB47.5 million and RMB21.2 million (US$2.7 million) or
13.4%, 19.8% and 13.9% of our total net revenues in 2004, 2005 and 2006,
respectively.
To
our
knowledge, none of our franchisees are PRC government agencies.
eGrid
and
iTowNet have been our two largest customers for software development services.
Our net revenues from the provision of software development and other services
to eGrid were RMB24.2 million and RMB16.4 million (US$2.1 million) or 10.0%
and
10.7% of our total net revenues in 2005 and 2006, respectively. We did not
recognize any net revenues from the provision of software development and other
services to eGrid in 2004. Our net revenues from the provision of software
development services to iTowNet were RMB9.6 million, RMB4.1million and nil,
or
4.8%, 1.7% and nil of our total net revenues, in 2004, 2005 and 2006,
respectively. To our knowledge, iTowNet and eGrid are not PRC government
agencies, but iTowNet is 51.0% owned by the PRC Inspections
Administration.
In
the
event one or more of our customers discussed above discontinues their businesses
or their dealings with us, and we are unable to find an adequate replacement
for
such customer in a timely manner, we would suffer a decline in total net
revenues and in turn would need to significantly increase our sales and
marketing expenditures.
Our
trade receivables, which include trade receivables from related parties, are
significant and if customers fail to pay amounts owed, our profitability and
financial position could decline.
As
of
December 31, 2006, our trade receivables amounted to approximately RMB21.9
million (US$2.8 million), of which our trade receivables from related parties
amounted to RMB4.0 million (US$0.5 million). Our trade receivables as of
December 31, 2006 represented approximately 2.2% of our total current assets
and
our trade receivables from related parties represented approximately 0.4% of
our
total current assets. As of December 31, 2006, we had an allowance for doubtful
debts of approximately RMB1.1 million (US$0.1 million). If any of our
franchisees or any of our other customers fails to pay, or delays payment on,
all or part of these trade receivables, we would be required to make additional
allowances for doubtful debts and our profitability and financial position
could
decline.
Our
existing major shareholders have substantial control over us and could delay
or
prevent a change in corporate control, which could in turn reduce the market
price of your ADSs.
Our
executive officers, directors and shareholders with 5.0% or more shareholding
of
our company and their affiliates beneficially own approximately 46.35% of our
outstanding ordinary shares. Such concentration of ownership might have the
effect of delaying or preventing a change in control of our company which could
in turn reduce the market price of our ADSs and the voting and other rights
of
our other shareholders.
Our
failure to market our customer maintenance services to our existing users could
impair our planned revenue growth.
We
offer
one year of customer maintenance services with our iDeclare.CIQ basic package,
and charge a fee of RMB1,500 per licensee for customer maintenance services
each
year thereafter. However, until September 2003, we did not emphasize the
marketing of customer maintenance services because we were focused on building
our relationships with our users and we believed that not all of our users
and
potential users were accustomed to being charged for this type of service.
In
2006, we offered customer maintenance service contracts to approximately 29,000
users, so that approximately 23.8% of the total number of users due for a
maintenance contract renewal in 2006 paid for the renewal. In 2006,
we recognized approximately RMB41.5 million (US$5.3 million) from provision
of
customer maintenance services.
Our
success in marketing customer maintenance services to our users depends in
part
on whether users require software updates. Software updates can implement
modifications to forms, programs and information systems necessary to address
changes imposed by the PRC Inspections Administration.
Therefore,
the desirability and usefulness of our customer maintenance services is
dependent in part on changes occurring in government policies. If we fail to
market our customer maintenance services to, or to collect customer maintenance
service fees from, our users in the future, our planned revenue growth could
be
impaired.
We
currently depend on our iDeclare.CIQ product for a substantial majority of
our
total net revenues and our failure to develop or license additional enterprise
software or a decline in demand for iDeclare.CIQ could materially reduce our
total net revenues.
Sales
of
iDeclare.CIQ accounted for approximately 87.1%, 79.3% and 70.4% of our total
net
revenues in 2004, 2005 and 2006, respectively. Any decrease in the demand for
or
price of iDeclare.CIQ, any increase in competition to iDeclare.CIQ, including
but not limited to as a result of the PRC Inspections Administration’s and
iTowNet’s endorsement of a comparable product, any failure by our company to
develop additional enterprise software, any significant shift in our marketing
efforts, any lasting or prolonged interruption that prevents our enterprise
software from delivering data to government entities due to system failures
or
other factors, or any other adverse development specific to iDeclare.CIQ, could
materially reduce our total net revenues. In February 2006, the PRC Inspections
Administration commenced to promote and distribute a software product, which
has
certain basic functionalities similar to our iDeclare.CIQ, free-of charge to
end-users. As a result of competition from such free software, our
sales of iDeclare.CIQ have declined and will likely continue to decline. For
example, we sold, together with our franchisees, approximately 1,500 and 2,200
software packages of iDeclare.CIQ during the first quarter of 2006 and 2007,
respectively, which is significantly lower than the approximately 8,000 software
packages of iDeclare.CIQ sold by our company and our former distributors and
franchisees during the first quarter of 2005. In the event such decline
continues, we expect to experience a significant decline in our total net
revenues.
Competition
could reduce our profit margins and revenues.
Companies
that have expertise in marketing and providing government-related software
products and services may begin to compete with us. There are companies that
provide software products and services similar to ours in many other countries.
In addition, there are companies in China that provide such products and
services to PRC government agencies other than the PRC Inspections
Administration. In particular, there are regional software providers in China
implementing systems for provincial branches of government agencies such as
the
Customs General Administration of the PRC, or PRC Customs. Furthermore, we
are
aware of one other software provider in China, Fujian Ronji Software Development
Co., Ltd., or Ronji, that provides enterprise software for PRC Inspections
Administration-related filings. We are also aware of several software developers
that provide software development services to our customers, in particular
to
iTowNet. See Item 4 of this annual report, “Information on the Company —
Business overview — Competition.” There can be no assurance that other companies
will not allocate resources to pursue opportunities relating to the needs of
international trade enterprises making government filings in China.
Our
potential competitors may have greater marketing, programming, research and
development, capital and other resources than we do. These resources could
enable our potential competitors to take aggressive action to gain market share.
Additionally, we may face competition from the free software distributed by
the
PRC Inspections Administration and from companies with established reputations
and political relationships with PRC government agencies. If we do not compete
effectively or if we experience any pricing pressure from our potential
competitors, we may experience loss of market share and reduced profit margins
and revenues.
Future
acquisitions and investments could divert our management’s attention, which may
have an adverse effect on our ability to manage our business and expose us
to
potential risks.
Selective
acquisitions and investments in new businesses form part of our strategy to
further expand our business. In 2006 and 2007, we made investments in a leading
Chinese B2B trade facilitator and a leading Chinese B2B vertical search engine
operator, respectively. In May 2007, we launched our new B2B vertical
search platform, tootoo.com. We plan to utilize these investments in
combination with our existing software expertise to further increase our service
profile. If we are presented with additional opportunities, we may acquire
additional complementary companies, products or technologies, or invest in
new
businesses. Future acquisitions and investments and the subsequent integration
of new companies, assets or business ventures would require significant time
and
attention from our management. The diversion of our management’s attention to
integrate such acquisitions or investments and any difficulties encountered
in
any integration process could have a material adverse effect on our ability
to
manage our business and expose us to potential risks, including risks associated
with the integration of new operations, technologies and personnel, unforeseen
or hidden liabilities, the diversion of resources from our existing businesses
and technologies, the inability to generate sufficient revenues to offset the
costs and expenses of acquisitions and investments, and potential loss of,
or
harm to, our relationships with employees, customers and suppliers.
Our
business depends substantially on the continuing efforts of our executive
officers, and our business may be severely disrupted if we lose their
services.
Our
success depends substantially on the expertise and experience of our executive
officers, who have extensive skills in and knowledge about the international
trade industry and the software industry in China. They also have established
relationships with our major customers, our suppliers, government regulators
and
our shareholders. We do not maintain key-man life insurance for any of our
executive officers. The loss of services of any or all of our executive officers
in the absence of suitable replacements could have a material adverse effect
on
our operations and future profitability.
In
addition, if any of our executive officers joins a competitor or forms a
competing company, we may lose customers, suppliers, research and development
expertise and employees and our relationship with the PRC Inspections
Administration could be materially and adversely affected. Although all of
our
executive officers have entered into service agreements with us which contain
confidentiality and non-competition provisions, it may be difficult to enforce
such provisions in China in light of uncertainties relating to China’s legal
system. See “— Risks related to doing business in China — The uncertain legal
environment in China could limit the legal protections available to you and
could adversely affect our ability to provide our products and services in
China.”
Our
inability to attract and retain experienced personnel may adversely affect
our
ability to create enterprise software for international trade enterprises or
provide software development services to PRC government
agencies.
Our
success depends on our ability to attract, retain, train and motivate highly
skilled employees, including experienced software engineers, technical personnel
and sales and marketing personnel, all of whom are in great demand in China.
In
particular, we depend on software engineers who have expertise and experience
in
creating enterprise software for international trade enterprises as well as
providing software development services to PRC government agencies. We may
not
be able to attract or retain the key personnel that we will need to achieve
our
business objectives. In addition, as we are still a relatively young company
and
our business has grown rapidly since our establishment, at times our ability
to
train and integrate new employees into our operations may not meet the growing
demands of our business. As the PRC economy continues to develop, demand for
personnel with the skills we require to create and
distribute
our enterprise software will increase, which could raise our costs or make
it
impracticable for us to hire skilled or experienced personnel. Certain of our
senior software engineers, technical officers or staff members are not bound
by
non-competition agreements and those who are not bound could decide to resign
or
work for our competitors at any time without any contractual restriction. The
departure of any of these personnel could have a material adverse effect on
our
ability to create enterprise software for international trade enterprises or
provide software development services to PRC government agencies.
If
we
grant employee share options and other share-based compensation in the future,
our net income could be materially and adversely affected.
We
adopted the 2003 Plan in November 2003, and the Amended and Restated 2004 Plan
and the 2006 Share Incentive Plan in October 2005, or collectively, the
Plans. As of December 31, 2006, we had granted options under the
Plans with the right to purchase a total of 3,464,000 ordinary shares, of which
165,809 unexercised options had been returned to the pool of our ungranted
options as a result of resignation from employment by a few former
employees.
Until
December 31, 2005 we accounted for options granted to our directors and
employees in accordance with Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees,” or APB 25, and its related
interpretations, which require us to recognize compensation expenses for share
options we grant where the exercise price is less than the deemed fair value
of
our ordinary shares on the date of the grant. However, the Financial Accounting
Standards Board, or FASB, has issued Statement No. 123 (Revised 2004),
“Share-Based Payments,” or SFAS 123R, which requires all companies to recognize,
as an expense, the fair value of share options and other share-based
compensation to employees at the beginning of the first annual or interim period
after June 15, 2005. As a result, beginning on January 1, 2006, we account
for
compensation costs for certain share options using a fair-value based method
and
recognize expenses in our consolidated statement of operations in accordance
with the relevant rules under U.S. GAAP, which may have a material and adverse
effect on our reported earnings. Moreover, the additional expenses associated
with share-based compensation may reduce the attractiveness of such incentive
plan to us. However, if we reduce the scope of the Plans, we may not be able
to
attract and retain key personnel, as share options are an important employee
recruitment and retention tool. If we grant employee share options or other
share-based compensation in the future, our net income could be adversely
affected.
Without
PRC government action, we may not be able to introduce or enhance our enterprise
software products, which may restrict our ability to expand our business and
revenues.
Our
ability to offer enterprise software to international trade enterprises depends
on the ability of various PRC government agencies to accept electronic filings
from users of our enterprise software. This includes some PRC government
agencies permitting electronic filings for the first time and other PRC
government agencies which already permit some electronic filings allowing
additional types of filings to be made. Factors such as a government agency’s
budget, timing, decision-making process, ability to implement our enterprise
software, willingness of local offices to implement our enterprise software
and
other factors beyond our control could constrain our ability to expand our
business or increase our revenues.
Our
failure to adequately manage our growth and expansion could result in a
deterioration in our results of operations and financial
condition.
Our
historical growth has placed, and such growth and any further growth is likely
to continue to place, a significant strain on our managerial, operational,
financial and other resources. Our future success will depend, in part, upon
the
ability of our senior management to manage our growth effectively. Such
effective management will require us to implement additional management
information systems, to
develop
further our operating, administrative, financial and accounting systems and
controls and to maintain close coordination among our software design, software
coding, accounting, finance, marketing, sales and operations organizations.
Any
failure to implement or improve systems or controls to manage our growth and
expansion effectively could result in a deterioration in our results of
operations and financial condition.
We
often commence work on software development projects based on verbal agreements
and if our customers do not pay us for these services our working capital
requirements and expenses may increase without a corresponding increase in
net
revenues, which would adversely affect our
profitability.
As
we
believe is consistent with the practice of other software development companies
in China engaged in government-related work, we often commence software
development projects based on oral commitments from our customers. We may accrue
substantial trade receivables in connection with such projects, because we
seldom receive pre-payment or progress payments during the project. As a result,
we may need to substantially increase our expenses without assurance that we
will be paid for our software development services. Furthermore, we may not
recognize any revenue from software development projects in any given period
because we recognize revenue from such services only when a contract has been
signed. If our customers do not pay us, or delay paying us, for our
software development services, our working capital requirements and expenses
may
increase without a corresponding increase in net revenues, which would adversely
affect our profitability.
It
may be difficult for us to maintain our market position and brand recognition
in
a rapidly developing market or in the face of competition, which could severely
hamper our ability to operate profitably.
We
believe that market position and brand recognition are critical to attracting
potential customers in the PRC market. In particular, we believe that our sales
through indirect channels such as our four franchisees rely significantly on
our
reputation and brand recognition. However, there is no assurance that we can
retain our reputation or capitalize on our current leading market share,
reputation or brand recognition as our market develops and attracts new
competitors. Our failure to promote and enhance our brand name could result
in
reduced sales or slower growth, each of which may require us to increase
spending on marketing or to increase fees to our franchisees, which could reduce
our profitability.
Programming
errors or flaws in our enterprise software or other product defects could
decrease market acceptance of our software, which would reduce our revenues
and
profitability.
Software
as complex as our enterprise software frequently contains undetected defects
that may be identified at any point in the software’s life. There can be no
assurance that, despite repeated testing, defects will not occur in existing
or
new software. Such defects could result in loss of or delay in receiving
revenues, loss of market share, failure to achieve market acceptance, diversion
of development resources, injury to our reputation or increased service and
warranty costs. Any of the above consequences could adversely impact our
business, results of operations and financial condition. Furthermore, our
software development services typically involve working with sophisticated
software, computing and networking systems. Our failure or inability to meet
customer expectations or project milestones in a timely manner could also result
in loss of revenues or delay in revenue recognition, loss of market share,
failure to achieve market acceptance, injury to reputation and increased costs.
Because our customers rely on our products and services for critical trade
transactions, any significant defects or errors in our products or services
might discourage our customers or potential customers from utilizing our
products and services or result in tort or warranty claims. We do not maintain
any insurance against
product
liability or legal claims. Any imposition of liability on us may adversely
affect our business and increase our costs, resulting in reduced revenues and
profitability.
We
may not be able to adequately protect our intellectual property rights and
others may claim that we have infringed on their intellectual property rights,
which could cause us to be less competitive, may expose us to litigation and
may
negatively impact our business, results of operations and financial
condition.
We
rely
on a combination of copyrights, trademarks and other methods to protect our
intellectual property rights. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
our
technology. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property. We cannot
be certain that the steps we have taken will prevent misappropriations of our
technology. From time to time, we may have to resort to litigation or other
measures to try to enforce our intellectual property rights, which could result
in substantial costs and diversion of our resources. We may be unable to enforce
our intellectual property rights even through litigation or other measures,
particularly in China. See “— Risks related to doing business in China — The
uncertain legal environment in China could limit the legal protections available
to you and could adversely affect our ability to provide our products and
services in China.” In particular, we are aware of an online video game company
in China whose name is substantially similar to our name in Chinese. Although
we
have registered our trademarks in China, we cannot assure you that such company
will not take actions against us for trademark infringement. We are in the
process of registering our trademark outside of China.
There
can
be no assurance that infringement or other claims will not be asserted or
prosecuted against us in the future or that any past or future assertions or
prosecutions will not materially and adversely affect our business, results
of
operations and financial condition. Any such claims, with or without merit,
could be time-consuming, result in costly litigation and diversion of technical
and management personnel or require us to develop non-infringing technology
or
enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to us, or
at
all. In the event of a successful claim of infringement against us, our revenues
may decrease and our expenses to obtain or develop non-infringing technology
or
to license the infringed or similar technology may increase. In addition, our
failure or inability to develop non-infringing technology or license the
infringed or similar technology on a timely basis may cause our business,
results of operations and financial condition to be negatively affected. See
Item 4 of this annual report, “Information on the Company — Business overview —
Intellectual property rights.”
We
sold some of our enterprise software before they were registered for sale with
the Ministry of Information Industry of the PRC, which could expose us to
penalties.
We
sold
our iDeclare.CIQ basic package before it was registered for sale with the
Ministry of Information Industry of the PRC, a registration which is required
of
all PRC software products. We obtained the registration certificate for
iDeclare.CIQ in September 2001, 14 months after sales commenced in July 2000
and
recorded net revenues from sales of enterprise software of approximately RMB12.6
million in the period prior to issuance of the registration certificate. Our
PRC
counsel has advised us that the PRC regulations requiring the registration
of
software prior to its public sale do not set out any specific penalties for
the
sales of unregistered software products, except that PRC regulators may issue
warnings and public censures. Although we were not aware of any warning or
public censure related to our pre-registration sales issued by any government
entity as of the date of this annual report, our business may be adversely
affected if penalties are subsequently imposed by the Ministry of Information
Industry of the PRC.
Any
reduction of our preferential tax treatment as a PRC high technology enterprise
could materially reduce our net income.
All
of
our principal PRC operating subsidiaries enjoy or are entitled to enjoy
preferential tax treatment in the form of reduced tax rates or tax holidays
provided by the PRC government or its local agencies or bureaus. Beijing New
Take Electronic Commerce Limited, or Beijing New Take; Beijing Ninetowns Times
Electronic Commerce Limited, or Ninetowns Times; Ninetowns Digital Technology
Limited, or Beijing Digital currently benefit from a 15.0% preferential
enterprise income tax, or EIT, rate. Beijing Ninetowns Ports Software and
Technology Co., Ltd., or Ninetowns Ports, currently benefit from a 7.5%
preferential EIT rate. Shanghai New Take Digital Technology Co., Ltd., or
Shanghai New Take, currently benefit from a 16.5% preferential EIT rate. Beijing
Ninetowns Network and Software Co., Ltd., or Ninetowns Network, and Guangdong
Ninetowns Technology Co., Ltd., or Guangdong Ninetowns Technology, are currently
entitled to an exemption from EIT. As a result of these preferential
tax treatments and the recognition of deferred tax assets for deductible
temporary differences, our effective income tax rate for 2006 was 2.2%. In
addition, we also receive from the PRC government a 14.0% value added tax,
or
VAT, refund on sales of certain registered software. We cannot assure you that
we will continue to enjoy this preferential tax treatment in the future, either
due to a change in the PRC government’s tax policies or because a subsidiary
fails to satisfy the financial and operational criteria necessary to maintain
its eligibility for such preferential tax treatment. Any reduction in our
preferential tax treatment could materially reduce our net income.
On
March
16, 2007, the 2008 PRC Enterprise Income Tax Law was enacted. Under
the new law, effective on January 1, 2008, the PRC government will adopt an
uniform tax rate of 25.0% for all enterprises (including foreign-invested
enterprises) and revoke the current tax exemption, reduction and preferential
treatments applicable to foreign-invested enterprises. However, the
preferential tax rate of 15.0% for “high and new technology enterprises” was
strongly supported by the State and current preferential tax treatments for
foreign-invested enterprises are expected to be grandfathered for a period
of
five years following the effective date of the new law. We believe
that our PRC operating subsidiaries will continue to qualify as high and new
technology enterprises entitled to the 15% preferential rate, and therefore
we
will not be adversely affected by the new law. However, we cannot
assure you that we will continue to enjoy this preferential tax treatment in
the
future, either due to a change in the PRC government’s tax policies or because a
subsidiary fails to satisfy the financial and operational criteria necessary
to
maintain its eligibility for such preferential tax treatment. Any
reduction in our preferential tax treatment could materially reduce our net
income. Additionally, because the PRC State Council has not
promulgated detailed rules for the 2008 PRC Tax law, our subsidiaries and
operating companies may not qualify as “high and new technology enterprises” and
thus may not be entitled to a preferential enterprise income tax rate of 15.0%.
Instead, our subsidiaries and operating companies may be subject to the standard
rate of 25.0% after the current preferential tax treatment they enjoy
expires. We will seek to apply for “high and new technology
enterprise” status for our subsidiaries and operating companies once the
detailed rules are made available to us. In addition, under the 2008
PRC Enterprise Income Tax Law, enterprises established under the laws of foreign
countries or regions whose “de facto management bodies” are located within the
PRC are considered resident enterprises and will generally be subject to the
enterprise income tax at the rate of 25.0% on its global
income. However, the 2008 PRC Enterprise Income Tax Law does not
define the term “de facto management bodies.” Substantially all of
our management is currently located in the PRC and if they remain located in
the
PRC after the effective date of the PRC Enterprise Income Tax Law, we may be
considered to be a resident enterprise and therefore may be subject to the
enterprise income tax at the rate of 25.0% on our global income in the
PRC.
It
is likely that we would be considered a passive foreign investment company
for
2006, which could lead to additional taxes for U.S. holders of
ADSs.
Special
U.S. federal income tax rules apply to U.S. holders of shares of a non-U.S.
corporation that is classified as a passive foreign investment company, or
PFIC,
for U.S. federal income tax purposes. The determination of our PFIC status
principally depends upon the composition of our assets, including goodwill,
and
the amount and nature of our income, from time to time. The amount of goodwill
will depend in part on the market value of our ADSs or ordinary shares, which
may be especially volatile in a technology-related enterprise. We have limited
control over these variables. Accordingly, there can be no assurance that we
would not be considered a PFIC for any taxable year.
It
is
likely that we would be classified as a PFIC for 2006. As a result,
U.S. holders of shares may be subject to United States federal income tax
consequences that are less favorable than those that would apply if we were
not
a PFIC.
For
example, gain from the sale of our shares may be ineligible for preferential
capital gains rates and may be subject to an interest charge. Please
see Item 5 of this annual report, “Additional Information – Taxation – United
States federal income taxation.”
Risks
related to our industry
Our
industry is subject to rapid changes in technology and our failure to develop
and introduce new enterprise software could reduce our market competitiveness
and ability to generate revenues.
Our
industry is characterized by rapid technological changes and evolving customer,
industry and government standards. Our future success will depend, to a large
extent, on our ability to keep pace with technological advances in a timely
and
cost-effective manner by improving our existing enterprise software or
developing new enterprise software that addresses changing customer
requirements. Our development of new enterprise software or the enhancement
of
our existing enterprise software will entail substantial investments in research
and development, which we expect to fund with our cash flow from operations
and
our available cash. Nevertheless, there can be no assurance that our research
and development efforts will result in the successful introduction of new
enterprise software or the enhancement of our existing enterprise software,
nor
that any of such new or enhanced enterprise software will be accepted by the
market. The emerging nature of our market and its rapid evolution will require
us to continually improve the performance, features and reliability of our
enterprise software particularly in response to changing market standards,
and
require us to introduce enterprise software or make enhancements to existing
enterprise software as quickly as possible and prior to our competitors. The
success of our new enterprise software is dependent on several factors,
including differentiation of our enterprise software from products of our
competitors and market acceptance. There can be no assurance that we will be
successful in developing and marketing new enterprise software that responds
to
competitive and technological developments and changing customer
needs.
Our
failure to develop and introduce new enterprise software successfully on a
timely basis or to achieve market acceptance could reduce our market
competitiveness and ability to generate net revenues. In addition, the
widespread adoption of new Internet, networking or telecommunication
technologies or standards or other technological changes could require
substantial expenditures by us to modify or adapt our products and services.
To
the extent that a method other than submission by Internet is adopted to enable
trusted and secure communications with the PRC Inspections Administration and
other trade-related PRC government agencies, sales of our existing and planned
enterprise software products will be adversely affected and our enterprise
software could be rendered unmarketable or obsolete. Such
consequences
would have a negative impact on our business, results of operations and
financial condition.
Government
policies, standards, rules and regulations may force us to implement changes
to
our existing enterprise software or change how we provide products and services
to our customers, which could increase our expenses and decrease our
profitability.
The
software industry is a new and rapidly evolving industry in China and the
regulatory environment has been and continues to be subject to uncertainty.
Although the PRC government adopted policies to encourage the development of
the
PRC electronic government, or e-government, industry through the “Three
Digitizations Project,” there can be no assurance that policies and the
government’s standards, rules and regulations relating to the e-government
software industry, such as the Regulations for the Protection of Computer
Software, will not be implemented, interpreted or revised in a manner that
may
force us to implement changes to our existing enterprise software or change
how
we provide products and services to our customers, which could increase our
expenses and decrease our profitability. See Item 4 of this annual report,
“Information on the Company — Business overview — Regulation” for a discussion
of the laws and regulations that apply to our company. We cannot accurately
predict the circumstances that would cause the PRC government to implement,
interpret or revise its policies in such a manner. Nevertheless, the PRC
government could adopt measures to more closely regulate the use of the Internet
or the software industry in China in order to enhance the government’s control
over the Internet or over the content of software being distributed in
China.
For
example, we may be subject to potential liability for selling software that
is
subsequently deemed to be illegal by the relevant PRC regulatory authorities
for
having non-approved technology. These potential liabilities may include fines,
product confiscation and criminal sanctions. We cannot assure you that our
business, financial condition and results of operations will not be negatively
affected by the application of these regulations.
Furthermore,
China and the United States may afford different patent protection to software
programs. For example, there are jurisdictional variations in the enforcement
of
patent rights in China because most patent infringement disputes are resolved
by
courts at the municipal or provincial level or by local administrative
authorities for patent affairs, which may be subject to varying local economic
and political influences in rendering their decisions. By contrast, all patent
disputes in the United States are reviewable by a single federal circuit court,
which generally provides greater uniformity to the adjudication of patent
disputes. We cannot predict whether the PRC authorities would centralize the
enforcement or adjudication of patent rights in the future or how such
centralized enforcement or adjudication would affect our rights. If the PRC
authorities further de-centralize the regulation of the software industry,
or
centralize its enforcement or adjudication policy in a way that is detrimental
to our company, we may be forced to implement changes to our existing enterprise
software or change how we provide products and services to our customers, which
could increase our expenses and decrease our profitability.
Risks
related to doing business in China
Adverse
economic, political, social or legal developments or a decrease in domestic
demand in China could result in a reduction in international trade activities
involving China, which could in turn reduce the demand for our products and
services.
All
of
our total net revenues have been, and are for the foreseeable future expected
to
be, derived from the PRC market and substantially all of our operating assets
are located in China. Accordingly, our operating results and financial condition
are largely subject to economic, political, social and legal developments in
China as well as changes in the demand for our enterprise software and
software
development
services by international trade enterprises and PRC government agencies in
China. There can be no assurance that such developments will not adversely
affect our performance and profitability.
We
cannot
predict the future direction of the economic reform measures that have been
adopted by the PRC government or the effects these measures may have on our
business, results of operations or financial position. Many laws and regulations
governing economic matters implemented by the PRC government are at an early
stage of development and their interpretation and enforcement involve more
uncertainties than in most countries belonging to the Organization for Economic
Cooperation and Development, or OECD. In addition, the PRC economy differs
from
the economies of most countries belonging to the OECD. These differences
include:
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economic
structure;
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level
of government involvement in the
economy;
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level
of development;
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level
of capital reinvestment;
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control
of foreign exchange;
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methods
of allocating resources; and
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balance
of payments position.
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As
a
result of these differences, our business may not develop in the same way or
at
the same rate as might be expected if the PRC economy were similar to those
of
other OECD member countries.
In
addition, there can be no assurance that any growth in the PRC economy will
be
steady or that any slowdown will not have a negative effect on our business;
that deflation will not reoccur in the PRC economy in the foreseeable future;
or
that the level of international trade to and from China will not cease to grow
at historical rates or even decrease, which could negatively impact demand
for
our enterprise software. Finally, our results of operations and financial
condition could be negatively affected by adverse changes in government monetary
policies, import/export polices and regulations, tax regulations or policies
and
regulations affecting the software industry. In recent years, the PRC government
implemented a number of measures, such as raising bank reserves against deposit
rates, to place additional limitations on the ability of commercial banks to
make loans, in order to slow growth in certain segments of the PRC economy
it
believed to be overheating. These actions, as well as future actions and
policies of the PRC government, could result in a reduction in international
trade activities involving China, which could in turn reduce the demand for
our
products and services.
The
uncertain legal environment in China could limit the legal protections available
to you and could adversely affect our ability to provide our products and
services in China.
We
conduct our business entirely through our operating subsidiaries and variable
interest entities incorporated in China. Our 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 a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In the late 1970s, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters. However, these laws,
regulations and legal requirements are relatively new and are evolving rapidly,
and their interpretation and
enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to foreign investors and entities, including you and us, such as
the
right of foreign-invested enterprises to hold licenses and permits such as
customs-related business licenses and permits, software licenses and licenses
and approvals necessary to provide services to government enterprises. As the
PRC legal system matures, changes in its legislation or interpretation of its
legislation may adversely affect our ability to provide our products and
services in China.
Landlords
for some of our leased properties may not possess valid title to their
properties and we could be forced to vacate such properties should their title
be challenged.
PRC
law
requires that lessors of properties possess title certificates to the leased
properties. We currently have approximately eight leases for properties
that we use as employee housing or as our offices for technical support centers
in Guangdong Province for which the lessors cannot provide copies of the
required title certificates. If there are disputes over the ownership of any
of
these leased properties for which the lessors do not possess title certificates,
our leases may be deemed invalid by the PRC courts and we may be forced to
vacate these properties.
The
recurrence of SARS or avian influenza may result in a reduction in business
activity in and related to Asia, which could have an adverse effect on our
total
net revenues, growth and profits.
In
early
2003, several economies in Asia, including Hong Kong and China, were affected
by
the outbreak of Severe Acute Respiratory Syndrome, or SARS. Several confirmed
or
suspected SARS cases were reported in early 2004 in Beijing and Anhui Province
in China. In addition, lethal outbreaks of avian influenza A (H5N1) infection
among poultry were reported by several countries in Asia, including China in
2005. In March 2007, a new fatal case of avian influenza was reported in Anhui
Province in China. If there is a recurrence of an outbreak of SARS or
avian influenza, it may adversely affect our total net revenues, growth and
profits. For instance, a recurrence of SARS, avian influenza or any other
epidemic may reduce the level of economic activity in affected areas and
negatively impact international trade activities involving China, which could
have a negative impact on our business. In addition, health or other government
regulations may require temporary closure of our offices, government offices
or
the offices of our customers, which will severely disrupt our business
operations and have a material adverse effect on our total net revenues, growth
and profits.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
to,
among other things, pay dividends and make
distributions.
Because
almost all of our future revenues will be in the form of Renminbi, any future
restrictions on currency exchanges may limit our ability to use revenues
generated in Renminbi to fund future business activities outside China or to
make dividend or other payments in U.S. dollars. There are significant
restrictions on the convertibility of the Renminbi, including the restriction
that foreign-invested enterprises may only buy, sell and/or remit foreign
currencies after providing valid commercial documents at banks authorized to
conduct foreign exchange business. In addition, conversion of Renminbi for
capital account items, including direct investment and loans, is subject to
approval of the State Administration of Foreign Exchange of the PRC, or SAFE,
and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the PRC regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi, especially with respect to foreign exchange
transactions.
The
value of our ordinary shares and our ADSs, and the value of your investment
in
our company, may decrease due to changes in the foreign exchange rate between
U.S. dollars and Renminbi.
The
value
of our ordinary shares and our ADSs will be affected by the foreign exchange
rate between U.S. dollars and Renminbi. For example, to the extent that we
need
to convert U.S. dollars into Renminbi for our operational needs and if the
Renminbi appreciates against the U.S. dollar at that time, our financial
condition and the price of our ordinary shares and our ADSs may be adversely
affected. Conversely, if we decide to convert our Renminbi into U.S. dollars
for
the purpose of declaring dividends on our ordinary shares or for other business
purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar
equivalent of our earnings from our subsidiaries and variable interest entities
in China would be reduced.
The
value
of your investment in our ADSs may fluctuate with the foreign exchange rate
between the U.S. dollar and the Renminbi, because the value of our business
is
largely denominated in Renminbi, while our ADSs will be traded in U.S.
dollars.
PRC
regulations relating to offshore investment activities by PRC residents may
increase our administrative burden and restrict our overseas and cross-border
investment activity. If our shareholders who are PRC residents fail
to make any required applications and filings under such regulations, we may
be
unable to distribute profits and may become subject to liability under PRC
law.
In
October 2005, SAFE issued the Notice on Issues Relating to the Administration
of
Foreign Exchange in Fund – Raising and Return Investment Activities of Domestic
Residents Conducted via Offshore Special Purpose Companies, or Notice 75, which
took effect on November 1, 2005. Notice 75 supersedes prior SAFE
regulations promulgated in January and April of 2005. Notice 75
requires PRC residents to register with the relevant local SAFE branch in
connection with their establishment or control of an offshore entity established
for the purpose of overseas equity financing involving onshore assets or equity
interests held by them. The term “PRC residents” as used in Notice 75
includes PRC citizens as wells as other persons who habitually reside in the
PRC
for economic benefit. Such PRC residents are required to complete
amended registrations with the relevant SAFE branch upon (i) injection of equity
interests or assets of an onshore enterprise into the offshore entity, (ii)
subsequent overseas equity financing by such offshore entity, or (iii) any
material change in the shareholding or capital of the offshore entity, such
as
changes in share capital, share transfers and long-term equity or debt
investments, and providing security. PRC residents who have already
incorporated or gained control of offshore entities that made onshore
investments in the PRC before Notice 75 was promulgated was required to register
with the relevant local SAFE branch on or before March 31, 2006. In
addition, such PRC residents are required to repatriate into China all of their
dividend profits or capital gains from their shareholdings in the offshore
entity within 180 days of their receipt of such profits or gains.
The
registration and amendment procedures set forth by Notice 75 are prerequisites
for other approval and registration procedures necessary for capital inflow
from
the offshore entity, such as inbound investment or shareholders loans, or
capital outflow to the offshore entity, such as the payment of profits or
dividends, liquidating distributions, equity sale proceeds or the return of
funds upon a capital reduction.
A
number
of terms and provision in Notice 75 remain unclear. Because of uncertainty
over
how Notice 75 will be interpreted and implemented, we cannot predict how it
will
affect our business operations or future strategies. For example, our present
and prospective PRC subsidiaries' or variable interest entities' ability to
conduct foreign exchange activities, such as remitting dividends and
foreign-currency denominated borrowings, may be subject to compliance with
Notice 75 requirements by our PRC resident shareholders. Despite our efforts
to
fully comply with the SAFE regulations, we cannot assure you that we will
obtain, or receive waivers
from,
any
necessary approvals or not be found in violation of the SAFE regulations or
any
other related foreign exchange regulations. In particular, we cannot assure
you
that we will be able to cause all our present or prospective PRC resident
shareholders to comply with all SAFE regulations. A failure by our
PRC resident shareholders to comply with Notice 75 or our inability to secure
required approvals or registrations may subject us to fines or legal sanctions,
limit our subsidiaries' ability to make distributions or pay dividends, restrict
our overseas or cross-border investment activities or affect our ownership
structure, any of which could affect our business and prospects.
Risks
related to our ADSs and ordinary shares
Your
ability to participate in any future rights offerings may be limited, which
may
cause dilution to your holdings.
We
may
from time to time distribute rights to our shareholders, including rights to
acquire our securities. Under the deposit agreement, the depositary will not
offer you those rights unless the distribution to ADS holders of both the rights
and any related securities are either registered under the U.S. Securities
Act
of 1933, as amended, or the Securities Act, or exempt from registration under
the Securities Act. We are under no obligation to file a registration statement
with respect to any such rights or securities or to cause such a registration
statement to be declared effective. Moreover, we may not be able to establish
an
exemption from registration under the Securities Act. Accordingly, you may
be
unable to participate in our rights offerings and may experience dilution in
your holdings.
The
future sales by our directors, officers and our current shareholders of a
substantial number of our ordinary shares could result in the supply of our
ADSs
in the public market exceeding demand, which in turn could lower the market
price of our ADSs.
If
our
shareholders sell substantial amounts of our ordinary shares or ADSs, including
those issued upon the exercise of outstanding options, in the public market,
the
market price of our ADSs could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future
at a
time and price that we deem appropriate. If any existing shareholder or
shareholders sell a substantial amount of ordinary shares, the supply of our
ADSs in the public market may exceed demand, which in turn could lower the
market price for our ADSs and thus the value of your investment could be
adversely affected.
The
market price for our ADSs may be volatile, and the value of your investment
in
our ADSs may decrease.
The
market price for our ADSs may be highly volatile and subject to wide
fluctuations in response to the factors set forth elsewhere in this section,
as
well as:
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actual
or anticipated fluctuations in our quarterly operating
results;
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actual
or anticipated fluctuations in the market price of Internet and
PRC-related companies;
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announcements
of new products or services by us or our
competitors;
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conditions
in the international trade industry;
and
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments.
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In
particular, the performance and fluctuation of the market prices of other
PRC
technology companies that have listed their securities in the United States
may
affect the trading and price volatility of our ADSs. Recently, a number of
PRC
companies have listed their securities, or are preparing to list their
securities, in the United States. Some of these securities have experienced
significant volatility, including significant price declines in connection
with
or in the periods following their initial public offerings. The trading
performances of these companies’ securities may affect the investor sentiment
towards PRC companies listed in the United States in general, which may impact
the trading performance of our ADSs. These broad market and industry factors
may
significantly affect the market price and volatility of our ADSs.
You
may not be able to exercise your right to vote.
The
SEC
generally exempts foreign private issuers such as our company from its proxy
solicitation requirements. As a holder of ADSs, you may instruct the depositary
of our ADSs to vote the ordinary shares underlying your ADSs, but only if we
ask
the depositary to ask for your instructions. Otherwise, you will not be able
to
exercise your right to vote unless you withdraw the ordinary shares. However,
you may not know about the meeting enough in advance to withdraw the shares.
If
we ask for your instructions, the depositary will notify you of the upcoming
vote and arrange to deliver our voting materials to you. We cannot assure you
that you will receive the voting materials in time to ensure that you can
instruct the depositary to vote your ordinary shares. In addition, the
depositary and its agents are not responsible for failing to carry out voting
instructions or for the manner of carrying out voting instructions. This means
that you may not be able to exercise your right to vote and there may be nothing
you can do if the ordinary shares underlying your ADSs are not voted as you
request.
We
and the depositary may amend the deposit agreement at any time without your
consent, and by doing so may change your rights thereunder in a manner with
which you disagree.
We
may
agree with the depositary to amend the deposit agreement without your consent
for any reason. If you continue to hold your ADRs after being notified of such
amendment, you will be deemed to have agreed to such amendment. In the event
you
disagree with any such amendment, your only recourse may be to sell your
ADSs.
You
may not receive distributions on ordinary shares or any value for them if it
is
illegal or impractical to make them available to you and these restrictions
may
reduce the value of your ADSs.
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. However, the
depositary is not required to do so if it decides that it is unlawful or
impractical to make a distribution available to any holders of ADSs. We have
no
obligation to register ADSs, ordinary shares, rights or other securities under
U.S. securities laws. We also have no obligation to take any other action to
permit the distribution of ADSs, ordinary shares, rights or anything else to
holders of ADSs. This means that you may not receive the distributions we make
on our ordinary shares or any value for them if it is illegal or impractical
for
us to make them available to you. These restrictions may reduce the value of
your ADSs.
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 it expedient to do so 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 thinks 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.
We
have
not adopted any policy regarding the closing of our books relating to our ADSs,
nor is there any provision under Cayman Islands or New York law, or the deposit
agreement, that would prevent the transferability of ADSs. Under the deposit
agreement, however, the depository may close its books for our ADR facility
from
time to time at its discretion, which may prevent you from transferring your
ADSs when you wish to do so.
If
our subsidiaries are restricted from paying dividends and other distributions
to
us, our primary source of funds would decrease.
We
are a
holding company with no significant assets other than our equity interests
in
our subsidiaries in China. As a result, we rely on dividends and other
distributions paid to us by our subsidiaries in China, including the funds
necessary to service any debt we may incur. If our subsidiaries incur debts
on
their own behalf in the future, the instruments governing the debts may restrict
their ability to pay dividends or make other distributions to us, which in
turn
would limit our ability to pay dividends on our ordinary shares. PRC regulations
permit payment of dividends only out of accumulated profits as determined in
accordance with PRC accounting standards and regulations. Our subsidiaries
in
China are also required to set aside a portion of their after-tax profits
according to PRC accounting standards and regulations to fund certain reserve
funds that are not distributable as cash dividends.
Other
than restrictions imposed by PRC law as set forth under Item 8 of this annual
report, “Financial Information — Consolidated statements and other financial
information — Dividend policy,” and except as set forth below, our subsidiaries
in China are not currently subject to any restriction that would prevent them
from paying any dividend or any other form of distribution to us, but there
can
be no assurance that PRC legal restrictions will not prevent the payment of
dividends or distributions in the future and deprive us of our primary source
of
funds.
Relevant
PRC laws and regulations permit payments of dividends by our PRC subsidiaries
only out of their retained earnings, if any, as determined in accordance with
PRC accounting standards and regulations. In addition, the statutory general
reserve fund, which requires annual appropriations of 10% of net after-tax
income should be set aside prior to payment of any dividends. As a result of
these and other restrictions under PRC laws and regulations, our PRC
subsidiaries and affiliates are restricted in their ability to transfer a
portion of their net assets to us either in the form of dividends, loans or
advances, restricted portion amounted to approximately RMB522.5 million (US$67.0
million), or 40.0% of our total consolidated net assets as of December 31,
2006.
Even
though we currently do not require any such dividends, loans or advances from
our PRC subsidiaries, we may in the future require additional cash resources
from our PRC subsidiaries due to changes in business conditions, to fund future
acquisitions or developments, or merely to declare and pay dividends or
distributions to our shareholders, although we currently have no intention
to do
so.
You
may face difficulties in protecting your interests, and our ability to protect
our rights through the U.S. federal courts may be limited, because we are
incorporated under Cayman Islands law.
Our
corporate affairs are governed by our amended and restated memorandum and
articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as
consolidated and revised) and the common law of the Cayman Islands. The rights
of shareholders to take action against the directors and actions by minority
shareholders are to a large extent governed by the common law of the Cayman
Islands. Cayman
Islands
law in this area may not be as established and may differ from provisions under
statutes or judicial precedent in existence in the United States. As a result,
our public shareholders may face different considerations in protecting their
interests in actions against our management, directors or our controlling
shareholder than would shareholders of a corporation incorporated in a
jurisdiction of the United States.
The
rights of shareholders and the responsibilities of management, members of the
board of directors and controlling shareholders under Cayman Islands law, such
as in the areas of fiduciary duties, are different from those applicable to
a
company incorporated in a jurisdiction of the United States. For example, the
Cayman Islands courts are unlikely:
|
·
|
to
recognize or enforce against us judgments of courts of the United
States
based on certain civil liability provisions of U.S. securities laws;
and
|
|
·
|
in
original actions brought in the Cayman Islands, to impose liabilities
against us based on certain civil liability provisions of U.S. securities
laws that are penal in nature.
|
As
a
result, our public shareholders may have more difficulty in protecting their
interests in connection with actions taken by our management, members of our
board of directors or our controlling shareholder than they would as public
shareholders of a U.S. company.
Our
ability to protect our rights through the U.S. federal courts may be limited
because we are incorporated under Cayman Islands law.
Cayman
Islands companies may not have standing to initiate a derivative action in
a
federal court of the United States. As a result, our ability to protect our
interests if we are harmed in a manner that would otherwise enable us to sue
in
a United States federal court may be limited.
Your
ability to bring an action against us or against our directors and officers,
or
to enforce a judgment against us or them, will be limited because we are
incorporated in the Cayman Islands, a substantial portion of our operations
are
in China and the majority of our directors and officers reside outside of the
United States.
We
are
incorporated in the Cayman Islands, and we conduct substantially all of our
operations through our operating subsidiaries and variable interest entities
in
China. Most of our directors and officers reside outside of the United States
and substantially all of the assets of those persons are located outside of
the
United States. As a result, it may be difficult or impossible for you to bring
an action against us or against these individuals in the United States in the
event that you believe that your rights have been infringed under the U.S.
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 the assets of our directors and
officers. For more information regarding the relevant laws of the Cayman Islands
and China, see Item 10 of this annual report, “Additional Information — Taxation
— United States federal income taxation — Enforceability of civil
liabilities.”
We
may be at risk of securities class action litigation.
In
the
past, securities class action litigation has been brought against companies
following declines in the market price of their securities. If we are faced
with
such litigation, it could result in substantial costs and a diversion of our
management’s attention and resources, which could have a material adverse effect
on our business, results of operation, financial condition and the trading
price
of our ADSs.
We
are required to implement additional controls and procedures in finance and
accounting systems in the future to satisfy new reporting requirements. Failure
to complete the required assessment as to the adequacy of our internal control
over financial reporting or unavailability of an unqualified report as to the
effectiveness of our internal controls over financial reporting provided by
our
independent registered public accounting firm could result in the loss of
confidence in the reliability of such controls, which may adversely affect
the
trading price of our ADSs.
As
a
public reporting company, we are required to comply with the Sarbanes-Oxley
Act
of 2002 and the related rules and regulations of the Securities and Exchange
Commission, including expanded disclosures and accelerated reporting
requirements. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002
and
other requirements may increase our costs and require additional management
resources. We have recently been upgrading and implementing additional
controls and procedures in our finance and accounting systems and will
need to continue to do so as we grow our business and organization and to
satisfy new reporting requirements. If we are unable to complete the
required assessment as to the adequacy of our internal control over financial
reporting or if our independent registered public accounting firm qualifies
its
report as to the effectiveness of our internal controls over financial
reporting, investors could lose confidence in the reliability of our internal
controls over financial reporting, which could adversely affect the trading
price of our ADSs.
Our
management has determined that our internal control over financial
reporting as at December 31, 2006 was effective. However, it is
possible that we or our independent registered public accounting firm may
identify other significant deficiencies or material weakness in future periods.
Such results could cause our investors to lose confidence in the
reliability of our internal controls over financial reporting, which could
adversely affect the trading price of our ADSs. Furthermore, we anticipate
that
we will continue to incur increased costs and devote significant management
resources to comply with Section 404 of the Sarbanes-Oxley Act of
2002.
Item
4. Information on the
Company.
A. History
and development of the company
Our
predecessor, Ninetowns Technology, a “share cooperative enterprise” formed under
PRC law on March 22, 1995, focused on the research and development of software
related to the declaration process, in addition to selling computer hardware
and
accessories. Through a series of restructuring transactions in 2000, Ixworth
Enterprises Limited, or Ixworth, a company incorporated in the British Virgin
Islands, acquired 90.0% of the equity interest of Ninetowns Technology. Such
90.0% equity interest acquired by Ixworth was held by New Take Limited, or
New
Take, and Shielder Limited, or Shielder, both Hong Kong companies, through
their
respective subsidiaries, Beijing New Take and Ninetowns Times. In September
2003, we issued 21,999,996 ordinary shares to Jitter Bug Holdings Limited,
or
Jitter Bug, the parent company of Ixworth. Jitter Bug simultaneously transferred
100.0% of the equity interest in Ixworth to us. We were incorporated in the
Cayman Islands on February 8, 2002 as Ninetowns Digital World Trade Technology
Holdings Limited. We changed our name to “Ninetowns Digital World Trade One
Technology Holdings Limited” on June 11, 2002 and then to “Ninetowns Digital
World Trade Holdings Limited” on April 7, 2003. On June 30, 2004, we signed
definitive agreements to acquire the remaining 10.0% equity interest in Shanghai
New Take for a consideration of RMB50,000 from Import & Export. From August
to October 2004, we completed a series of reorganization transactions to acquire
from our shareholder Value Chain International Limited, or Value Chain, the
remaining 10.0% equity interest in Beijing New Take, Ninetowns Digital,
Ninetowns Times, Ninetowns Ports and Shanghai New Take, as well as a 70.0%
equity interest in Tsingdao Fujin, in exchange for 2,002,312 ordinary shares
and
US$5,876,540 in cash. On November 8, 2006, Tsingdao Fujin terminated
its registration with the Qingdao Industry and
Commercial
Administrative Bureau, Shinan Branch. On November 9, 2004, we
effected a 4-for-1 split of our ordinary shares in preparation for our initial
public offering. On December 3, 2004, we listed our ADSs on the Nasdaq National
Market, under the symbol “NINE.” On December 8, 2004, we completed the initial
public offering of our ADSs, each of which represented one ordinary share.
Ixworth formed Beprecise Investments Limited, or Beprecise, a British Virgin
Islands Company, as a wholly-owned subsidiary in 2006. On October 19,
2006, our wholly-owned subsidiary, Beprecise, acquired a 16.25% interest in
Global Market Group Limited, or Global Market. On September 15, 2006,
we changed our name to “Ninetowns Internet Technology Group Company
Limited.” On April 27, 2007, our wholly-owned subsidiary, Ixworth,
acquired a 70% interest in Ample Spring Holdings Limited, or Ample
Spring, a company incorporated in the British Virgin Islands.
We
conduct our business in China through seven PRC subsidiaries, namely (i)
Beijing
New Take, (ii) Ninetowns Digital, (iii) Ninetowns Times, (iv) Ninetowns
Ports, (v) Shanghai New Take, (vi) Guangdong Ninetowns Technology and (vii)
Ninetowns Network; two variable interest entities, namely (i) Ronghe Tongshang
and (ii) Beijing Baichuan Tongda Science and Technology Development Company
Ltd., or Baichuan, which we effectively control, through a series of contractual
agreements entered into in 2006 and 2007, respectively. For more
information, see Item 7 of this annual report “Major Shareholders and Related
Party Transactions – Related party transactions—Control over Ronghe Tongshang”
and “Major Shareholders and Related Party Transactions – Related party
transactions—Control over Baichuan.” Our principal executive offices are located
at 5th Floor, Union Plaza, 20 Chaowai Street, Chaoyang District, Beijing
100020,
People’s Republic of China. Our telephone number in China is (86 10) 6588-7788.
We have appointed CT Corporation System, 111 Eighth Avenue, New York, NY
10011,
as our agent for service of process in the United States.
Our
capital expenditures for 2004, 2005 and 2006, which totaled approximately
RMB51.5 million, RMB31.4 million and RMB75.9 million (US$9.7 million),
respectively, consisted primarily of purchases of property and equipment
as well
as copyright for software, acquisition of interests in subsidiaries and other
investments. During 2004, 2005 and 2006, we paid deposits for the
acquisition of property and equipment in the amounts of RMB49.7 million,
RMB23.4
million and RMB0.4 million (US$48,000), respectively. We anticipate
that we will incur capital expenditures in 2007 of approximately RMB30.0
million
(US$3.8 million) to purchase equipment and software products to support our
new
software development projects and development of new potential business
ventures, approximately RMB65.0 million (US$8.3 million) to acquire office
premises and office furniture as part of our effort to reduce office rental
expenses in the future, and approximately RMB125 million (US$16.0 million)
for
strategic acquisitions and investments. We expect to use our cash flow from
operations and our available cash to fund such capital expenditures (including
capital expenditures for development of new software products and functions)
and
to execute our business strategy.
B. Business
overview
We
are a
leading PRC software company that enables enterprises and trade-related PRC
government agencies to streamline the import/export process in China; we believe
we are a leader in our market based on revenues and market share. We achieve
this by leveraging our international trade expertise and our insight into the
needs and procedures of trade-related PRC government agencies. To date, we
have
focused on providing enterprise software and related services for the completion
over the Internet of the declaration process. In order to secure our market
position, we assisted in designing and building, and continue to help maintain
and upgrade, the electronic systems of the PRC Inspections Administration that
enable our enterprise software to process electronic declarations over the
Internet. We have pioneered the implementation of enterprise software that
enables, among other things:
|
(i)
|
electronic
application to the PRC Inspections Administration for an Origin
Certificate;
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|
(ii)
|
electronic
application to the PRC Inspections Administration for goods
inspection;
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|
(iii)
|
electronic
transfer of various import/export documents between the local inspection
agency branch office where an international trade enterprise is located
and the branch office at the discharging port or station through
which the
relevant goods are being imported into or exported from the PRC;
and
|
|
(iv)
|
electronic
transfer of documents from the PRC Inspections Administration to
PRC
Customs.
|
Our
enterprise software products consists of standardized, easy-to-install
applications that simplify the declaration and approval process for
international trade enterprises. Our enterprise software automates and
facilitates the processing of the required import/export declarations and
approvals in a cost-efficient, user-friendly and legally-compliant manner over
the Internet, utilizing an electronic infrastructure we helped build that links
together numerous branch offices of the PRC Inspections
Administration.
Through
our software development services, we assist in the development and maintenance
of (i) the software systems used to process electronic filings by the PRC
Inspections Administration and iTowNet and (ii) the data exchange platforms
which serve as the interface between such systems and our enterprise software
users. The infrastructure used by the PRC Inspections Administration in the
declaration process was developed as a result of the collaborative efforts
of
our company and the PRC Inspections Administration. We and the PRC Inspections
Administration used shared knowledge in connection with the implementation
at
the PRC Inspections Administration of a PRC e-government initiative widely
known
as the “Three Digitizations Project.” The “Three Digitizations Project” became
particularly active following China’s accession into the World Trade
Organization, or WTO, and seeks to enhance the transparency of the
administration and improve the internal organization and workflow management
of
PRC government agencies. The PRC Inspections Administration infrastructure
we
helped implement includes internal electronic processing systems and data
exchange platforms, operated by iTowNet, that interface between international
trade enterprises using our enterprise software and the PRC Inspections
Administration’s internal electronic processing system. We believe e-government
initiatives relating to import/export processes will continue to be an important
factor in PRC international trade as China becomes more fully integrated into
the WTO.
We
believe the market for our enterprise software is large and relatively
under-penetrated. The market for our enterprise software relating to the
declaration process consists of international trade enterprises in China.
According to the PRC Ministry of Commerce, there were approximately 609,276
foreign-invested companies registered to do business in China as of May 31,
2007, many of which engage in importing goods into and exporting goods from
China, as well as millions of PRC-based companies which do not have foreign
investment but which do engage in importing and exporting. Of these companies,
as of May 31, 2007, only approximately 150,000 engaged
in
electronic import/export declaration processing. We believe approximately
134,000, or approximately 89.3%, of such users use our enterprise software
to
complete the declaration process with the PRC Inspections
Administration.
In
August
2005, the PRC Inspections Administration selected our company as the winning
bidder in connection with the PRC Inspections Administration’s request for
proposals for the development of a software product that has certain basic
functionalities similar to those of iDeclare.CIQ and
iProcess.CIQ. The PRC Inspections Administration agreed to pay a
one-time fee of RMB3.3 million (US$423,000) to purchase the ownership of the
software product that we developed. The development of such software product
was
completed in December 2005 and the PRC Inspections Administration commenced
to
distribute such software products free-of-charge to end-users in February 2006.
We believe that the distribution of free software products, while in the
long-term would further increase the number of e-filers and in turn increase
demand for our enterprise software services, would also have a significant
adverse
effect
on
our business, our results of operations and profitability in the short-term.
For
example, we sold, together with our franchisees, approximately 1,500 and 2,200
software packages of iDeclare.CIQ during the first quarter of 2006 and 2007,
respectively, which is significantly lower than the approximately 8,000 software
packages of iDeclare.CIQ sold by our company and our former distributors and
franchisees during the first quarter of 2005.
In
2006,
we derived 76.2% of our total net revenues from sales of enterprise software
and
23.5% from software development services. Specifically, our enterprise software
recognized net revenues of RMB188.7 million, RMB203.5 million and RMB116.8
million (US$15.0 million) in 2004, 2005 and 2006, respectively. We believe
there
were approximately 95,000, 122,000 and 130,000 licensees of our enterprise
software registered on their data exchange platforms as of December 31, 2004,
2005 and 2006, respectively.
We
intend
to increase our revenues by leveraging and strengthening our market reputation,
enhancing value for our clients through broader product offerings and improved
customer maintenance services, expanding our client base through increased
marketing, maintaining our leadership in technical and industry knowledge and
pursuing selective strategic acquisitions and investments. However, given the
uncertain impact on our business resulting from the distribution of free
software products by the PRC Inspections Administration to end-users, we cannot
predict the growth in our revenues, if there are any at all.
Advantages
of our enterprise software products
Our
enterprise software primarily facilitates declaration processing in a
cost-efficient and user-friendly manner over the Internet, utilizing data
exchange platforms that we helped build. The key advantages of our products
are:
Ease
of deployment
Our
enterprise software consists of standardized programs that can be easily
installed onto most computers from a CD-ROM or through the Internet and be
fully
operational in less than 30 minutes. Our enterprise software is broadly
applicable to all international trade enterprises seeking to complete the
declaration process electronically and does not require customization. We helped
build the PRC Inspections Administration’s internal electronic processing
systems and the data exchange platforms within the PRC Inspections
Administration offices. We have leveraged our experience and expertise with
these data exchange platforms, which interface between international trade
enterprises and the PRC Inspections Administration’s own internal electronic
processing systems, to design enterprise software with optimal compatibility
with the PRC Inspections Administration’s systems and internal requirements. We
intend to continue to help maintain and upgrade the data exchange platforms.
Given our knowledge of such data exchange platforms and our role in continuing
to maintain and upgrade such systems, we believe we are in a unique position
to
provide enterprise software that is easy to deploy, fully integrated and
optimally compatible with the PRC Inspections Administration’s systems and
internal requirements.
Fast,
efficient and accurate transfers
Our
enterprise software eliminates the need for the manual preparation and
submission of paperwork in the declaration process and can reduce the time
required to complete the declaration process from approximately two or more
days
to as quick as one hour. Our enterprise software enables nearly immediate
submission of electronic filings and notice of most submission errors, allowing
for fast and accurate submissions. In addition, demands on staff time are
reduced and the risk of delayed responses from the PRC Inspections
Administration due to delivery failures is minimized because transmissions
to
and
feedback from the PRC Inspections Administration are delivered electronically.
Furthermore, since data is submitted in electronic format, there is reduced
risk
of error and delay related to the PRC Inspections Administration’s inability to
read or accurately copy required data. The electronic forms contained in our
enterprise software are regularly updated, ensuring that all required
information is submitted to the PRC Inspections Administration.
Reduction
of costs associated with declaration filings
We
believe our enterprise software significantly reduces the costs associated
with
PRC Inspections Administration filings and that the increased efficiency and
accuracy derived from using our enterprise software results in reduced need
for
staff to complete the declaration process. In addition, there is a reduction
in
travel expenses traditionally associated with making declarations in person
at
the PRC Inspections Administration. Furthermore, faster processing can result
in
reduced transportation time for goods, which is particularly important for
perishable goods and reduces an importer’s or exporter’s working capital
allocated to inventory.
Convenience
of filing anytime and from anywhere over the Internet
Traditionally,
an international trade enterprise would send a representative to a PRC
Inspections Administration branch office in China during business hours to
make
a declaration filing. The PRC Inspections Administration branch office would
then process and forward the documentation to the PRC Inspections Administration
branch office at the port or station through which the relevant goods were
being
imported into or exported from China. Our enterprise software allows
international trade enterprises to make declaration filings with the PRC
Inspections Administration electronically over the Internet. Declarations can
be
made at any time, whether the PRC Inspections Administration’s branch offices
are open for business or not, and from anywhere in the world through a computer
on which our enterprise software is installed and which is connected to the
Internet. In addition, our enterprise software and the electronic systems we
helped build allow the PRC Inspections Administration branch office processing
the electronic filing to electronically transmit various import/export documents
to the PRC Inspections Administration branch office at the relevant import
or
export port or station. This system increases the efficiency and accuracy of
communications between the PRC Inspections Administration’s branch offices and
saves time and expense for the PRC Inspections Administration.
User-friendly
software
Our
user-friendly enterprise software simplifies the declaration process. Our users
benefit from an interface that requires very little training and is updated
regularly to reflect revisions to the regulations related to the declaration
process. Our enterprise software has auto-correction functions that
automatically detect errors and suggest corrections. We also offer additional
software functions that our users can purchase to expand their software
capabilities as their business requires.
Competitive
advantages
We
believe we have achieved the leading position in our industry, in part, by
establishing the competitive strengths described below:
First
to market, setting the industry standard
We
assisted in designing and building the electronic infrastructure used by
the PRC
Inspections Administration to accept and process electronic declarations.
We
believe our enterprise software for PRC Inspections Administration filings
is
perceived by our customers and others to be the industry standard in our
market
because:
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·
|
we
helped build the PRC Inspections Administration’s system for accepting and
processing electronic declarations,
|
|
·
|
our
enterprise software is highly
reliable,
|
|
·
|
we
believe our enterprise software was the first made available for
electronic declaration processing with the PRC Inspections
Administration,
|
|
·
|
we
believe our enterprise software was the first product endorsed
by the PRC
Inspections Administration for use in such declarations,
and
|
|
·
|
as
of May 31, 2007, our enterprise software is being used by approximately
89.3% of all filers making electronic PRC Inspections Administration
declarations.
|
Based
on
the foregoing, we believe we are the leading provider of enterprise software
to
international trade enterprises using the electronic declaration process
in
China.
Proven
ability to establish and maintain collaborative relationships with the PRC
Inspections Administration
We
believe we were the first company to work with the PRC Inspections
Administration to develop enterprise software related to the declaration
process. As a result of our long-standing relationship with the PRC Inspections
Administration, we have developed a detailed understanding of the PRC
Inspections Administration’s and international trade enterprises’ declaration
processing and other trade-related requirements. Mr. Wang and Ms. Dong also
beneficially own a 49.0% equity interest in iTowNet, which is 51.0% owned
by the
PRC Inspections Administration and operates the data exchange platforms that
interface between international trade enterprises using our enterprise software
and the PRC Inspections Administration’s internal electronic processing
system. We continue to work closely with the PRC Inspections
Administration to refine our enterprise software to reflect changes in the
PRC
Inspections Administration’s information systems, procedures, rules and
regulations and to create new software functions to address additional aspects
of the declaration process. For more information regarding our relationship
with
the PRC Inspections Administration. See Item 3D of this annual report, “Risk
factors – Risks related to our business – We currently generate substantially
all of our total net revenues from either PRC government agencies or in
connection with PRC government agency filings and approval procedures, and
our
failure to maintain a continued working relationship with certain PRC government
agencies and, in particular, the PRC Inspections Administration, would result
in
the reduction or loss of substantially all of our total net
revenues.” We also believe that our solid track record with
the PRC Inspections Administration will assist us in establishing collaborative
relationships with other PRC government agencies, such as PRC
Customs.
Scalable,
modular and secure software
The
data
exchange platform that we built for iTowNet is designed to effectively and
efficiently handle a large number of concurrent transactions for a large
number
of users. We believe such scalability enables the PRC Inspections Administration
to adapt to the growing and changing PRC market at minimal cost. Our enterprise
software is designed to be modular, which allows our users to easily add
functions by installing additional software over the Internet with minimal
cost
to us. Furthermore, all users must be
authenticated
as having a licensed copy of our enterprise software and as having a properly
registered account with the PRC Inspections Administration in order to conduct
electronic transactions over the PRC Inspections Administration’s data exchange
platforms, thus making it difficult to use pirated copies of our enterprise
software.
Strong
market reputation
We
believe we have earned a strong market reputation among international trade
enterprises in China for fast, user-friendly, efficient, cost-effective and
convenient declaration processing over the Internet, as well as for our customer
maintenance service. We believe that the endorsement of iDeclare.CIQ by the
PRC
Inspections Administration and our significant market share have established
us
as the market leader in our industry. iDeclare.CIQ has been recognized by
various PRC agencies and authorities for its quality.
Extensive
distribution and support network
Currently,
through our own distribution network and our franchisees, we maintain four
technical support centers, and also cooperate with our franchisees to jointly
maintain 43 technical support centers to reach most of the major
import/export cities in China. Through them, we provide coverage,
sales and marketing and customer maintenance services to most of the major
import/export cities in China.
Experienced
management team with strong product development
capabilities
Our
management team has significant experience in the enterprise software business.
They have extensive knowledge of international trade enterprises, the
inner-workings of the PRC Inspections Administration and the rapidly changing
PRC trade-related regulations. In addition, our management has been recognized
for its expertise in the information technology industry in China. For example,
in March 2002, Mr. Shuang Wang was awarded the Traverse Cup Prize by Software
World Magazine jointly with a number of industry magazines in China for his
significant contributions to the information technology industry. In March
2003,
Mr. Wang was also recognized as one of the “2002 top ten leaders of the PRC
software industry in China” by Software World Magazine and China Central TV for
his significant contributions to the PRC software industry. We believe our
management team’s (i) close relationship with the PRC Inspections
Administration, (ii) deep and broad experience with PRC import/export processes,
(iii) knowledge of PRC import/export policies and business requirements and
(iv)
strong product development capabilities provide us with the ability to develop
high-quality software to serve the needs of our markets.
Business
strategy
Our
primary goal is to create long-term shareholder value and to become the leading
software company that enables enterprises and government agencies to streamline
their import/export processes in China. Our new B2B strategy
leverages our market intelligence in business-to-government, or B2G, trade
processing, by integrating B2B vertical search capabilities into our service
profile with pioneering vertical search technology. We believe China’s rapidly
growing import/export activities, continuous import/export policy changes
and
evolving import/export filing requirements, coupled with the PRC government’s
initiative to streamline and use the Internet to carry out various government
operations, provide us with significant growth opportunities. We intend to
use
our cash flow from operations and our available cash to pursue the following
strategies:
Leverage
and strengthen our market reputation by creating new
products
We
believe that we have a strong market reputation for enabling international
trade
enterprises to complete electronic declarations over the Internet efficiently
and cost effectively. We intend to expand this brand recognition for PRC
Inspections Administration-related products to other PRC trade-related
government agencies and trade-related third parties such as banks, insurers
and
logistics providers. For example, we launched a new product series called
iProcess.CIQ in June 2005, which enables international trade enterprises
and
their suppliers to submit product quality-related data to the PRC Inspections
Administration throughout the production process over the Internet. Such
information allows the PRC Inspections Administration to accelerate the approval
process and provide better monitoring support. We believe that building a
strong
brand is an essential element of our sales and marketing strategy because
brand
recognition allows us to grow our revenues rapidly without incurring significant
marketing costs.
Enhance
value for existing clients through broader product offerings and improved
customer maintenance services
We
intend
to develop new functions for our existing products to enhance the interaction
between our users and the PRC Inspections Administration, other PRC
trade-related government agencies and related third parties. For example,
we are
in the process of developing additional functions to further expand our existing
iDeclare.CIQ products, such as applications for permits to import used
equipment, paint, food and cosmetic products. In addition, we currently support
our existing users jointly with our four franchisees through four technical
support centers operated and maintained by us and 43 technical support
centers operated and maintained by our four franchisees located in most of
the
major import/export cities in China.
Expand
our client base through increased marketing and broader product
offerings
We
intend
to grow our client base by expanding the use of our franchisees and our own
distribution network for marketing and front-line technical support throughout
China. In addition, we plan to upgrade all of our existing technical support
centers to full-service customer relations management centers. As a result,
we
do not intend to engage new distributors in the near future. In addition,
we
intend to develop new products which will appeal to international trade
enterprises that do not currently use our enterprise software.
Maintain
leadership in technical and industry knowledge
We
intend
to continue to invest in our research and development efforts to enhance
our
existing enterprise software and develop new products that will increase
the
efficiency and cost-effectiveness of the declaration process and related
processes. In addition, we expect to continue to accumulate
import/export-related industry knowledge and technical expertise in order
to
provide software for potential import/export-related processes. Both software
technology and the import/export regulatory environment in China are
continuously changing and we believe that continuous accumulation of both
technical and industry knowledge is crucial in providing the best software
for
our customers.
Pursue
selective strategic acquisitions, investments, joint ventures or collaborative
arrangements
We
expect
that our enterprise software user base will grow with the expected expansion
of
the PRC export manufacturing sector and the increase in domestic demand for
imported goods. In response to this growth in our base of potential users,
we
intend to pursue strategic acquisitions, investments, joint ventures or other
collaborative arrangements that complement our existing enterprise software.
We
are
reviewing
selective investments in order to increase the scale of our business and
strengthen our position as a leading provider of enterprise software for
international trade enterprises.
In
connection with our pursuit of selective strategic acquisitions, on October
19,
2006, our indirect wholly-owned subsidiary, Beprecise, acquired a 16.25%
interest in Global Market for a consideration of US$5,000,000. Global
Market is a leading Chinese B2B trade facilitator headquartered in
Guangzhou. On April 27, 2007, Ixworth, our wholly-owned subsidiary,
acquired a 70% interest in Ample Spring, for a consideration of RMB210 million
(US$26.9 million). Ample Spring is a related party of Baichuan, a leading
Chinese B2B vertical search engine operator. In May 2007, our company
launched tootoo.com, our new B2B vertical search platform. By
leveraging our B2G expertise with these recent acquisitions and integrating
Baichuan's pioneering vertical search technology and supplier ranking system
with the in-depth quality validation process offered by our existing software
solutions, tootoo.com is positioned to become a leading B2B search and service
provider. We plan to continue to seek opportunities to cooperate with other
B2B
platforms and technology to further increase our service profile.
Products
and services
In
2006,
we derived 76.2% of our total net revenues from sales of enterprise software
and
23.5% of our total net revenues from provision of software development
services.
The
products and services we offered in 2006 included the following:
Enterprise
software
We
have
five enterprise software products currently available commercially or in
trial
version: (i) iDeclare.CIQ, (ii) iProcess.CIQ, (iii) User Message Agent, or
UMA, (iv) iMonitor.CGA and (v) iValue.
iDeclare.CIQ
series
Commercially
introduced in August 2000, the iDeclare.CIQ series of products enables
international trade enterprises to complete the declaration process
electronically over the Internet. We initially offered the iDeclare.CIQ basic
package, which included two separate software functions, for a one-time license
fee of RMB6,800, including one year of customer maintenance services. In
September 2001, we started to offer the current iDeclare.CIQ basic package,
which includes six separate software functions, for a one-time license fee
of
RMB4,500, including one year of basic customer maintenance
services. In September 2006, we also developed Ninetowns Network
Quality Supervision Software v1.0, the newest version of software in the
iDeclare.CIQ series. We charge RMB1,500 for each additional year of
customer maintenance services, which includes a number of value-added services
in addition to the basic maintenance services. In 2004, 2005 and 2006, we
generated RMB175.5 million, RMB186.5 million and RMB107.9 million (US$13.8
million), respectively, of net revenues from sales of the iDeclare.CIQ basic
package and related customer maintenance services (including the per declaration
fees as described below), which represented a substantial portion of our
net
revenues from sales of enterprise software in each of those
periods.
A
limited
number of our iDeclare.CIQ users, substantially all of whom are located in
Guangdong Province, China, do not pay a one-time license fee or annual customer
maintenance service fees. Instead, such users pay a fee of RMB20 per declaration
filing made using iDeclare.CIQ. Net revenues from sales of enterprise software
included RMB24.1 million, RMB23.6 million and RMB21.9 million (US$2.8 million)
of such per-use fees, or 12.8%, 9.8% and 18.7% of our net revenues for sales
of
enterprise software in 2004, 2005 and 2006, respectively.
We
offer
trial versions of our new software functions to existing users until we
commercially launch such software functions. Once commercially launched,
these
new software functions are not offered as part of the iDeclare.CIQ basic
package
and a user must pay additional fees in order to use the new software
functions.
Our
iDeclare.CIQ product series users include a variety of international trade
enterprises operating in a wide range of businesses. They include the PRC
branch
offices of multinational trading companies that might purchase multiple copies
of iDeclare.CIQ, as well as smaller PRC companies focused on niche businesses
that might buy only one copy of iDeclare.CIQ. We rely mainly on our franchisees
to sell our iDeclare.CIQ product series.
Our
iDeclare.CIQ product series allows users to submit encrypted applications
to the
PRC Inspections Administration for examination, comment and approval over
the
Internet. In addition, iDeclare.CIQ is capable of generating electronic
documents with information inter-linking ability to efficiently replicate
documents required for international trade transactions. Such documents include
invoices for export, packaging forms, bills, customs clearing forms and approval
forms for special goods. Additional software functions are designed for easy
installation and incorporation into the iDeclare.CIQ product series. When
a
customer purchases and installs a new module, new tabs and folders appear
in the
existing user interface, allowing customers to add new software functions
while
maintaining a familiar and easy-to-use environment.
Currently,
the iDeclare.CIQ product series has three main applications: (i) Origin
Certificate processing, (ii) declaration processing and (iii) registration
and
permit processing.
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·
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The
Origin Certificate processing application allows users to apply
for and
obtain over the Internet an Origin Certificate, which is a required
document showing the place of origin of goods imported or exported.
iDeclare.CIQ’s Origin Certificate processing application has five software
functions that allow an international trade enterprise to obtain
Origin
Certificates. The different software functions relate to the import/export
regulations of different countries and can help an enterprise determine
if
it qualifies for favorable tariffs between China and a second country.
To
date, all five software functions have been included in the iDeclare.CIQ
product series.
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·
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The
declaration processing application allows users to declare their
imported
or exported goods for inspection by the PRC Inspections Administration,
which typically involves a general inspection of the goods, the
packaging
material and the shipping container. To date, the declaration for
inspection of goods has been included in the iDeclare.CIQ product
series.
A package inspection function and container inspection function
are new
software functions available only in trial versions; we expect
to charge
our users a fee to use each of these software functions when they
are
launched commercially.
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·
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The
registration and permit processing application allows users to
register
goods to be imported or exported and to apply for a permit for
such
import/export transaction. This application is currently used when
animals, plants or related products are imported or exported. The
registration and permit processing application is a new function
and is
only available in a trial version; we expect to charge our users
a fee to
use this function when it is launched commercially. See Item 5
of this
annual report, “Operating and Financial Review and Prospects — Research
and development.”
|
Our
iDeclare.CIQ product series transmits all user submissions to the PRC
Inspections Administration electronically in an encrypted format over the
data
exchange platforms operated by iTowNet. iTowNet receives a fee for each
submission made over its platforms. Once received by the PRC Inspections
Administration, such transmissions are examined and electronically approved
or
returned to the user for revision.
The
table
below sets forth the benefits of electronic filings, as compared to paper
filings:
|
Traditional
paper-based filing method
|
iDeclare.CIQ
electronic filing method
|
|
declaration
form filled manually
|
electronic
input minimizes mistakes arising from illegible
handwriting
|
|
declaration
form physically submitted to the PRC Inspections
Administration
|
submission
of electronic declaration form reduces cost and time
|
|
long
waiting time in the process of declaration
|
no
physical queue-up for submission required
|
|
incomplete
information or mistakes in declaration form cause delay, stress
and
additional costs
|
built-in
error detection function helps prevent omissions and
mistakes
|
iProcess.CIQ
series
In
June
2005, we launched iQS, one component of a new product series called
iProcess.CIQ, in certain major cities of the PRC including Ningbo, Qingdao,
Dalian, Hangzhou, Jinan, Tianjin and Shanghai. Our iProcess.CIQ product series
enables international trade enterprises and their suppliers to submit product
quality-related data to the PRC Inspections Administration throughout the
production process. In addition, Our iProcess.CIQ product series enables
manufacturers to submit production-related data over the Internet to the
PRC
Inspections Administration regarding the nature and quality of the components
and materials being used by the manufacturers in creating their products.
Such
information can be submitted prior to the manufacturers’ exporting their
products from the PRC. The PRC Inspections Administration may, but is not
required to, use such information to assess the products and determine whether
an inspection is necessary prior to such products being exported from the
PRC. A
determination by the PRC Inspections Administration that an inspection is
not
required will likely expedite the declaration process for such
products.
Furthermore,
users of our iDeclare.CIQ product series that have paid their annual maintenance
fees may share data between the iDeclare.CIQ and iProcess.CIQ product series.
This will not only reduce data input requirements for iDeclare.CIQ users,
but
may also encourage existing iDeclare.CIQ product series users to pay their
annual maintenance fees.
In
2005
and 2006, we generated RMB3.3 million and RMB5.5 million (US$0.7 million),
respectively, of net revenues from sales of the iProcess.CIQ product
series.
UMA
series
Commercially
launched in October 2003, the UMA series of enterprise software facilitates
effective and secure data transfers:
|
·
|
within
iTowNet’s data exchange platforms;
|
|
·
|
among
PRC Inspections Administration’s internal processing systems;
and
|
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·
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between
PRC government agencies.
|
We
entered into a product sales and service contract with iTowNet in October
2003.
Pursuant to such contract, we sold certain UMA software to iTowNet for a
one-time license fee of RMB50,000. We also charge RMB15,000 per licensee
for
each year of customer maintenance services.
In
2005
and 2006, we recognized RMB13.5 million and RMB3.5 million (US$0.4 million),
respectively, in net revenues from sales of the UMA series of enterprise
software and related customer maintenance services. We currently do
not expect to have significant sales of the UMA series of enterprise software
and related services.
iMonitor.CGA
series
The
iMonitor.CGA series of software and hardware products was commercially
introduced in June 2004 and was designed to be installed at the customs clearing
gates of PRC Customs branch offices to allow inspection of goods-in-bond.
The
purpose of an inspection of goods-in-bond is, among other things, to monitor
and
inspect shipping containers to prevent such shipping containers from passing
PRC
Customs without paying the required tariffs. We expect the price per system
of
iMonitor.CGA, including software and certain hardware, for example cameras
and
sensors, to range from RMB100,000 to RMB200,000, and we intend to charge
an
annual maintenance fee after the first year of installation. We have not
yet
determined the maintenance fee for iMonitor.CGA product series. The price
per
system of iMonitor.CGA will be determined through negotiations with our
potential customers for such product, which we expect to be mainly trade-related
PRC government agencies. To date, we have not recognized any significant
revenues from the sale of iMonitor.CGA product series.
Our
iMonitor.CGA product series has two main applications: (i) data collection
through container number recognition, and (ii) gate inspection.
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·
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The
container number recognition application allows PRC Customs to
manage the
thousands of shipping containers that pass through China’s import/export
ports daily by using cameras to observe, identify and process
identification numbers painted on the exterior of shipping
containers.
|
|
·
|
The
gate inspection application provides PRC Customs an entire suite
of
applications, ranging from the container number recognition application
described above to the tracking of vehicles and containers. The
gate
inspection application uses automatic sensors to electronically
observe,
transmit, process and manage data such as vehicle driver identification,
vehicle license plate numbers, shipping container identification
codes and
shipping container size and weight, as well as the movement of
vehicles
and containers in the PRC Customs ports. The gate inspection application
also verifies the collected information against the information
stated in
the relevant declaration documents.
|
Our
iMonitor.CGA series of products interfaces with PRC Customs’ multiple cameras
and sensors installed at import/export clearing gates to process the captured
images and output the results in an organized and easy-to-manage manner.
The
main advantage of iMonitor.CGA product series is its automation of previously
manual inspection procedures which significantly reduces the staff costs
and
time that it would take for information gathering, while increasing accuracy
of
the information gathered.
iValue
series
A
trial
version of iValue product was introduced in March 2004. The purpose of the
iValue product series is to provide services that are complementary to a
user’s
interaction with the PRC Inspections Administration and PRC Customs. Currently,
iValue product series has only one principal application: electronic bill
payment. This application allows users to electronically pay PRC Inspections
Administration- or PRC Customs-related fees over the Internet via a platform
that we operate. This trial product minimizes staff costs associated with
in-person payments and delays associated with payments by post. Electronic
payments are made as wire transfers directly from a payor’s bank account at a
participating bank. Funds are released upon receipt of wire instructions
by the
participating bank through our iValue platform. As a result, we are not exposed
to the credit risk of the payor. The iValue product series
also allows integration of payment records into other software and
databases.
Since
we
only introduced our iValue product in a trial version, we have not marketed
the
iValue product to international trade enterprises and we have not yet determined
the pricing model for, or recognized any revenues from, this
product.
Software
development services
We
provide software development services to PRC government agencies, their related
entities and their third party service providers in order to enhance electronic
data exchange, processing and monitoring capabilities. Our software development
services consist of the design, development and maintenance of, and upgrades
to:
(i) the internal software systems used by PRC government agencies and their
related entities to process electronic filings made with our enterprise
software, and (ii) the data exchange platforms which serve as the interface
between such systems and users of our enterprise software.
In
2003,
we provided software development services primarily to Beijing Regard in
connection with Beijing Regard’s contracts to provide software development
services for iTowNet. Under this arrangement, Beijing Regard designs software
for iTowNet and subcontracts the software coding work to us. We enter into
all
contracts with iTowNet and eGrid on an arm’s length basis. See Item 7 of this
annual report, “Major Shareholders and Related Party Transactions — Related
party transactions.” On January 27, 2005, we entered into a software development
contract with the PRC Inspections Administration pursuant to which we contracted
to develop an internal Decision & Support System for the PRC Inspections
Administration for RMB5.6 million.
On
February 16, 2006 and February 28, 2006, we entered into two software
development contracts with the PRC Inspections Administration pursuant to
which
we contracted to develop an electronic monitoring system and an “import and
export hygiene monitoring system” for the PRC Inspections Administration for
RMB3.3 million (US$423,000) and RMB1.6 million (US$205,000),
respectively.
We
offer
our software development services on a fixed-fee basis. We often start work
on
software development projects based on verbal agreements and do not receive
payment until the completion of a particular project. We believe such practice
is consistent with the general practice in the government-related software
development industry in China.
Technology
Our
enterprise software operates on a sophisticated data processing platform
called
iCSP. iCSP is our proprietary Internet-based services management platform
with
centralized data exchange capabilities that we have been developing since
1999.
Our iCSP platform allows our enterprise software to incorporate the utility
and
power of the Internet. Our iCSP platform has two components. One component
supports Microsoft Windows clients and is a part of our enterprise software.
The
other component supports a variety of Microsoft, UNIX and Linux servers and
is a
part of the software that we assisted in developing for iTowNet. We used
development tools such as Microsoft.Net and Sun Java2EE to develop our iCSP
platform.
The
iCSP
platform is a modular, scalable and secure client/server architecture, which
suits the rapidly changing demands of enterprise users. The basic software
architecture of the iCSP platform allows for (i) dynamic application management
for enterprise users, (ii) seamless data exchange among multiple
enterprises and government agencies and (iii) automatic data
synchronization.
At
the
core platform level, the service management system provides various basic
system
functions, such as downloading of applications, authentication of user licenses
and performance of routine system maintenance. The architecture separates
data
exchange (oDex), data synchronization (oCox) and application logic (oAfx)
into
different units to maintain flexibility and scalability.
oDex
is
the data exchange system which supports common data exchange protocols such
as
EDI, x.12, EBXML and RossetaNet. oDex converts document formats and processes
documents based on pre-determined programming rules.
oCox
is
the data synchronization system which replicates data across different users,
systems and institutions.
oAfx
is
the application library system which contains the various enterprise software
functions.
The
iCSP
platform also has a comprehensive security system which performs security
auditing and management to maintain data security and integrity.
Products
under development
We
usually have numerous new software products and features in development.
The
process of researching and developing software products and features typically
involves steps to: (i) work with the relevant PRC government agency to identify
needs and parameters; (ii) begin research and development; (iii) test product
or
function feasibility; (iv) establish product launch plan and timetable with
the
PRC government agency; and (v) launch the product or function. The following
are
examples of new enterprise software and enhancements to our existing products
which are currently under development:
Additional
iValue modules
We
are
currently developing additional functions to complement iValue to process
status
enquiries for a user’s PRC Inspections Administration filings and to allow for
enrollment in online courses, such as customs declarer
examinations. We cannot predict if or when such efforts will be
completed.
iDeclare.CGA
Series
Similar
to the PRC Inspections Administration, PRC Customs has a standardized set
of
forms used by international trade enterprises and we plan to work with PRC
Customs to develop enterprise software that will facilitate electronic filings
of such forms. We intend for this enterprise software to enable electronic
filings of customs, manifest, bill of lading, export goods receipt and other
declarations. In addition, we also plan to work with PRC local tax authorities
to develop a product to facilitate electronic filings of tax and ATA Carnet
declarations, which are international customs documents that permit duty-free
and tax-free temporary import of goods for up to one year. Research and
development work on the iDeclare.CGA product series commenced in the second
quarter of 2004; we cannot predict if or when such efforts will be
completed.
Production
and hardware design
The
principal steps involved in production of our enterprise software are
duplicating CDs, printing boxes and related materials such as user manuals, and
assembling and shipping our final products. We have production arrangements
with
several outside contractors under which they provide all necessary outsourced
production services related to our enterprise software. We produce enterprise
software packages on an as-necessary basis and keep only a small inventory
in
our headquarters in Beijing. Currently we also distribute some of our enterprise
software packages through the Internet. We have designed the configuration
of
some data-gathering hardware, for example cameras, for use with the iMonitor.CGA
product series although customers may also use their own hardware. The hardware
we design is produced by third party vendors.
Seasonality
There
is
no particular seasonal fluctuation in our sales except that net revenues
from
sales of our enterprise software in the first quarter are typically lower
than
in other quarters. This is primarily due to decreased business activities
throughout China before, during and after the week-long Chinese New Year
holidays, which occur in January or February each year. In addition, net
revenues from software development services are typically higher in the third
and fourth quarters of each year because our software development contracts
are
usually signed during that time. However, we cannot predict when our software
development contracts will be signed in the future, or if they will be signed
at
all.
Our
future revenues and results of operations may fluctuate significantly due
to a
combination of factors, including:
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·
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acceptance
of our products and services in
China;
|
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·
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the
strength of our relationships with the PRC Inspections Administration,
PRC
Customs and other PRC government
agencies;
|
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·
|
our
ability to attract and retain
users;
|
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·
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our
ability to develop new software products and
services;
|
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·
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PRC
government regulation of software sales and development;
and
|
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·
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general
economic conditions in China.
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Quality
We
are
committed to delivering enterprise software and services of consistently
superior quality to our customers. We believe our commitment to quality and
our
total quality management system are key elements to our operation as a leading
provider of enterprise software to international trade enterprises and
trade-related PRC government agencies.
On
August
3, 2004, we were awarded the ISO 9001:2000 Quality Management System Recognition
Certificate. ISO 9001:2000 is a worldwide quality management system
certification program regarding management system standards administered
by the
International Organization for Standardization. Our enterprise software has
also
been endorsed by the PRC Inspections Administration for electronic customs
declaration.
Sales
and marketing
We
have
implemented our sales and marketing initiative in three phases. In the first
phase, we relied mainly on direct sales of new software products to
international trade enterprises. In the second phase, we used authorized
distributors to reach additional international trade enterprises. We are
currently implementing the third phase of our sales and marketing initiative
by
helping third parties establish franchisee to sell our software products.
Our
intention is to continue to use a focused strategy designed to further enhance
our brand name and acquire new customers by recruiting franchisees, who will
use
the “Ninetowns” brand name in the sales and marketing of our enterprise
software.
Direct
sales and marketing
We
re-defined our regional markets and changed our business model from direct
sales
to a regional franchise model.
As
of
December 31, 2006, we had a sales and marketing force consisting of
approximately 130 people, serving mainly the southern regions of China. Our
sales and marketing representatives also perform customer maintenance
services.
The
market operations center at our principal executive offices in Beijing is
responsible for national marketing policies, strategies and budgets. The
market
operations center is divided into two departments: the corporate communication
department and the market operations department.
The
corporate communication department is responsible for brand promotion, package
design and marketing functions. The market operations department is responsible
for the collection of marketing intelligence. In addition to the corporate
communication department and the market operations department, we also have
salespersons in our own four technical support centers. The salespersons in
such centers are responsible for regional marketing strategies, including
(i) organizing promotional conferences in which existing and potential
clients are introduced to our products, and (ii) participating in national
and
regional trade shows. On the local level, our salespersons promote our
enterprise software products mainly by holding seminars for international
trade
enterprises, making telephone calls to potential customers and sending
promotional materials by mail.
Our
annual sales targets are set by our general manager of sales and marketing
according to regional sales plans and are reviewed quarterly. We have an
incentive-based sales scheme whereby salespersons are rewarded based on
achievement of sales targets.
Sales
by authorized distributors
We
had
previously contracted with distributors to undertake marketing, distribution
and
service activities in certain provinces in China where we do not have any
offices or where our customer maintenance service capabilities are insufficient
to serve and support our international trade enterprise clients. However,
it is
our current strategy to develop our distribution and technical support network
through franchisees. As of December 31, 2005, the distribution agreements
with
our two former authorized distributors, Panyu Chengchang Trade Development
Co.,
Ltd., or Panyu Chengchang, and Shanghai Tomorrow Technology Development Co.,
Ltd., or Tomorrow Technology, expired and we chose not to renew them due
to our
plans to develop our franchisee network. We currently do not have any
distributor.
For
2004,
2005 and 2006, net revenues from sales of enterprise software we recognized
from
our former authorized distributors amounted to approximately RMB77.0 million,
RMB71.4 million and RMB17.0 million (US$2.2 million), respectively.
Sales
by our franchisee
It
is our
current strategy to expand our franchisee network to undertake marketing,
distribution and service activities using the “Ninetowns” brand name. As of
December 31, 2006, we have four franchisees, Ninetowns Enke, Ninetowns Zhi
Fang,
Ninetowns Xin He and Ninetowns Wang Li. Our franchise agreement with
Ninetowns Enke was entered into in February 2004. Pursuant to the franchise
agreement, Ninetowns Enke agreed to a minimum sales commitment of RMB50.0
million for the two
years
ended February 14, 2006 and a sales discount of RMB1,000 per each iDeclare.CIQ
basic package purchased from our company. In addition, Ninetowns Enke also
agreed to act as our sales agent to sell after sales maintenance services
for
our enterprise software to our customers. On April 22, 2004, we agreed with
Ninetowns Enke to amend the franchise agreement to revise certain pricing
terms.
This agreement has a two-year term and contains minimum sales
commitments. On May 12, 2006, we entered into a new franchise
agreement with Ninetowns Enke for our iDeclare.CIQ basic package. This agreement
has a two-year term and does not contain any minimum sales
commitment. Our franchise agreements with Ninetowns Zhi Fang were
entered into in May 2005 for two of our software products, iQs under the
iProcess.CIQ series and our iDeclare.CIQ basic package. Each of these
franchise agreements has a two-year term and does not contain any minimum
sales
commitment. In January 2006, we engaged Ninetowns Xin He, as a new
franchisee. The franchise agreement with Ninetowns Xin He has a two-year
term
and does not contain any minimum sales commitment. In October 2006, we entered
into a franchise agreement with our newest franchisee, Ninetowns Wang Li
for our
iDeclare.CIQ basic package. This agreement has a two-year term and
does not contain minimum sales commitments. In December 2006, we
entered into new franchise agreements with Ninetowns Enke, Ninetowns Xin
He,
Ninetowns Zhi Fang and Ninetowns Wang Li for our new software version under
the
iDeclare.CIQ series, Ninetowns Network Quality Supervision Software v1.0
software, each for two-year terms and without minimum sales
commitments. Our franchisees provide customer maintenance services to
our enterprise software users. We intend to focus on establishing new franchisee
arrangements in the future.
For
2004,
2005 and 2006, net revenues from the sale of enterprise software generated
by
our franchisee amounted to approximately RMB25.2 million, RMB50.8 million
and
RMB40.9 million (US$5.2 million), respectively.
Customers
In
2006,
our customers for sales of enterprise software include our two former
distributors, and our franchisees, and international trade enterprises that
we
sell our software to directly. Our users are engaged in a wide variety of
import
and export activities in China. For 2004, 2005 and 2006, our five largest
enterprise software customers, which consisted primarily of our former
distributors and franchisees, accounted for approximately 56.0%, 60.1% and
49.1%, respectively, of our net revenues from sales of enterprise
software.
Our
customers for software development services include the PRC Inspections
Administration, iTowNet, eGrid and other third party customers. We did not
recognize any net revenues from provision of software development services
until
2002. iTowNet and eGrid accounted for substantially all of our net revenues
for
provision of software development services in 2004 and 2005. In 2006,
net revenues from provision of software development services to iTownet and
eGrid accounted for approximately 35.9% of our total software development
revenue.
Customer
maintenance services
We
believe our ability to provide customer maintenance services is one of the
key
factors to building user loyalty. We offer one year of free customer maintenance
services with our iDeclare.CIQ basic package, and charge a fee of RMB1,500
for
customer maintenance services each year thereafter.
The
customer maintenance services we provide in connection with our software
products generally include:
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help-desk
support via telephone, facsimile or
e-mail;
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·
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site
visits to carry out maintenance
procedures;
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·
|
training
for new updates of our enterprise software;
and
|
|
·
|
automatic
updates of software relating to changes in codes associated with
goods,
countries and regions and changes to import/export
regulations.
|
Our
franchisees also provide customer maintenance services, including help-desk
support via telephone or e-mail, site visits for maintenance procedures and
software training.
We
also
provide customer maintenance services to purchasers of our iMonitor.CGA product
series. Such customer maintenance services generally include routine inspections
of the system, system and software updates, on-site technical support and
maintenance services, consultation services through a toll free phone-line,
company website or direct hotline and training of our customer’s staff. We also
provide various customer maintenance services to our software development
services clients.
Each
of
our technical support centers functions as a call center that responds to
calls
from customers located in the surrounding areas. As of December 31, 2004,
2005
and 2006, we had 360, 454 and 128 customer service and technical support
employees, respectively.
Competition
We
believe there are only two enterprise software products, namely our iDeclare.CIQ
product series and “Easy Inspection” offered by Ronji, that have been endorsed
by the PRC Inspections Administration. We are not aware of any other products
or
services which compete with our enterprise software. Therefore, we believe
we
only have one competitor engaged in providing enterprise software to
international trade enterprises for transactions with the PRC Inspections
Administration. In addition, we face competition from the PRC
Inspections Administration’s free software product.
We
compete with several software developers in bidding for software development
projects. In particular, we compete against eGrid, which is a related party
of
our company and one of our major customers in our software development business,
to provide software development services to iTowNet.
Many
other companies may in the future provide software and development services
of
the type we offer. Companies that have expertise in marketing and providing
technical services to government entities may begin to compete with us by
further developing their services and increasing their focus on this aspect
of
their business. There are companies which provide e-government services and
enterprise software similar to ours in many other countries. In addition,
there
are other companies in China which are focusing on providing such services
to
government agencies in China; in particular, regional providers attempting
to
implement systems for provincial branches of government agencies such as
PRC
Customs. Furthermore, there can be no assurance that software, hardware or
other
companies unrelated to us will not allocate resources to pursue opportunities
relating to the needs of international trade enterprises making government
filings in China.
We
believe that the principal factors upon which we compete are:
|
·
|
reputation
in the market;
|
|
·
|
understanding
of the needs of PRC international trade-related government agencies,
such
as the PRC Inspections Administration, as well as endorsements
from such
agencies;
|
|
·
|
the
quality of our products and
services;
|
|
·
|
responsiveness
to the needs of users;
|
|
·
|
installed
base of international trade enterprise
customers;
|
|
·
|
cost-effectiveness;
and
|
|
·
|
distribution
network.
|
We
believe that we compete favorably with respect to the above-listed
factors.
Intellectual
property rights
We
rely
on a combination of nondisclosure, confidentiality and other contractual
arrangements with the PRC Inspections Administration, certain of our directors,
employees and customers, as well as PRC privacy and trade secret laws, to
protect and limit the distribution of the proprietary software and processes
we
have developed in connection with our products and services.
As
of
December 31, 2006, we had registered 38 software copyrights and three trademarks
in China. Although we have no registered trademarks outside China, we are
in the
process of registering certain of our trademarks in the United States and
Hong
Kong.
If
we
fail to adequately protect our intellectual property rights or proprietary
technology or if we become involved in litigation relating to our intellectual
property rights or proprietary technology, our business could be harmed.
Any
actions we take may not be adequate to protect our rights and other companies
may develop technologies that are similar or superior to our proprietary
technology.
Although
we believe that our products and services do not infringe on the intellectual
property rights of others and that we have all rights needed to use the
intellectual property employed in our business, it is possible that we could
in
the future become subject to claims alleging infringement of third party
intellectual property rights. Any such claims could subject us to costly
litigation and may require us to pay damages and develop non-infringing
intellectual property or acquire licenses to the intellectual property that
is
the subject of the alleged infringement.
We
are
aware of an online video games company in China whose Chinese name is
substantially similar to ours and which may therefore infringe on our
trademark.
New
Business
We
are
currently in the process of exploring potential opportunities related to
international trade. We commenced market research in the first quarter of
2006
and we are currently evaluating various business models and experimenting
with
new products. We cannot predict if or when any of such efforts will be
completed.
However,
we have pursued selective strategic acquisitions. On October 19,
2006, our indirect wholly-owned subsidiary, Beprecise, acquired a 16.25%
interest in Global Market, a leading Chinese B2B trade facilitator headquartered
in Guangzhou. On April 27, 2007, Ixworth, our wholly-owned
subsidiary, acquired a 70% interest in Ample Spring, a related party of
Baichuan, a leading Chinese B2B vertical search engine operator. In
May 2007, our company launched tootoo.com, our new B2B vertical search
platform. By leveraging our B2G expertise with these recent
acquisitions and integrating Baichuan's pioneering vertical search technology
and supplier ranking system with the in-depth quality validation process
offered
by our existing software solutions, tootoo.com is positioned to become a
leading
B2B
search
and service provider. We plan to continue to seek opportunities to cooperate
with other B2B platforms and technology to further increase our service
profile.
Regulation
Political,
legal, economic and social considerations in China
Since
1979, many laws and regulations dealing with economic matters with respect
to
general foreign investment have been promulgated in China. In 1982, the PRC
National People’s Congress amended the PRC Constitution to authorize foreign
investments and guarantee the “lawful rights and interests” of foreign investors
in China. In 2004, the PRC Constitution was further amended to recognize
the
right to private property for all PRC citizens. Subsequent legislation has
enhanced significantly the protection afforded to foreign and domestic investors
and allowed more active control of investors over their private enterprises
in
China. In the last two decades, the PRC government has introduced substantial
economic and legal reforms. However, the legal system of the PRC is still
underdeveloped when compared to the systems of the advanced western nations.
The
implementation and interpretation of existing laws may therefore be
uncertain.
Foreign
investment policies
According
to the Foreign Investment Industry Policy Guidelines promulgated on March
4,
2002, as amended on November 30, 2004, foreign investors are encouraged to
invest in the development and manufacturing of software products. No
restrictions or prohibition is currently imposed on the foreign ownership
of
businesses engaged in the development and production of software products
in
China.
New
regulation relating to the administration of an office
In
April
2006, State Administration of Industry and Commerce, Ministry of Commerce,
State
General Custom and SAFE jointly promulgated “Implementation Opinion on Certain
Issues about Application of Laws on Administration of Approval and Registration
for Companies with Foreign Investment”, or the Opinion. According to the
Opinion, the registration for companies with foreign investment apply to
companies registered under the PRC Company Law, as amended on October 27,
2005
and effective on January 1, 2006, and the Regulations on Administration of
Companies, amended on December 18, 2005, except otherwise stipulated by the
laws
and regulations specifically governing companies with foreign investment.
According to the Opinion, the registration of offices established by companies
with foreign investment is required to cease. The Opinion also provides that
the
procedures of variation or renewal for the offices that have been registered
will not be carried out. Once the operating term of an office expires, the
procedure of “cancellation of registration” will be implemented. If necessary,
such company can choose to establish a branch office.
In
the
opinion of our PRC counsel, Commerce & Finance Law Offices, the ownership
structures, businesses and operations of our subsidiaries and variable interest
entities in China comply with all existing PRC laws, rules and regulations.
In
addition, our PRC counsel has confirmed that no consent, approval or license,
other than those already obtained, is required for such ownership structures,
businesses and operations in order for us to comply with existing PRC laws
rules
and regulations.
Regulation
of the software industry
Software
copyright
The
State
Council of the PRC, or the State Council, promulgated the Regulations for
the
Protection of Computer Software, or the Software Protection Regulations,
on
December 20, 2001, and such regulations became effective on January 1, 2002.
The
Software Protection Regulations were promulgated, among other things, to
protect
the copyright of computer software in China. According to the Software
Protection Regulations, computer software that is independently developed
and
exists in a physical form will be protected. However, such protection does
not
apply to any ideas, mathematical concepts, processing and operation methods
used
in the development of software products.
Under
the
Software Protection Regulations, PRC citizens, legal persons and organizations
enjoy copyright protection for computer software they develop, regardless
of
whether the software has been published. In addition, foreigners or any person
without a nationality enjoy copyright protection of computer software they
develop, if such computer software was first distributed in China.
Under
the
Software Protection Regulations, software copyright holders enjoy the rights
of
publication, authorship, modification, duplication, issuance, lease,
transmission on the information network, translation, licensing and transfer.
The software copyright comes into being on the day of completion of its
development. In the case of software developed by legal persons and other
organizations, the protection period is 50 years and ends on the thirty-first
day of December of the fiftieth year from the date the software product was
first published. However, the Software Protection Regulations will not protect
the software if it has never been published within 50 years since the completion
of development. A written license contract is required to license the right
to
use the software copyright and a written assignment contract is required
for
transfer of any software copyright.
Enforcement
actions available under the Software Protection Regulations against
infringements of copyright include, among other things, cessation of the
infringement, elimination of the effects, apology, compensation for losses
and
other civil responsibilities. Disputes regarding infringements of software
copyright can be mediated. In addition, the parties may apply for arbitration
in
accordance with the arbitration provision set forth in the copyright contract
or
the arbitration agreement otherwise entered into between or among the parties.
If the parties do not have an arbitration agreement, they can resolve the
dispute through the PRC courts.
Software
copyright registration
Pursuant
to the Copyright Law of the PRC, or the Copyright Law, which was adopted
at the
15th Meeting of the Standing Committee of the Seventh National People’s Congress
on September 7, 1990 and effective from June 1, 1991, works including computer
software developed by PRC citizens, legal persons or other entities without
legal personality, whether published or not, are protected under the Copyright
Law. On February 20, 2002, the State Copyright Administration of the PRC
promulgated the Measures Concerning Registration of Computer Software Copyright
Procedures, or the Registration Procedures, to implement the Regulations
for the
Protection of Computer Software and to promote the development of China’s
software industry. The Registration Procedures apply to the registration
of
software copyrights and software copyright exclusive licensing contracts
and
assignment contracts. The registrant of a software copyright will be the
copyright owner and the natural person, legal person or other organization
in
whom the software copyright becomes vested through succession, assignment
or
inheritance.
Pursuant
to the Registration Procedures, the software to be registered must (i) have
been
independently developed or (ii) significantly improve in its function or
performance after modification from the original software, with the permission
of the original copyright owner. If the software being registered is developed
by more than one person, the copyright owners may nominate one person to
handle
the copyright registration process on behalf of the other copyright owners.
If
the copyright owners fail to reach an
agreement
with respect to the registration, any of the copyright owners may apply for
registration but the names of the other copyright owners must be recorded
on the
application.
The
parties to a software copyright assignment contract or exclusive licensing
contract may apply to the Copyright Protection Center of the PRC, or CPC,
for
registration of such contracts. In registering a contract, the following
materials must be submitted: (1) a completed contract registration form;
(2) a
copy of the contract; and (3) the applicant’s identification
documents.
The
CPC
will complete its examination of an accepted application within 60 days of
the
date of acceptance. If an application complies with the requirements of the
Software Protection Regulations and the Registration Procedures, a registration
will be granted, a corresponding registration certificate will be issued
and the
registration will be publicly announced.
Software
products registration
On
October 27, 2000, the Ministry of Information Industry of the PRC, or the
MII,
issued the Measures Concerning Software Products Administration, to regulate
and
administer software products and promote the development of the software
Industry in China. Pursuant to the Measures Concerning Software Products
Administration, all software products operated or sold in China must be duly
registered with the relevant authorities.
To
produce software products in China, the software production units should
meet
certain requirements, such as the possession of (i) enterprise legal person
status and a scope of operations which includes the computer software business;
(ii) a fixed production site; (iii) conditions and technologies for producing
software products; and (iv) quality control measures and capabilities for
the
production of software products. Software developers or producers are allowed
to
sell their registered software products independently or through agents,
or by
way of licensing. If the software products are sold through a distribution
agent, there must be a contract between the software developer and the agent,
and between the agent and its sub-agents, if any, specifying the distribution
rights, distribution territory and distribution term as well as the technical
services to be provided by the distribution agent. The MII and other relevant
departments may carry out supervision and inspection over the development,
production, operation and import/export activities of software products in
China.
Policies
to encourage the development of software and integrated circuit
industries
On
June
24, 2000, the State Council issued Certain Policies to Encourage the Development
of Software and Integrated Circuit Industries, or the Policies, to encourage
the
development of the software and integrated circuit industries in China and
to
enhance the international competitiveness of the PRC information technology
industry. The Policies encourage the development of the software and integrated
circuit industries in China through various methods, including:
|
(i)
|
encouraging
investment in the software industry and providing or assisting
software
enterprises to raise capital
overseas;
|
|
(ii)
|
providing
tax incentives, including a tax rebate for taxpayers who sell
self-developed software products, before 2010, the amount of the
17.0%
statutory value added tax that exceeds 3.0%, will be refunded immediately
when paid. There is a full exemption from the PRC enterprise income
tax
for two years starting from the first profit-making year of operations
and
a 50.0%-relief from the PRC enterprise income tax for the following
three
years for recognized newly established enterprises that are engaged
in the
software industry. The software enterprises of particular importance
pursuant to the state stipulations, which do not enjoy any tax
exemption
benefit in a
|
|
|
given
year, will be subject to a reduced enterprise income tax rate of
10.0% in
that year. Moreover, software enterprises that import certain equipment
for the development of their self-developed software, with limited
exemptions, are also entitled to the exemption of import related
value-added tax;
|
|
(iii)
|
providing
government support, such as government funding in the development
of
software technology;
|
|
(iv)
|
providing
preferential treatment, such as credit facilities with low interest
rates
to enterprises that export software
products;
|
|
(v)
|
taking
various strategies to ensure the software industry has sufficient
expertise; and
|
|
(vi)
|
implementing
measures to enhance intellectual property protection in
China.
|
Regulation
of foreign exchange and dividend distribution
Foreign
exchange
The
principal regulations governing foreign exchange in China are the Foreign
Exchange Control Rules (1996), as amended. On June 20, 1996, the People’s Bank
of China promulgated the Administration Rules of Settlement, Sale and Payment
of
Foreign Exchange, or the FX Administration Rules, which became effective
on July
1, 1996.
Under
the
FX Administration Rules, Renminbi is generally freely convertible for trade
and
service-related foreign exchange transactions, but not for foreign direct
investment, foreign loans or issuance of securities outside China unless
the
prior approval of SAFE is obtained.
Pursuant
to the FX Administration Rules, foreign investment enterprises in China
generally may purchase foreign exchange without the approval or review of
SAFE
for trade and service-related foreign exchange transactions by providing
commercial documents evidencing these transactions. They may also retain
foreign
exchange, subject to a cap approved by SAFE, under current account items.
However, the relevant PRC government authorities may limit or eliminate the
ability of foreign investment enterprises to purchase and retain foreign
currencies in the future. Foreign investment enterprises are permitted to
distribute their profits or dividends in foreign currencies out of their
foreign
exchange accounts or exchange Renminbi for foreign currencies through banks
authorized to conduct foreign exchange business.
Dividend
distribution
The
principal PRC regulations governing the distribution of dividends by our
wholly
foreign-owned enterprises are (i) The Wholly Foreign-Owned Enterprise Law
(1986), as amended in 2000; and (ii) Implementation Regulations under the
Wholly
Foreign-Owned Enterprise Law (2001).
Under
these regulations, wholly foreign-owned enterprises in China may only pay
dividends out of their accumulated profits, if any, determined in accordance
with PRC accounting standards and regulations. In addition, a wholly
foreign-owned enterprise in China is required to set aside at least 10.0%
of its
after-tax income each year, if any, to fund a reserve fund until the accumulated
reserve amounts to 50.0% of its registered capital. It is also required to
set
aside funds for the employee bonus and welfare fund from its after-tax income
each year at percentages determined at its sole discretion. These reserves
are
not distributable as cash dividends.
Restricted
net assets
Relevant
PRC laws and regulations permit payments of dividends by our PRC subsidiaries
only out of their retained earnings, if any, as determined in accordance
with
PRC accounting standards and regulations. In addition, the statutory general
reserve fund, which requires annual appropriations of 10% of net after-tax
income should be set aside prior to payment of any dividends. As a result
of
these and other restrictions under PRC laws and regulations, our PRC subsidiary
and affiliate are restricted in their ability to transfer a portion of their
net
assets to us either in the form of dividends, loans or advances, restricted
portion amounted to approximately RMB522.535 million (US$67.0 million), or
40.0%
of our total consolidated net assets as of December 31, 2006.
Even
though we currently do not require any such dividends, loans or advances
from
our PRC subsidiaries, we may in the future require additional cash resources
from our PRC subsidiaries due to changes in business conditions, to fund
future
acquisitions or developments, or merely to declare and pay dividends or
distributions to our shareholders, although we currently have no intention
to do
so.
Regulation
of the import/export industry
The
State Administration for Quality Supervision and Inspection and Quarantine
of
the PRC
In
April
2001, the PRC Inspections Administration was established by combining the
former
State Import and Export Commodity Inspection Quarantine Bureau of the PRC
and
the State Quality and Technique Supervision Bureau of the PRC, which oversees
the inspection work of import and export commodities for the PRC in accordance
with the institutional reform plan of the State Council. The PRC Inspections
Administration, which is primarily an administrative and law enforcement
institution governing, among others, the health quarantine of imported and
exported animals and plants, the inspection, appraisal, certification and
supervision of imported and exported commodities, has the following
responsibilities, among others:
|
•
|
executing
the inspection and quarantine, appraising and supervising of import
and
export commodities;
|
|
•
|
implementing
the quarantine and supervision for the import and export of animals
and
plants and the inspection, supervision and administration of the
sanitary
and food quality;
|
|
•
|
administering
health registrations of import and export food products and their
production units and external registration for export enterprises;
administering the import and export inspection and quarantine marks,
import safety licenses, and export quality licenses; and implementing
the
import and export-related quality authentication and
accreditation;
|
|
•
|
administering
the issuance of Origin Certificates for commodities and the general
certificates of origin;
|
|
•
|
formulating
the development plan of technologies for commodity inspection and
quarantine; and
|
|
•
|
developing
international cooperation and technology exchanges related to commodity
inspection and quarantine and carrying out the implementation work
relating to technological barriers to trade, as
stipulated.
|
Customs
General Administration of the PRC
PRC
Customs, General Administration is the highest authority for supervising
and
administering the customs points for entering into and departing from the
PRC
and is responsible for customs administration throughout the
nation.
The
PRC
Customs Law is intended to protect PRC sovereignty and interests and to
strengthen the administration of customs supervision. In accordance with
the PRC
Customs Law, PRC Customs, General Administration has primary responsibility
for:
|
•
|
supervising
the entering into and departing from the PRC of transportation
tools,
goods, luggage, postal items and other
articles;
|
|
•
|
collecting
customs duties and other taxes and
fees;
|
|
•
|
investigating
and suppressing smuggling; and
|
|
•
|
preparing
customs statistics and conducting other customs
affairs.
|
Import/
Export license system
The
import and export license system is an important administrative measure in
the
international trade regulations of the PRC. Since the early 1990’s, the PRC
government has gradually relaxed its control over import activities including
abandoning or reducing the range of import licenses, import quotas and import
control. Since 1998, the PRC government has removed its control of import
licenses and export quotas over a wide range of commodities which previously
required import licenses. On December 10, 2001, the State Council issued
the
Regulations of the People’s Republic of China on Administration of Import and
Export, or the Regulations, which apply to the import of goods into China
and
the export of goods from China, to standardize administration of import and
export of goods and to promote the development of foreign trade in China.
Pursuant to the Regulations, goods for importation are divided into three
categories: (i) prohibited for imports, (ii) restricted for imports, and
(iii)
free for imports. The lists of prohibited and restricted imports is formulated
by the State Council department responsible for foreign trade and economic
cooperation after consulting other relevant State Council departments.
Restricted imports are further divided into quota-controlled imports,
license-controlled imports and tariff- and quota-controlled imports. Import
quotas are distributed to quota applicants annually based on specific criteria.
Import licenses are issued on a case-by-case basis. Exported goods are also
divided into prohibited exports, restricted exports and free exports. The
lists
of prohibited and restricted exports is formulated by the State Council
department responsible for foreign trade and economic cooperation after
consulting other relevant State Council departments. Restricted exports are
further divided into quota-controlled exports and license-controlled exports.
Export quotas are distributed annually and may be distributed through direct
allocation, invitation of bids or other methods. Export licenses are issued
on a
case-by-case basis. Under certain circumstances, the relevant State Council
departments may take certain temporary measures to restrict or prohibit certain
imports.
Administrative
provisions on the Origin Certificate
All
exporters may apply for origin certificates in respect of the products to
be
exported out of China. In compliance with the Implementation Rules of the
Place
of Origin for Export Goods of the PRC issued on April 1,
1992, which became effective on May 1, 1992, and the Provisions for the Issuance
of the Origin Certificate for Export Goods of the PRC (Trial Implementation),
which became effective on January 1, 1996, and to strengthen the administration
of the issuance of Origin Certificates, the Ministry of Foreign
Trade
and
Economic Cooperation, currently known as the Ministry of Commerce, promulgated
the Administrative Provisions of the PRC on Origin Certificate on March 8,
1996,
or the Administrative Provisions. The Administrative Provisions are aimed
at
facilitating the implementation of a national EDI project by the Ministry
of
Commerce. The Ministry of Commerce made use of the recommended standard form
of
the Origin Certificate issued by the then State Technology Supervision
Administration of the PRC on July 1, 1996, to standardize and regulate the
administration, subscription, printing, transportation, record-keeping,
issuance, calculation and examination of the Origin Certificate, thus minimizing
or eliminating the occurrence of forged or fake Origin Certificates. The
new
standard form of the Origin Certificate bears a uniform serial
number.
Commodity
quality inspection and quarantine inspection
Commodity
quality inspection
The
Law
on the People’s Republic of China on Import and Export Commodity Inspection
adopted by the Standing Committee of the Seventh National People’s Congress on
February 21, 1989, which became effective on August 1, 1989, as amended on
April
28, 2002, provides that all imported and exported commodities included in
a
published inspection list must be inspected in accordance with the relevant
compulsory inspection standards or other standards specified by the state
inspection authorities prior to export out of China or use or sale in China
for
imported goods. On October 23, 1992, the State Import and Export Commodities
Inspection Bureau, with the approval of the State Council, promulgated the
Implementing Provisions for Law of the People’s Republic of China on Import and
Export Commodity Inspection, which stipulates particular requirements for
the
import and export commodity inspection.
Quarantine
inspection
The
Standing Committee of the PRC National People’s Congress adopted the Import
& Export Animals and Plants Quarantine Law on April 1, 1992, which provides
the legal basis for the quarantine inspection of animals, plants and other
products and the containers and packaging materials used for transporting
or
packing these items. On December 2, 1996, the State Council issued Implementing
Regulations for the Import & Export Animals and Plants Quarantine Law which
provides detailed procedures for quarantine inspection of animals, plants
and
other products. The PRC Inspections Administration is currently responsible
for
carrying out import and export commodity inspections.
C. Organizational
structure
We
conduct substantially all of our business through seven PRC subsidiaries
and two
variable interest entities in China. The following diagram illustrates our
subsidiaries, their country of incorporation and the proportion of our ownership
of each as of May 31, 2007.
For
details of the above subsidiaries and variable interest entities, see “— History
and development of the company.”
D. Property
and equipment
Our
principal executive offices occupy a total of approximately 3,170 square
meters on the 5th, 12th, 14th and 17th floors of Union Plaza, 20 Chaowai Street
and the 20th floor of the Fan Li Building, 22 Chowai Street, Chaoyang District,
Beijing 100020 PRC. In addition, we occupy a representative office of
approximately 200 square meters at Suites 1705-6, 17/F, Two Chinachem
Exchange Square, 338 King’s
Road, North Point, Hong Kong. As
of May 31, 2007, we have
one office which we own and we have also leased 9 locations in the
following cities and municipalities to serve as technical support centers and
quarters for our technical support staff:
|
Location
|
Office
space
(in
square meters)
|
Number
of employees
|
|
Guangdong
Province
|
||
|
Dongguan
|
921.69
|
44
|
|
Guangzhou
|
120.85
|
57
|
|
Beijing
|
551.65
|
37
|
|
Shanghai
|
139.00
|
12
|
|
Total
|
1,733.19
|
153
|
During
2005, we transferred a number of technical support centers to our franchisees
in
an effort to reduce the number of technical support centers that we operate
on
our own. We currently support our existing users jointly with our
four franchisees through four technical support centers operated and
maintained by us and 43 technical support centers operated and maintained
by our four franchisees located in most of the major import/export cities in
China.
Ninetowns
Ports acquired, subject to the receipt of the necessary title certificates,
four
residential units in the Sing Sun Building in Guangzhou, with aggregate space
of
approximately 355 square meters and uses such premises as employee housing
for
our employees in Guangzhou. During 2006, Ninetowns Ports acquired two
commercial units as offices with aggregate space of approximately 340.61 square
meters.
Ninetowns
Times owns two commercial units in the Qingdao Bai Sing Building in Qingdao,
with aggregate space of approximately 384 square meters and uses such commercial
units as offices. Ninetowns Times also acquired, subject to the receipt of
the
necessary title certificates, an eight-storey building in Fengtai, with
aggregate space of approximately 2,206.59 square meters and uses such
building as a call center for our technical support services and also as a
research and development center.
Ninetowns
Ports also acquired four floors and the naming right of a building in
Beijing. See Item 7 of this annual report, “Major Shareholders and
Related Party Transactions — Related party transactions — Transaction with Mr.
Ko Jin Heng.”
Insurance
The
insurance industry in China is still at an early stage of development. We are
not required to maintain business liability insurance, and, to our knowledge,
other software companies in China do not maintain such insurance. As a result,
we do not have business liability insurance coverage, but we do maintain vehicle
liability insurance. Moreover, while business disruption insurance is available,
we have determined that the risks of disruption and the cost of insurance are
such that we do not require it at this time. Any business disruption, litigation
or natural disaster might therefore result in substantial costs and diversion
of
our resources.
We
do not
maintain key-man life insurance for any member of senior management. We maintain
directors and officers insurance for our directors and members of senior
management.
Item
5. Operating and Financial Review
and Prospects.
Overview
We
are a
leading PRC software company that enables enterprises and trade-related PRC
government agencies to streamline the import/export process in China; we believe
we are a leader in our market based on revenues and market share. We achieve
this by leveraging our international trade expertise and our insight into the
needs and procedures of certain trade-related PRC government agencies. To date,
we have focused on providing enterprise software and related customer
maintenance services for the completion over the Internet of the declaration
process. In order to secure our market position, we assisted in designing and
building, and continue to maintain and upgrade, the electronic systems of the
PRC Inspections Administration, that enable our enterprise software to process
electronic declarations over the Internet.
We
generated total net revenues of RMB201.5 million, RMB239.9 million and RMB153.2
million (US$19.6 million) in 2004, 2005 and 2006, respectively. The decrease
in
our total net revenues was due to the PRC Inspections Administration’s free
distribution of products that are similar to our iDeclare.CIQ product
series. Our net income in 2004 was RMB134.0 million increasing to
RMB151.6 million in 2005. Our net income in 2006 was RMB45.9 million
(US$5.9 million) representing a 69.7% decrease from 2005. We believe
there were approximately 95,000, 122,000 and 130,000 licensees of our enterprise
software registered to effect electronic import/export processing with the
PRC
Inspections Administration as of December 31, 2004, 2005 and 2006,
respectively.
The
major
factors affecting our results of operations and financial condition
include:
Focus
on sales of enterprise software and software development
services
Our
predecessor, Ninetowns Technology, was formed in 1995 to focus on the research
and development of software related to the declaration process, in addition
to
selling computer hardware and accessories. During the first several years of
our
operations, our net revenues from computer hardware sales constituted almost
all
of our total net revenues and provided the necessary funding for our development
of software related to the declaration process. As we developed, we engaged
in
three main lines of business: (i) sales of enterprise software and related
customer maintenance services, (ii) provision of software development services,
and (iii) sales of computer hardware and accessories. Since 2001, we have
shifted our business focus from sales of computer hardware and accessories
to
sales of enterprise software and related customer maintenance services and
provision of software development services. Sales of computer hardware and
accessories accounted for an insignificant percentage of our total net revenues
in 2006 and are expected to be a negligible part of our business in the
future. We intend to continue deploying our resources on sales of
enterprise software and related customer maintenance services and provision
of
software development services that enable enterprises and trade-related PRC
government agencies to streamline the import/export process in
China.
Growth
of the import/export industry in China
Our
financial results have been, and we expect them to continue to be, affected
by
the growth of the import/export industry in China. According to Global Insight,
the total value of import/export transactions in China reached approximately
US$1.7 trillion in 2006, up from approximately US$1.2 trillion in
2004 and approximately US$1.4 million in 2005. As a result of China’s accession
into the WTO in 2001, tariffs imposed by China on all imported goods are
expected to be reduced and PRC-imposed import quotas and permit requirements
are
expected to be gradually eliminated. We believe the combination of a
rapidly
growing
PRC economy and China’s accession to the WTO will accelerate the growth of the
import/export industry in China, and as a result create additional demand for
our products and services.
Increase
in number of potential users
The
number of users of our enterprise software has increased significantly since
we
first launched our iDeclare.CIQ software products in August 2000. This increase
is partially attributable to the increasing number of PRC international trade
enterprises and partially attributable to the increasing demand from such
enterprises for more efficient import/export processing methods. We expect
an
increase in the number of PRC international trade enterprises as the PRC economy
continues to expand. We believe this in turn will increase demand for our
enterprise software and related customer maintenance services and software
development services, as international trade enterprises seek an efficient
means
of completing the declaration process.
In
August
2005, the PRC Inspections Administration selected our company as the winning
bidder in connection with the PRC Inspections Administration’s request for
proposals for the development of a software product that has certain basic
functionalities similar to those of iDeclare.CIQ and iProcess.CIQ product
series. The PRC Inspections Administration agreed to pay a one-time
fee of RMB3.3 million (US$423,000) to purchase the ownership of the software
product that we developed. In February 2006, the PRC Inspections Administration
commenced to distribute such software products free-of-charge to
end-users. We believe that the distribution of free software
products, while in the long run will likely increase the number of e-filers
and
hence increase demand for our enterprise software services, would have a
significant adverse effect on our total net revenue, our results of operations
and profitability in the short-term. For example, we sold, together with our
franchisees, approximately 1,500 and 2,200 software packages of iDeclare.CIQ
during the first quarter of 2006 and 2007, respectively, which is significantly
lower than the approximately 8,000 software packages of iDeclare.CIQ sold by
our
company and our former distributors and franchisees during the first quarter
of
2005. In May 2007, the PRC Inspections Administration selected our
company as one of the winning bidders in connection with the PRC Inspections
Administration’s request for proposals for servicing the free import/export
e-filing software provided by the PRC Inspections Administration.
Expanding
our user base through franchisees
We
believe our user base has substantial growth potential due to the high number
of
international trade enterprises that possess import/export rights in China.
According to the PRC Ministry of Commerce, there were approximately 609,276
foreign-invested companies registered to do business in China as of May 31,
2007. In addition, there are numerous PRC-based companies that possess
import/export rights. A key component of our growth strategy is to secure new
customers through the efforts of our franchisees and we intend to engage
additional franchisees to expand our marketing and distribution network.
Currently, we have engaged four franchisees to undertake marketing, distribution
and service activities in China.
Description
of revenues, cost items and trade receivables
We
primarily operate in three lines of business: (i) sales of enterprise software,
(ii) software development services, and (iii) sales of computer hardware and
accessories. Currently, our total net revenues are primarily derived from our
sales of enterprise software. Our net revenues from sales of computer hardware
and accessories constituted less than 0.3% of our total net revenues for
2006. In May 2007, we launched tootoo.com, our new B2B vertical
search platform.
Total
net revenues
Currently,
we generate total net revenues primarily from (i) sales of enterprise software
products and fees from customer maintenance services, (ii) fees from software
development services, and (iii) sales of computer hardware and
accessories.
We
derived RMB51.7 million, RMB89.1million and RMB37.6 million (US$4.8 million),
or
25.6%, 37.1% and 24.6% of our total net revenues in 2004, 2005 and 2006,
respectively, from our related parties iTowNet and eGrid, which are two of
our
major customers for software development services, and Ninetowns Enke, which
is
one of our franchisees.
Our
total
net revenues are net of business tax and VAT, but include VAT refunds as
discussed below. Our sales of enterprise software products and computer hardware
and accessories are generally subject to a VAT of 17.0%. Our fees charged for
software development services and customer maintenance service for enterprise
software products are generally subject to a 5.0% business tax. Pursuant to
the
laws and regulations of the PRC, three of our subsidiaries in China are entitled
to a refund of the 14.0% VAT for certain self-developed software products.
We
recognize the VAT refunds at the same time we recognize net revenues from sales
of enterprise software. VAT refunds are included in our net revenues from sales
of enterprise software. In 2006, we recognized RMB10.5 million (US$1.3 million)
in
VAT refunds. We cannot predict how much our net revenues from sales of our
enterprise software or software development services will increase in the
future, or if they will increase at all.
Enterprise
software. Our net revenues from enterprise software are derived primarily
from sales of our iDeclare.CIQ basic package and related customer maintenance
service fees. We charge users of our iDeclare.CIQ product series a license
fee of RMB4,500 per software package, which includes a one-year basic customer
maintenance service period. We also charge RMB1,500 for each additional year
of
customer maintenance services, which includes a number of value-added services
in addition to the basic maintenance services. We charge users of
iProcess.CIQ product series on the same terms as those for iDeclare.CIQ product
series. Enterprise software revenues and fees from customer maintenance services
are recognized ratably over a 12-month period. Enterprise software revenues
received or receivable but not yet recognized are accounted for as deferred
revenue on our balance sheets. Deferred revenue is reduced proportionately
as
enterprise software revenues are recognized ratably over the 12-month
period.
In
addition to direct sales, we also sold our enterprise software to our former
distributors and franchisees for further sale to users. As of December 31,
2005,
the distribution agreements with our former distributors, Panyu Chengchang
and
Tomorrow Technology, expired and we chose not to renew them due to our efforts
to develop our franchisee network. In May 2005, January 2006 and
October 2006, we engaged three new franchisees and we currently have four
franchisees. Our per-unit license fee for enterprise software
products charged to our former distributors and franchisees is based on our
negotiated sales arrangement with the former distributor or franchisee, and
is
less than the RMB4,500 per-unit license fee we receive from direct sales. We
also sell iDeclare.CIQ products on a fee-per-declaration filing basis to a
limited number of users, substantially all of whom are located in Guangdong
Province, China. Our ability to grow our net revenues from sales of enterprise
software will depend on (i) the rate of increase in the number of new users
of
such product, (ii) the market’s acceptance of our planned new software products,
(iii) the success of our plans to engage additional franchisees, and (iv) our
increased efforts in marketing our customer maintenance services to our users.
It is currently unclear how the distribution of free enterprise software by
the
PRC Inspections Administration affects our ability to grow our net revenues
from
sales of enterprise software.
Notwithstanding
that we intend to charge for such maintenance services, we believe our users
and
potential customers are not accustomed to being charged for this type of service
and it is unclear to us
how
many
of our users will pay for such maintenance services. In 2006, we collected
customer maintenance service fees from approximately 29,000 users, representing
approximately 23.8% of our users due to renew their maintenance
service. We intend to continue to increase our marketing and
collection efforts with respect to these customer maintenance service fees.
We
expect our profit margin from sales of enterprise software to decrease if the
VAT refund is eliminated or reduced by the PRC tax authorities. We expect net
revenues from per declaration filing fees to increase with our increased sales
of enterprise software, but to remain stable as a percentage of our total net
revenues.
Software
development services. Our net revenues from software development services
are derived primarily from contracts related to PRC government agency software
development projects, such as our services for the PRC Inspections
Administration and the data exchange platforms operated by iTowNet, which is
our
related party, and our services for eGrid, which is also our related party.
As
we believe is consistent with the practice of other software development
companies in China engaged in government-related work, we often commence work
on
software development projects based on oral commitments from our customer and
sign the contract after the commencement of work. Once a contract has been
signed, we begin recognizing net revenues from these projects based on the
percentage-of-completion method, in which revenue recognition is based on the
man-hours spent and the costs invested in the project. Billing is generally
done
periodically in accordance with predetermined milestones as established by
the
contract. We expect net revenues from software development services to increase
as we are engaged by additional PRC government agencies, such as PRC Customs,
to
perform such services, but we cannot predict how much such revenues will grow
in
the future, or if they will grow at all.
Computer
hardware sales. Although we derived significant net revenues
from computer hardware sales in the past, we expect net revenues from this
business to represent an insignificant portion of our total net revenues in
the
future.
Cost
of revenues
Our
cost
of revenues consists principally of costs related to sales of our enterprise
software and our provision of software development services.
Enterprise
software. Our enterprise software consists of standardized software, the
production of which involves minimal cost. We have production arrangements
with
several outside contractors, under which they produce the compact discs that
contain our software and charge us a fee for such services. We package such
compact discs with compact disc holders and ship the packages from our Beijing
headquarters to our branch offices, former distributors and franchisees. As
a
result, the cost of revenues for sales of enterprise software consists mainly
of
outsourcing costs to those outside contractors and costs associated with
packaging and shipping of software. Currently, we also distribute our enterprise
software procedures through the Internet. We expect our cost of revenues from
sales of enterprise software to increase as a percentage of our total net
revenues because we will be required to recognize additional cost of revenues
after we commercially introduce our iMonitor.CGA product series, since the
costs
associated with our iMonitor.CGA product seriesas a percentage of net revenues
from sales of enterprise software are higher than the costs associated with
our
iDeclare.CIQ product series.
Software
development services. Our cost of software development services is
comprised mainly of personnel expenses, office rental expenses and other
expenses directly related to our provision of software development services.
We
record cost of revenues for software development services on a
percentage-of-completion method by reference to the man-hours incurred and
estimated total project hours. We expect our cost of revenues related to
software development services to increase as a percentage of our net revenues
from software development services as a result of the requirement for more
advanced technologies in new projects. As such, we expect our overall cost
of
revenues from software development services to increase as we perform more
software development services.
Computer
hardware sales. Our cost of revenues from computer hardware sales is
minimal because (i) we do not manufacture these products, but source them from
third party manufacturers, (ii) we maintain minimal inventories of computer
hardware and accessories, and (iii) we have a very low volume of sales in this
line of business.
Gross
profit margin
Our
gross
profit margin is primarily affected by our net revenues from sales of enterprise
software and the cost of revenues for our software development services. For
the
purpose of calculating our gross profits, costs that are not otherwise
specifically allocated are allocated to our costs associated with (i) sales
of
enterprise software, (ii) software development services, and (iii) sales of
computer hardware and accessories, in proportion to the gross profits from
these
lines of business prior to the allocation of such common costs. We expect our
enterprise software gross profit margin to decrease with our expected increase
in iMonitor.CGA sales because the costs associated with iMonitor.CGA, as a
percentage of net revenues from sales of enterprise software, are higher than
the costs associated with our iDeclare.CIQ product series. We expect our
software development services gross profit margin to decrease as we invest
in
more advanced technologies in new software development projects. We do not
expect our computer hardware line of business to impact our gross profit as
we
continue to shift our business focus to our other lines of
business.
Operating
expenses
Our
operating expenses consist of (i) selling expenses, (ii) general and
administrative expenses and (iii) research and development
expenses. We do not allocate operating expenses to individual lines
of business when making decisions about allocation of resources or assessing
the
performance of our lines of business. Effective January 1, 2006, the
Company adopted SFAS 123R which supercedes APB 25 and recognized stock-based
compensation cost on a straight-line basis over the requisite service period,
which is the vesting method.
Selling
expenses. Selling expenses consist primarily of sales, marketing and
personnel expenses, customer service expenses, associated rental expenses,
marketing and advertising expenses and travel and entertainment expenses
for our
sales and marketing staff. We expense all selling expenses as they are incurred.
As we engage additional franchisees to expand our marketing and distribution
network, we expect to significantly decrease the number of our sales and
marketing staff. This, after netting off the effect of the increase
in our stock-based compensation expenses, resulted in a significant decrease
in
our selling expenses for 2006. We expect to expand our marketing and
advertising campaigns to compete with the free software distributed by the
PRC
Inspections Administration and we intend to increase incentive payments to
salespersons to promote our enterprise platform products. In
addition, if we decide to engage in a new line of business, we expect to
increase the number of our sales and marketing staff to promote that business.
As a result of the above, we generally expect a gradual increase in our selling
expenses.
General
and administrative expenses. General and administrative expenses consist
primarily of personnel expenses, office rental expenses, general office
expenses, travel and entertainment expenses, professional fees and allowance
for
doubtful debts. We expense all general and administrative expenses as they
are
incurred. In 2006, we incurred substantially higher general and administrative
expenses than in earlier years (excluding the impact of stock-based compensation
charge of RMB35.0 million in 2003) as a result of increases in (i) professional
fees incurred related to our status as a public company and our acquisition
and
investment activities, (ii) depreciation and amortization charges on fixed
assets and intangible assets, (iii) increase in stock-based compensation
expenses and (iv) increase in the number of employees due to our expansion
into
the B2B business. We expect our general and administrative expenses
to increase continuously in 2007.
Research
and development expenses. Research and development expenses consist
primarily of research and development personnel expenses and associated rental
expenses. We expense research and development expenses as they are incurred.
In
addition, because technological feasibility for our software products ordinarily
occurs right before such products are commercially launched and because costs
incurred between technological feasibility and commercial launch are immaterial,
such costs are expensed as incurred. We expect our research and development
expenses to increase as a result of (i) our investment in the research and
development of new enterprise platform products, (ii) an increase in the
number
of research and development personnel, (iii) an increase in stock-based
compensation expenses, (iv) an expected increase in our potential new business
ventures and (v) our investment in software licenses for development tools
to
increase the productivity of our overall research and development
efforts.
As
a
result of the cumulative effect of the factors described above, we expect
in the
future our total operating expenses will increase.
Taxation
Under
the
current laws of the Cayman Islands our company is not subject to tax on its
income or capital gains. In addition, payment of dividends by us is not subject
to withholding tax in the Cayman Islands.
PRC
enterprise income tax. Our PRC operating subsidiaries are subject to PRC
EIT on their taxable income. Pursuant to PRC tax laws, EIT is generally assessed
at the rate of 33.0% of taxable income.
Beijing
New Take, Ninetowns Times and Beijing Digital are afforded favorable tax
treatment and are only subject to a 15.0% EIT, Shanghai New Take and Ninetowns
Ports are also afforded favorable tax treatment. Shanghai New Take was exempt
from EIT from January 1, 2003 to December 31, 2004 and is subject to a 16.5%
EIT
from January 1, 2005 to December 31, 2007. Ninetowns Ports was exempt from
EIT
from August 1, 2003 to December 31, 2005 and is subject to a 7.5% EIT for the
period from January 1, 2006 to December 31, 2008. Guangdong Ninetowns
Technology is entitled to an exemption from EIT from January 1, 2006 to December
31, 2007. Ninetowns Network is entitled to an exemption from EIT from January
1,
2006 to December 31, 2008. Ronghe Tongshang and Baichuan are
currently subject to a 33% EIT.
Beijing
Digital, Beijing New Take, Ninetowns Times, Ninetowns Ports and Ninetowns
Network have qualified as “new and high technology enterprises” and have been
granted preferential EIT rates based on such status. Shanghai New Take has
also
been granted preferential EIT rates based on its status as a software company.
Relevant PRC government authorities specify certain financial and operational
criteria for a company to comply with in order to maintain its status as a
new
and high technology enterprise.
PRC
business tax. Our PRC operating subsidiaries are also subject to PRC
business tax. We primarily pay business tax on our net revenues generated from
software development services and customer maintenance services. Our PRC
operating subsidiaries generally pay a 5.0% business tax on our net
revenues
derived from software development services and customer maintenance services
and
this business tax is deducted from our total net revenues.
Value-added
tax. Our PRC operating subsidiaries are also generally subject to a 17.0%
VAT on sales of computer hardware and accessories and our enterprise software
products. Pursuant to PRC tax regulations, Ninetowns Times, Ninetowns
Digital and Ninetowns Ports are entitled to a 14.0% VAT refund on sales of
certain registered self-developed software products. Our net revenues from
sales
of such enterprise software include VAT refunds in the amount of RMB17.4
million, RMB19.8 million and RMB10.5 million (US$1.3 million) in 2004, 2005
and
2006, respectively.
Upon
expiration of these preferential EIT rates and VAT refunds, we will consider
available options, if any, in accordance with applicable law, that would enable
us to qualify for further tax incentives.
Trade
receivables
Our
trade
receivables from external customers and trade receivables from related parties
consist primarily of amounts due from our franchisees for enterprise software
delivered to them and amounts billed but not paid for our software development
services. Our trade receivables balance due from related parties was RMB4.0
million (US$0.5 million) as of December 31, 2006.
Critical
accounting policies
The
methods, estimates and judgments we use in applying our accounting policies
have
a significant impact on the results we report in our consolidated financial
statements. Some of our accounting policies require us to make difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. We have summarized below our accounting policies
that we believe are both important to the portrayal of our financial results
and
involve the need to make estimates about the effect of matters that are
inherently uncertain.
Revenue
recognition
We
account for the sales of our enterprise software in accordance with American
Institute of Certified Public Accountants, or AICPA, Statement of Position
(SOP)
97-2, “Software Revenue Recognition.” The application of SOP 97-2 requires
judgment, including whether a software arrangement includes multiple elements,
and if so, whether vendor-specific objective evidence, or VSOE, of fair value
exists for those elements. Our customers receive certain elements of our
enterprise software over a period of time, including post-delivery repair and
enterprise software maintenance, training, telephone support and nonspecific
enhancements of the software on a when-and-if-available basis. As no fair value
of these elements can be assessed reliably, we recognize such revenues ratably
over the contract period of the software arrangement, which is usually 12
months. Changes to the elements in a software arrangement, the ability to
identify VSOE for those elements, and the fair value of the respective elements
could all materially impact the amount of earned and unearned revenue.
Enterprise software revenues received or receivable but not yet recognized
are
accounted for as deferred revenue on our balance sheet. Deferred revenue is
reduced proportionately as enterprise software revenues are recognized ratably
over the 12-month period.
As
we
believe is consistent with the practice of other software development companies
in China engaged in government-related work, we often commence work on software
development projects based on oral commitments from our customer and sign the
contract after the commencement of work. Once a contract has been signed, we
begin recognizing revenues from these projects based on the
percentage-of-completion of the contracts, in which revenue recognition is
based
on the actual hours spent and the
estimated
costs to complete the projects. Billing is generally done periodically in
accordance with predetermined milestones as established by the contract. The
determination of percentage-of-completion with reference to actual hours spent
and the estimated costs to complete the projects requires significant
judgment.
Stock-based
compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
123R,
using the modified prospective transition method. Under this method, share-based
compensation expense recognized beginning January 1, 2006 includes: (a)
compensation expense for all share-based compensation awards granted prior
to,
but not yet vested as of January 1, 2006, based on the fair market value
as of
the grant date, measured in accordance with the Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” issued
by FASB and (b) compensation expense for all share-based compensation awards
granted on or subsequent to January 1, 2006, based on grant-date fair vale
estimated in accordance with the provisions of SFAS 123R. We recognize
share-based compensation costs on a straight-line basis over the requisite
service period which is generally the vesting period. For share-based
compensation awards that were granted before we became a public company and
are
not yet vested, the fair value is measured using the minimum value method
and we
continue to report these options under APB 25. For options vested
prior to January 1, 2006, we accounted for share-based compensation plans
in
accordance with APB 25.
We
recorded a compensation charge of RMB10.3 million for the options granted to
our
employees under our 2004 Plan.
As
we
have not granted options to our employees under the 2006 Share Incentive Plan,
we do not have compensation charges that are associated with the 2006 Share
Incentive Plan to record.
Trade
receivables
We
perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customer’s current credit-worthiness, as
determined by our review of their current credit information. We extended three
months of credit to our former distributors and franchisees pursuant
to
our
distribution and franchise agreements. However, it took on average five to
six
months for our former distributors and franchisees, who are also our major
customers, to settle their debts to us. Therefore, in some fiscal periods,
our
trade receivables increased, and may increase in the future, to an amount which
is approximately equal to our total net revenues for such period. We
continuously monitor collections and payments from our customers and maintain
a
5.0% provision on the period-end balance of the trade receivables for estimated
credit losses from our customers and franchisees based upon our historical
experience. We typically write-off trade receivables that are over 360 days
outstanding. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have had in the
past. The trade receivables from Ninetowns Enke, iTowNet and eGrid,
which are our customers that are related to us, were approximately 18.1% of
our
total trade receivables as of December 31, 2006. The trade receivables from
our
customers and franchisees, which are unrelated to us, were approximately 81.9%
of our total trade receivables as of December 31, 2006. Since our trade
receivables are concentrated in a relatively small number of customers, a
significant change in the liquidity or financial position of any one of these
customers could have a material adverse impact on the collectibility of our
trade receivables and our future operating results.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired. Goodwill is tested for
impairment annually or more frequently if events or changes in circumstances
indicate that it might be impaired. We completed a two-step goodwill
impairment test for 2004, 2005 and 2006. The first step compares the
fair values of each reporting unit to its carrying amount, including
goodwill. If the fair value of each reporting unit exceeds its
carrying amount, goodwill is not impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair
value, the second step compares the implied fair value of goodwill to the
carrying value of a reporting unit’s goodwill. The implied fair value
of goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in the
first step to the assets and liabilities of the reporting unit. The
excess of the fair value of the reporting unit over the amounts assigned to
the
assets and liabilities is the implied fair value of goodwill. An
impairment loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Based on the Company’s
assessment, there was no impairment of goodwill for the years ended December
31,
2004, 2005 and 2006.
A. Operating
results
The
following table sets forth the results of our operations expressed as a
percentage of our total net revenues for the periods indicated. Our historical
operating results are not necessarily indicative of the results for any future
period.
|
Year
ended
December
31,
|
|||
|
2004
|
2005
|
2006
|
|
|
Total
net revenues:
|
|||
|
Enterprise
software
|
93.6%
|
84.8%
|
76.2%
|
|
Software
development
services
|
6.3
|
14.9
|
23.5
|
|
Computer
hardware
sales
|
0.1
|
0.3
|
0.3
|
|
Cost
of revenues:
|
|||
|
Enterprise
software
|
0.7
|
0.2
|
-
|
|
Software
development
services
|
1.5
|
7.6
|
11.0
|
|
Computer
hardware
sales
|
–
|
0.2
|
0.1
|
|
Gross
profit
|
97.8
|
92.0
|
88.9
|
|
Year
Ended
December
31,
|
|||
|
2004
|
2005
|
2006
|
|
|
Operating
expenses:
|
|||
|
Selling
expenses
|
7.9
|
10.7
|
8.9
|
|
General
and administrative expenses
|
18.2
|
20.6
|
43.0
|
|
Research
and development expenses
|
2.4
|
4.7
|
19.5
|
|
Government
subsidies
|
0.64
|
0.23
|
0.5
|
|
Income
from
operations
|
69.9
|
56.2
|
18.0
|
|
Interest
income
|
1.9
|
7.34
|
12.6
|
|
Income
before provision for income taxes and minority
interest
|
71.8
|
63.5
|
30.6
|
|
Provision
for income
taxes
|
0.9
|
0.3
|
0.6
|
|
Income
before minority
interests
|
70.9
|
63.2
|
30.0
|
|
Minority
interests
|
4.4
|
–
|
|
|
Net
income
|
66.5%
|
63.2%
|
30.0%
|
2006
compared to 2005
Total
net revenues
We
generated total net revenues of RMB153.2 million (US$19.6 million) in 2006,
a
decrease of 36.1% over our total net revenues of RMB239.9 million in 2005.
This
revenue decrease was principally the result of the PRC Inspections
Administration’s free distribution of products that are similar to
our iDeclare product series.
Enterprise
software. Net revenues from sales of our enterprise software decreased by
42.6% to RMB116.8 million (US$15.0 million) in 2006 from RMB203.5 million
in
2005, primarily as a result of the PRC Inspections Administration’s free
distribution of products that are similar to our iDeclare product
series. The availability of a free software product that has similar
functions as iDeclare caused our sales of our iDeclare product series to
decline
significantly. In 2006, we signed customer maintenance service
contracts with approximately 29,000 users whose customer maintenance service
contracts were due for renewal in 2006. We recognized net revenues of
RMB43.4 million (US$5.6 million) from provision of customer maintenance services
in 2006. Of our net revenues from sales of enterprise software, RMB23.6 million
and RMB21.9 million (US$2.8 million) were from per declaration filing fees
in
2005 and 2006, respectively, representing a year-on-year decrease of 7.2%.
As of
December 31, 2006, we believe there were approximately 130,000 licensees
of our
enterprise software registered to effect electronic import/export processing
over the data exchange platforms of iTowNet, an increase of 6.6% from
approximately 122,000 of such licensees as of December 31, 2005.
Software
development services. Net revenues from our software development services
increased by 0.9% from RMB35.7 million in 2005 to RMB36.0 million
(US$4.6 million) in 2006. In 2006, we did not enter into as many
software development contracts as compared to 2005, but we completed some
project milestones and recognized revenue for software development contracts
signed in 2005.
Computer
hardware sales. Net revenues from computer hardware sales comprised less
than 0.3% of our total net revenues as we gradually exited this line of
business.
Cost
of revenues
Enterprise
software. Cost of revenues from sales of enterprise software decreased by
100% to nil in 2006 as compared to RMB495,000 in 2005. Since iDeclare is
now
generally distributed through the Internet, we
incurred
minimal outsourcing costs to outside contractors and costs associated with
packaging and shipping of software.
Software
development services. Cost of revenues from software development services
decreased to RMB16.8 million (US$2.2 million) in 2006 from RMB18.2 million
in
2005, primarily as a result of fewer number of software development service
contracts signed in 2006. As of December 31, 2006, the Company did
not have capitalized costs related to such projects which represents a decrease
of 100% over the prior year’s balance of RMB153,000 as of December 31,
2005.
Computer
hardware sales. Cost of revenues from computer hardware sales was
insignificant in 2006.
Gross
profit margin
Enterprise
software. Gross profit margin for sales of enterprise software in 2006 was
100% compared to 99.8% in 2005 primarily because iDeclare is now generally
distributed through the Internet and we incurred minimal outsourcing costs
to
outside contractors and costs associated with packaging and shipping of
software.
Software
development services. Gross profit margin for software development services
in 2006 remained relatively stable at 53.3% compared to 49.0% in
2005.
Computer
hardware sales. Gross profit margin for computer hardware sales increased
to 66.3% in 2006 from 28.9% in 2005, primarily due to decreased sales of
lower-margin products such as desktop computers.
Operating
expenses
Operating
expenses increased by 26.4% to RMB109.4 million (US$14.0 million) in 2006
from
RMB86.5 million in 2005, primarily as a result of our efforts to expand our
business through new business models, additional staff, increase in stock-based
compensation costs and increased research and development.
Selling
expenses
Selling
expenses decreased by 47.2% to RMB13.6 million (US$1.7 million) in 2006 from
RMB25.7 million in 2005, primarily due to our change in business model from
direct sales to franchise sales.
General
and administrative expenses
General
and administrative expenses increased by 38.3% to RMB67.4 million (US$8.6
million) in 2006 from RMB48.8 million in 2005, primarily due to increases
in (i)
professional fees incurred in relation to our acquisition and investment
activities and compliance requirements applicable to us as a public company
in the United States, (ii) depreciation and amortization charges on
fixed assets and intangible assets, (iii) stock-based compensation costs
and
(iv) general personnel expenses, office expenses, communication expenses,
traveling expenses and insurance expenses, in each case associated with the
increase in the scale of our operations.
Research
and development expenses
Research
and development expenses increased significantly by 165.1% to RMB29.8 million
(US$3.8 million) in 2006 from RMB11.2 million in 2005, primarily due to an
increase in (i) stock-based compensation costs and (ii) staff costs related
to
the research and development of our new products primarily related to our
new
B2B business.
Government
subsidies
We
received government subsidies of RMB705,000
(US$90,000) in 2006, which represented an increase of 57.8% from RMB
477,000 in 2005, primarily attributable to the receipt of government subsidies
for research and development of an electronic platform from the Committee
of
Zhongguancun Science Park.
Interest
income
Interest
income increased to RMB19.3 million (US$2.5 million) in 2006 from RMB17.6
million in 2005, primarily due an increase in the amount of our term
deposits.
Income
taxes
Income
taxes increased by 64.7% to RMB1.0 million (US$132,000) in 2006 from RMB626,000
in 2005, as Ninetowns Ports, who is one of our major operating subsidiaries
and
was exempt from EIT from August 1, 2003 to December 31, 2005, became subject
to
a 7.5% EIT starting from January 1, 2006.
Net
income
Net
income decreased
significantly by 69.7% to RMB45.9 million (US$5.9 million) in 2006 from RMB151.6
million in 2005 as a result of the cumulative effect of the factors described
above.
2005
compared to 2004
Total
net revenues
We
generated total net revenues of RMB239.9 million in 2005, an increase of
19.0%
over our total net revenues of RMB201.5 million in 2004. This revenue growth
was
principally the result of the expansion of both of our enterprise software
business and software development business and the recognition of net revenues
from sales of enterprise software that were made in 2004.
Enterprise
software. Net revenues from sales of our enterprise software increased by
7.8% to RMB203.5 million in 2005 from RMB188.7 million in 2004, primarily
as a
result of an increase in the number of users of our enterprise software,
which
is partially attributable to the increasing number of international trade
enterprises operating in China and also attributable to the increasing demand
for more efficient import/export processing methods. The increase in our
net
revenues from enterprise software is also attributable to the increase in
the
number of customer maintenance service contracts sold to our existing users.
In
2005, we signed customer maintenance service contracts with approximately
44,600
users whose customer maintenance service contracts were due for renewal in
2005.
We recognized net revenues of RMB33.2 million from provision of customer
maintenance services in 2005. Of our net revenues from sales of enterprise
software, RMB24.1 million and RMB23.6 million were from per declaration filing
fees in 2004 and 2005, respectively, representing a year-on-year decrease
of
2.1%. As of December 31, 2005, we believe there were approximately 122,000
licensees of our enterprise software registered to effect electronic
import/export processing over the data exchange platforms of iTowNet, an
increase of 28.4% from approximately 95,000 of such licensees as of December
31,
2004.
Software
development services. Net revenues from our software development services
increased significantly to RMB35.7 million in 2005 from RMB12.7 million in
2004.
This increase is attributable to the fact that a number of software development
projects were initiated in 2004 based on oral commitments from our customers
but
contracts for such projects were not signed until 2005, and therefore net
revenues were not recognized until 2005.
Computer
hardware sales. Net revenues from computer hardware sales comprised less
than 1.0% of our total net revenues as we gradually exited this line of
business.
Cost
of revenues
Enterprise
software. Cost of revenues from sales of enterprise software decreased by
67.6% to RMB495,000 in 2005 as compared to RMB1.5 million in 2004, due to
the
effects of more stringent cost controls.
Software
development services. Cost of revenues from software development services
increased significantly to RMB18.2 million in 2005 from RMB3.0 million in
2004,
primarily as a result of our work on software development projects in 2004
based
on oral commitments from our customers but contracts for such projects were
not
signed until 2005, and therefore the cost for such projects were not recognized
until 2005. As of December 31, 2005, the Company has capitalized costs related
to such projects totaling RMB153,000 which represents a significant decrease
from the prior year’s balance of RMB6.7 million as of December 31,
2004.
Computer
hardware sales. Cost of revenues from computer hardware sales was
insignificant in 2005.
Gross
profit margin
Enterprise
software. Gross profit margin for sales of enterprise software in 2005
remained stable at 99.8% compared to 99.2% in 2004 primarily because our
costs
of producing our enterprise software are relatively low and did not change
between the periods presented.
Software
development services. Gross profit margin for software development services
in 2005 decreased to 49.0% compared to 76.7% in 2004, which is mainly
attributable to an increase in software development personnel
expenses.
Computer
hardware sales. Gross profit margin for computer hardware sales decreased
to 28.9% in 2005 from 91.3% in 2004, primarily due to increased sales of
lower-margin products such as desktop computers.
Operating
expenses
Operating
expenses increased by 50.8% to RMB86.5 million in 2005 from RMB57.4 million
in
2004, primarily as a result of our efforts to expand our business through
increased sales, additional staff and increased research and
development.
Selling
expenses
Selling
expenses increased by 61.2% to RMB25.7 million in 2005 from RMB16.0 million
in
2004, primarily due to an increase in advertising, office, rental, staff
and
travel expenses related to increased sales and the expansion of our distribution
network.
General
and administrative expenses
General
and administrative expenses increased by 36.0% to RMB48.8 million in 2005
from
RMB35.9 million in 2004, primarily due to increases in (i) professional fees
incurred in relation to compliance requirements applicable to us as a public
company in the United States, (ii) depreciation and amortization
charges on fixed assets and intangible assets and (iii) general personnel
expenses, office expenses, communication expenses, traveling expenses and
insurance expenses, in each case associated with the increase in the scale
of
our operations.
Research
and development expenses
Research
and development expenses increased by 133.4% to RMB11.2 million in 2005 from
RMB4.8 million in 2004, primarily due to an increase in staff costs related
to
the research and development of our new products such as a PRC Customs
declaration filing system and an electronic payment system.
Government
subsidies
Government
subsidies decreased by 66.6% to RMB447,000 in
2005 from RMB1.3 million in 2004. This was attributable to our receipt of a
RMB1.0 million government subsidy for research and development work from
the
Electronic Information Industry Fund of the Ministry of Information Industry
of
the PRC in 2004. We did not receive such subsidy in
2005.
Interest
income
Interest
income increased by significantly to RMB17.6 million in 2005 from RMB3.8
million
in 2004, primarily due to interest income derived from our net proceeds from
our
initial public offering in December 2004.
Income
taxes
Income
taxes decreased by 65.7% to RMB626,000 in 2005 from RMB1.8 million in 2004,
primarily due to the increasing operations of Ninetowns Ports, which was
exempt
from enterprise income tax in 2005.
Net
income
Net
income increased by 13.2% to
RMB151.6 million in 2005 from RMB134.0 million in 2004 as a result of the
cumulative effect of the factors described above.
Inflation
Inflation
and deflation in China did not have a material impact on our results of
operations in the past three years. According to the National Bureau of
Statistics of China, China’s overall national inflation rate, as represented by
the change in the Consumer Price Index in China, was 3.9%, 1.8% and 1.5%
in
2004, 2005 and 2006, respectively.
Foreign
currency risk
Substantially
all of our revenues and expenses are denominated in Renminbi, but a certain
amount of our cash is kept in U.S. dollars and Hong Kong dollars in reputable
financial institutions in Hong Kong and the United States. Although
we believe that in general, our exposure to foreign exchange risks should
be
limited, our cash flows and revenues will be affected by the foreign exchange
rate between U.S. dollars and Renminbi. For example, if we decide to convert
our
Renminbi into U.S. dollars for the purpose of declaring dividends on our
ordinary shares or for other business purposes and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of our earnings from our
subsidiaries in China would be reduced. In addition, our cash flows and revenues
may also be affected by the foreign exchange rate between Renminbi and Hong
Kong
dollars or U.S. dollars and Hong Kong dollars, as we have certain operating
expenses related to our representative office in Hong Kong that are denominated
in Hong Kong dollars.
We
have
experienced minimal foreign exchange gains and losses to date. We do not
engage
in any hedging activities, and we may in the future experience economic loss
as
a result of any foreign currency exchange rate fluctuations.
B. Liquidity
and capital resources
Our
primary sources of liquidity have been net cash provided by operating
activities. We had no outstanding debt as of December 31, 2006. The
following table sets forth the summary of our cash flows for the periods
indicated:
|
For
the years ended December 31,
|
||||||||||||||||||||
|
2003
|
2004
|
2005
|
2006
|
2006
|
||||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
RMB 87.2
|
RMB 143.3
|
RMB 146.4
|
RMB 40.8
|
US$ 5.2
|
|||||||||||||||
|
Net
cash used in investing
activities
|
(39.6 | ) | (179.4 | ) | (110.9 | ) | (176.5 | ) |
（22.6）
|
|||||||||||
|
Net
cash provided by financing activities
|
70.2
|
565.6
|
2.0
|
6.3
|
0.8
|
|||||||||||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
117.8
|
529.5
|
(34.5 | ) | (132.8 | ) | (17.0 | ) | ||||||||||||
|
Cash
and cash equivalents, beginning of year
|
49.7
|
167.5
|
697.0
|
731.5
|
93.7
|
|||||||||||||||
|
Cash
and cash equivalents, end of year
|
RMB 167.5
|
RMB 697.0
|
RMB731.5
|
RMB598.6
|
US$76.7
|
|||||||||||||||
Substantially
all of our operations are in China. The ability of our PRC operating
subsidiaries to convert Renminbi into U.S. dollars and transfer such U.S.
dollars to us is subject to PRC foreign exchange regulations, including
the
restriction that foreign invested enterprises may only buy, sell and/or
remit
foreign currencies at banks in the PRC authorized to conduct foreign exchange
business after providing valid commercial documents.
Cash
flow from operating activities
We
provided cash from operating activities of RMB40.8 milion (US$5.2 million)
in
2006. This was primarily attributable to our cash receipts from sales
of enterprise software and software development services. We provided
cash in operating activities of RMB146.4 million in 2005. This was primarily
attributable to our cash receipts from sales of enterprise software and
software
development services. We generated cash from operating activities of
RMB143.3 million in 2004. This was primarily attributable to our cash receipts
from sales of enterprise and software development services.
Cash
flow from investing activities
Cash
used
in investing activities was RMB176.5 million (US$22.6) million in
2006. This was primarily attributable to our purchase of property and
equipment for our new B2B business and our investment in Global Market,
our
purchase of intangible assets and increase of term deposits.
Cash
used
in investing activities was RMB110.9 million in 2005. This was
primarily attributable to a deposit payment for the acquisition of an additional
floor of the building under construction in Beijing, our purchases of property
and equipment and an increase in our term deposits. Investing activities
used
cash of RMB179.4 million in 2004. This was primarily attributable to our
purchase of three floors and the naming rights of a building under construction
in Beijing, computer equipment, furniture, fixtures and office equipment,
the
acquisition of minority interests in our subsidiaries and increase of term
deposits, offset by the repayment of loans by Import &
Export.
Cash
flow from financing activities
Financing
activities generated cash of RMB6.3 million (US$0.8 million), in
2006. This was comprised primarily of employee’s exercise of their
vested share options. Financing activities provided cash of RMB2.0
million in 2005. This was comprised primarily of receipt of proceeds on exercise
of stock options by our employees offset by our repayment of outstanding
advances from shareholders. Financing activities provided cash of RMB565.6
million in 2004. This was comprised primarily of the net proceeds from our
initial public offering in December 2004 of RMB531.4 million and approximately
US$3.0 million of escrowed net proceeds from our capital-raising activities
in
2003, which we received from escrow in September 2004, offset by our repayment
of loans to Jitter Bug.
Capital
resources
Our
primary source of liquidity is cash flow from operating activities. Our cash
and
cash equivalents primarily consist of cash on hand and bank deposits. As
of
December 31, 2006, we had RMB598.6 million (US$76.7 million) in cash and
cash
equivalents. In addition, as of December 31, 2006, we had invested RMB307.2
million (US$39.4 million) in term deposits, which are payable at varying
maturities from three to six months.
We
believe that our available cash and cash equivalents and cash provided by
operating activities will be sufficient to meet our capital needs for at
least
the next 12 months. Except for our net cash provided by operating activities,
we
currently have no plans to seek additional sources of liquidity in the near
future. However, we cannot assure you that our business or operations will
not
change in a manner that would consume our available capital resources more
rapidly than anticipated, especially as we continue to evaluate other investment
and acquisition opportunities. As of December 31, 2006, we had no lines of
credit or other credit facilities.
Capital
expenditures
For
details of our capital expenditures, see Item 4 of this annual report,
“Information on the Company – History and development of the
company.”
C. Research
and development
Our
research and development department works continuously to develop new software
products as well as new software functions with additional import/export
related
applications to complement our existing enterprise software, thereby enhancing
value for our users. Our research and development department is divided into
the
following three sub-departments:
|
·
|
Business
development department— our business development department is
responsible for business strategies and research to identify users’ needs
in order to formulate new product
designs.
|
|
·
|
Systems
development department— our systems development department is
responsible for product development in accordance with the designs
proposed by the business development department, as well as software
testing and quality control.
|
|
·
|
Project
management department— our project management department is
responsible for the allocation of staff and resources, employee
training,
product analysis and the registration of new software products
with the
relevant PRC government
authorities.
|
In
the
past, we have developed products and services both independently and through
cooperation with a variety of database providers, enterprise resource planners,
decision support statistical consultants, software integration providers
and
others. Although we intend to continue to work closely with outside third
parties in product development efforts, we expect the core technology and
know-how for future enhancements to our existing and new products will be
developed internally and may be supplemented by technology licensed from
third
parties. See Item 3 of this annual report, “Key Information — Risk factors —
Risks related to our business — We may not be able to adequately protect our
intellectual property rights and others may claim that we have infringed
on
their intellectual property rights, which could cause us to be less competitive,
may expose us to litigation and may negatively impact our business, results
of
operations and financial condition.” We have not granted any ownership interest
in any of our products to any party that has worked with us in our product
development efforts. In the past, we shared ownership in a foreign trade
business system software with Jingjiang A-Bin Software Workshop, or A-Bin,
and a
declaration software system that is not a part of our iDeclare.CIQ product
series, with Beijing Regard. We are not selling either software and, to our
knowledge, neither A-Bin nor Beijing Regard is currently selling such
software.
As
of
December 31, 2006, we had 424 employees dedicated to research and development,
22 of whom have master’s degrees and two of whom have Ph.D. degrees. Most of our
research and development efforts are located in our principal executive offices
in Beijing and in our research and development center in Fengtai.
Our
expenses for research and development activities totaled RMB4.8 million in
2004,
RMB11.2 million in 2005 and RMB29.8 million (US$3.8 million) in
2006.
We
believe that timely development of new and enhanced products and services
is
necessary for us to remain competitive in the marketplace. Accordingly, we
intend to continue recruiting and hiring research and development personnel
and
to make other investments in research and development. We are in the process
of
establishing two additional research and development centers, one in the
eastern
region of China and one in the southern region of China, and we expect those
research and development centers to be fully functional by the middle of
2008.
D. Trend
information
Other
than as disclosed elsewhere in this annual report, we are not aware of any
trends, uncertainties, demands, commitments or events for the period from
January 1, 2006 to December 31, 2006 that are reasonably likely to have a
material effect on our net revenues, income, profitability, liquidity or
capital
resources, or that caused the disclosed financial information to be not
necessarily indicative of future operating results or financial
conditions.
E. Off-balance
sheet arrangements
In
September 2006, we entered into a subscription agreement with Global Market
to
subscribe 1,940,000 Series A preferred shares, which represents 16.25%
of the
fully diluted equity interest in Global Market on an if-converted basis,
for a
cash consideration of US$5.0 million. The subscription agreement
contains certain put and call options. The call option gives us a
right to acquire a variable number of Global Market's ordinary shares at
a
nominal price of US$1.00 in the event Global Market's earnings fall below
a
predetermined level or to receive cash if additional earnings requirements
are
not met. The put option gives Global Market a right to repurchase up
to 285,000 issued ordinary shares from us at a nominal price of US$1.00
when
Global Market's earnings are above a predetermined level. These put
and call options are accounted for as embedded derivatives and because
they are
not clearly and closely related to the Series A preferred share agreement,
they
should be bifurcated and marked to market on each balance sheet
date. These embedded derivatives are bundled together and reported as
a single, compound embedded derivative instrument. As of December 31,
2006, the fair value of this bundled derivative instrument was not material
because we have only had our investment in Global Market for a short period
of
time and Global Market’s projected operating results are expected to be within a
reasonable range that will not cause a significant change in our investment
value.
We
do not
have other derivative financial instruments, off-balance sheet guarantees,
interest rate swap transactions or foreign currency forward contracts,
and we do
not engage in trading activities involving non-exchange traded
contracts.
F. Contractual
obligations
We
have
entered into leasing arrangements relating to our office premises and technical
support centers. Our contractual obligations regarding these lease arrangements
generally consist of rental payments and other charges that are due and payable
on a monthly basis during the term of the relevant lease. In general, our
lessors have the right to terminate the lease agreements and repossess the
leased premises if we fail to make the prescribed payments for two consecutive
months, or the expiration of a reasonable period after service of notice
for
non-payment of rent by the lessors. The following sets forth our commitments
under these leases as of December 31, 2006:
|
(in
thousands)
|
|
|
Less
than one
year
|
RMB1,959
|
|
1-3
years
|
155
|
|
3-5
years
|
—
|
|
More
than 5
years
|
—
|
|
Total
|
RMB2,114
|
As
of
December 31, 2006, we had no purchase obligations or long-term commitments
other
than the lease obligations described above.
G. Recently
issued accounting pronouncements
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No.
155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, to permit fair value re-measurement for any hybrid financial
instrument with an embedded derivative that otherwise would require bifurcation,
provided that the whole instrument is accounted for on a fair value basis.
SFAS
No. 155 amends SFAS No. 140, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, to allow a qualifying special-purpose entity to hold a
derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. SFAS No. 155 applies to all
financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006, with earlier application
allowed. The Company does not expect the adoption of SFAS No. 155 to have
a
material impact on its consolidated results of operations and financial
condition.
In
June
2006, the FASB ratified the provisions of the Emerging Issue Task Force Issue
No. 06-3 “How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement” (“EITF 06-3”), which
requires the Company to disclose how it accounts for taxes imposed on and
concurrent with a specific revenue-producing transaction. EITF 06-3 will
be
effective for the Company starting January 1, 2007. The Company does not
believe
that the application of EITF 06-03 will have a material effect on its financial
position, cash flow and results of operations
In
July
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognize and disclose in its financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 became effective
for the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN
48 and
its impact on its consolidated financial position, results of operations,
and
cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which
defines fair value, establishes a framework for measuring fair value and
expands
disclosures about fair value measurements. SFAS No.157 applies under other
accounting pronouncements that require or permit fair value measurements
and
accordingly does not require any new fair value measurements. SFAS No.157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating whether the adoption of SFAS No. 157 will have a material
effect on its consolidated results of operations and financial
position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an amendment of FASB
Statement No. 115". SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value. SFAS No.
159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand
the
effect of the company's choice to use fair value on its earnings. It also
requires entities to display the fair value of those assets and liabilities
for
which the Company has chosen to use fair value on the face of the balance
sheet. SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year beginning after November 15, 2007. The Company is currently
evaluating whether the adoption of SFAS No. 159 will have a material effect
on
its consolidated results of operations and financial position.
Item
6. Directors, Senior Management and
Employees.
A. Directors
and senior management
The
following table sets forth the name, age and position of our directors and
executive officers as of May 31, 2007:
|
Name
|
Age
|
Position
|
|
Shuang
Wang
|
44
|
Director
and Chief Executive Officer
|
|
Kin
Fai Ng
|
62
|
Director,
Senior Vice President and Company Secretary
|
|
Dachun
Zhang
|
62
|
Director
|
|
Fushan
Chen
|
68
|
Director
|
|
Xiaomin
Sun
|
52
|
Director
|
|
Mark
Ming Hsun Lee
|
35
|
Director
|
|
Xiaoguang
Ren
|
43
|
President
|
|
Tommy
Siu Lun Fork
|
44
|
Chief
Financial Officer
|
|
Name
|
Age
|
Position
|
|
Min
Dong
|
43
|
Senior
Vice President, Legal Affairs, Administration and Human
Resources
|
|
Bolin
Wu
|
41
|
General
Manager, Research and Development and Chief Technology
Officer
|
|
John
Yan Wang
|
45
|
Senior
Vice President, Business
Development
|
Shuang
Wang founded our predecessor, Ninetowns Technology, in 1995 and is now
a director and our Chief Executive Officer. From 1992 to 1994, Mr. Wang was
the
founder and Chief Executive Officer of Ninetowns Technology Co., Ltd., a
company
engaged in sales of computer hardware in China. From 1989 to 1992, Mr. Wang
was
the executive deputy general manager of Shenzhen Zhongnong Enterprise
Corporation, a company engaged in import and export of agricultural products.
In
March 2002, Mr. Wang was awarded the Traverse Cup Prize by Software World
Magazine and Microelectronic Industry Development and Research jointly with
a
number of industry magazines in China for Mr. Wang’s outstanding performance in
and significant contributions to the information technology industry. In
March
2003, Mr. Wang was also recognized as one of the “2002 top ten leaders of the
PRC software industry in China” by Software World Magazine jointly with China
Central TV for his significant contributions to the software industry. Mr.
Wang
is also the Chairman of the Board of Beijing New Take, Ninetowns Digital
and Beijing Ninetowns Times; the vice-chairman and a non-executive director
of
iTowNet; and a director of Jitter Bug, Ixworth, New Take, Shielder, Ninetowns
Ports and Global Market. Mr. Wang holds a bachelor’s degree in science from
Beijing Institute of Technology, a master’s degree in optics engineering from
Beijing Institute of Technology and an engineering qualification certificate
from the Ministry of Agriculture of the PRC.
Kin
Fai Ng has served as a director since October 2003, a senior vice
president of our company since 2000 and our company secretary since June
2006.
He has also been a director of New Take, Jitter Bug, Ixworth and Beijing
New
Take since 2000. From 1996 to 1999, Mr. Ng was an executive officer at Baolong
Real Estate Development Co., Ltd., a company engaged in property development
in
China.
Dachun
Zhang has served as a director since October 2003. From 2002 to 2003,
Mr. Zhang served as an executive director of Yew Sang Hong Holdings Limited,
an
electrical engineering contractor. Mr. Zhang was the vice president of COSCO
Group Limited, a shipping company, the executive deputy chairman and president
of COSCO (Hong Kong) Group Limited, chairman of COSCO (Hong Kong) Shipping
Company Limited from 1996 to 1999. Mr. Zhang served as an executive director
and
the president of China Merchants Group Limited, a conglomerate based in China
that is engaged in the transportation and harbor operation businesses, from
1998
to 1999 and the chairman of the board of directors of China Merchants Holdings
International Company Limited from 1998 to 2000. From 1999 to 2001, Mr. Zhang
served as the chairman of the board of directors of China Chengxin Securities
Rating Co., Ltd., a company engaged in the credit rating business in China.
Mr.
Zhang holds a bachelor’s degree in language and literature from Poznan
University in Poland, a master’s degree in shipping from the University of Wales
in the United Kingdom and the qualification certificate of a senior economist
in
shipping management conferred by the Ministry of Communications of the
PRC.
Fushan
Chen has served as a director since October 2003. Mr. Chen, who is
presently retired, served as the general manager and the director of the
Hong
Kong Branch of the China Classification Society, a shipping industry trade
organization, from 1995 to 2001. Mr. Chen also served as the deputy director
of
the Ship Inspection Bureau of the PRC and the vice-chairman of the China
Classification Society and the China Classification Association, respectively,
from 1989 to 1995. Mr. Chen holds a bachelor’s degree in ship casting from
Nanjing Shipping Institute.
Xiaomin
Sun has served as a director since July 2004. Mr. Sun is currently
the
president of Sanjiu Enterprise Group, or Sanjiu, a pharmaceutical manufacturer,
and has served in such position since May
2004.
Recently, the China Banking Regulatory Commission issued to financial
institutions in China a list of 15 companies and warned the financial
institutions to be on alert when making loans to these companies. Sanjiu
was
included on this list. Mr. Sun was appointed as the president of Sanjiu in
May
2004 by the State-Owned Asset Supervision and Administration Commission of
the
State Council of the PRC to help resolve the financial problems of Sanjiu,
which
had developed prior to Mr. Sun’s appointment. Mr. Sun also serves from time to
time as an arbitrator in the China International Economic and Trade Arbitration
Commission. From August 2000 to May 2004, Mr. Sun served as vice president
of
China General Technology (Group) Holdings Ltd., an import and export enterprise
based in China. From 1986 to 1998, Mr. Sun served as the General Manager
of the
Legal Department of China National Technical Import & Export Corporation, a
foreign trade corporation based in China. Mr. Sun holds a bachelor’s degree and
a master’s degree from the Department of Law of the University of
Beijing.
Mark
Ming Hsun Lee has served as a director since October
2004. Since June 2006, Mr. Lee was the founder, the chief executive
officer, president and a director of DeviceVM Ltd., a company engaged in
the
software business. Since March 2006, Mr. Lee also served as a
director of Dali System Co., Ltd. Mr. Lee was the founder, chief executive
officer, president and a director of OSA Technologies, Inc., a company engaged
in the software business, and has served in such positions from April 2000
to
April 2004. From April 2004 to June 2006, Mr. Lee served as the senior vice
president of Avocent Corp., a provider of computer keyboard, video and mouse
switching and network connectivity solutions, since it acquired OSA
Technologies, Inc. in April 2004. From the summer of 1991 to April 2000,
Mr. Lee
served in various positions, including enterprise platform marketing manager,
senior information technology architect and engineer, design engineer and
software quality assurance engineer for Intel Corporation. Mr. Lee holds
a
bachelor’s degree in electrical engineering and a master’s degree in electrical
engineering and computer science from Massachusetts Institute of Technology.
Mr.
Lee also holds a master’s degree in business administration from Arizona State
University.
Xiaoguang
Ren has served as our President since January 2004. From 1995 to
December 2003, Mr. Ren served in various positions with our company, including
vice president and senior vice president for sales and marketing. Mr. Ren
has
also been a director of Ixworth and Jitter Bug since February 2000. From
1988 to
1995, Mr. Ren served as the general manager of Beijing University Fangyuen
Life
Science Co., Ltd. and Tsingtao Minyi High Technology Co., Ltd, both companies
engaged in the software development business. Mr. Ren is also a director
of
iTowNet, New Take, Beijing New Take, Ninetowns Times and Ninetowns Ports,
a
director and general manager of Ninetowns Digital and the sole supervisor
of
Shanghai New Take. Mr. Ren holds a bachelor’s degree in mathematics from
Heilongjiang University and a master’s degree in computer science from the
Computing Technologies Research Institute of the Chinese Academy of
Sciences.
Tommy
Siu Lun Fork has served as our Chief Financial Officer since September
2002. Prior to joining our company, Mr. Fork was the Qualified Accountant
and
Company Secretary of Zheda Lande Scitech Limited, a provider of
telecommunications services, from 2001 to 2002. From 1997 to 2001, Mr. Fork
was
a senior manager of assurance and advisory services of Deloitte Touche Tohmatsu.
Mr. Fork holds a bachelor’s degree in Science from The University of Hong Kong
and is a Certified Public Accountant in Hong Kong.
Min
Dong formed our predecessor, Ninetowns Technology, in 1995 and is now
our Senior Vice President of Legal Affairs, Administration and Human Resources.
Prior to co-founding Ninetowns Technology in 1995, Ms. Dong served as a lecturer
at Central Finance and Economic University in China. Ms. Dong has been a
director of Jitter Bug and Ixworth since February 2000. Ms. Dong is also
a
director of New Take, Shielder, Beijing New Take, Ninetowns Digital, Ninetowns
Ports and Tsingdao Fujin, and a director and the
general
manager of Ninetowns Times. Ms. Dong is the spouse of Mr. Wang. Ms. Dong
holds a
bachelor’s degree and a master’s degree in law from China Politics and Law
University.
Bolin
Wu has served as our General Manager, Research and Development and
Chief Technology Officer since 1997. Prior to joining our company in 1997,
Mr.
Wu was in charge of the software engineering department of Tsingtao Minyi
High
Technology Co., Ltd., a company engaged in the software development business,
from 1995 to 1997 and served as an assistant professor at Shandong Textile
Polytechnic Institute and the Automation Faculty of Qingdao University from
1992
to 1995. Mr. Wu currently serves as the sole member of the supervisory board
of
iTowNet. Mr. Wu holds a bachelor’s degree in application electronics from
Hangzhou University of Commerce and a master’s degree in automation and computer
science from Shanghai Jiaotong University.
John
Yan Wang has served as our Senior Vice President of Business
Development since May 2004. Mr. Wang served as an independent consultant
for
investments to Zhongtian International, a company engaged in the software
service business, from May 2003 to May 2004. From May 2002 to April 2003,
Mr.
Wang was the President of Dawncom Company Limited, an electronics wholesaler.
He
was the Chief Operating Officer of Beijing Pansky Group, a company engaged
in
computer system integration and service, from May 2000 to April 2002. From
August 1998 to May 2000, Mr. Wang served as the country manager of Novell
China,
a network software company. He also served as the channel sales and marketing
director of Informix China Co., Ltd., a company engaged in the computer database
business, from June 1994 to July 1998 and a sales manager of UNISYS China,
a
company engaged in the computer system business, from January 1990 to June
1994.
From July 1986 to December 1989, Mr. Wang served as an engineer in the Ministry
of Light Industry in China. Mr. Wang holds a bachelor’s degree in automation
control from Shaanxi (Xian) Science and Technology University and a master’s
degree in computer network from The Chinese Academy of Sciences.
Effective
March 16, 2007, Eric Chen Yu Ho resigned as our Chief Strategy
Officer.
The
business address of each of our directors and executive officers is our
principal executive office at 5th Floor, Union Plaza, 20 Chaowai Street,
Chaoyang District, Beijing 100020 PRC.
B. Compensation
of directors and executive officers
As
of
December 31, 2006, we do not have any outstanding loans or credit to any
of our
directors or executive officers, and we have not provided guarantees for
borrowings by any of these persons. For 2006, the aggregate amount of
compensation paid by us to all of our directors and executive officers was
RMB7.8 million (US$1.0 million).
Our
full-time employees in China also participate in a government-mandated
multi-employer defined contribution plan pursuant to which pension benefits,
medical care, unemployment insurance and other welfare benefits are provided
to
those employees. The total provision for such employee benefits, corresponding
to the full amount of our obligation in connection therewith, was RMB1.4
million, RMB4.1 million and RMB7.5 million (US$1.0 million) for 2004, 2005
and
2006, respectively.
2003
Plan
Our
board
of directors adopted the 2003 Plan in November 2003. We have granted share
options relating to 2,574,400 ordinary shares under the 2003 Plan, which
is the
maximum number of share options allowed to be outstanding under the 2003
Plan. A
general description of the terms of the 2003 Plan is set forth
below.
Plan
administration. Our board of directors currently administers the 2003
Plan.
Eligibility.
Under the 2003 Plan, share options may be issued to employees and directors
of
our company or our subsidiaries.
Acceleration
of vesting upon general offers or winding up. The 2003 Plan provides for
acceleration of vesting upon the occurrence of a general offer or winding
up
transaction.
|
·
|
In
the event a general offer is made to all of our shareholders, including
a
takeover offer, repurchase offer or any similar arrangement, the
grantee’s
share options will become fully vested and exercisable for 14 days
after
the date on which such offer becomes or is declared
unconditional.
|
|
·
|
In
the event an application is made to a court in connection with
a proposed
compromise or arrangement between us and our creditors or between
us and
our shareholders, the grantee’s share options will become fully vested and
exercisable for 21 days after the date of such
application.
|
|
·
|
In
the event a notice is given by us to our shareholders to convene
a general
meeting to approve the voluntary winding-up of our company when
we are
solvent, the grantee’s share options will become fully vested and
exercisable at any time not later than two business days prior
to the
proposed general meeting.
|
Share
options. Share options under the 2003 Plan are evidenced by an option
certificate which contains, among other things, provisions concerning the
exercise price and vesting schedule of the share options. The exercise price
of
all of the options granted under our 2003 Plan is HK$25 per ordinary share,
which we believe was the fair market value of our ordinary shares on the
grant
date of such options. One-fourth of the share options granted under the 2003
Plan become exercisable on each of May 18, 2004, November 18, 2004,
November 18, 2005 and November 18, 2006. Generally, share options under the
2003
Plan are terminated if the grantee’s employment is terminated by us, or
terminated within 12 months from the date of the grantee’s retirement,
disability, change in our corporate structure, expiry of employment contract
or
termination of employment at the discretion of the board.
Termination
of 2003 Plan. Under the 2003 Plan, our board of directors may at any time
terminate the 2003 Plan, except that the provisions of the 2003 Plan will
remain
in respect of share options granted prior to such termination.
On
August
13, 2004, Mr. Wang and Ms. Dong entered into a deed of undertaking with AIG
Asian Opportunity Fund, L.P., or AOF, and American International Assurance
Company (Bermuda) Limited, or AIA, agreeing to (i) procure Value Chain to
distribute all of the cash consideration received from the reorganization
transaction to Mr. Wang and Ms. Dong, (ii) exercise all of their vested share
options under our 2003 Plan for 122,752 ordinary shares and apply the cash
from
the reorganization transaction to the exercise of such options, (iii) exercise
the remaining share options under our 2003 Plan for 368,260 ordinary shares
as
soon as such options become vested and exercisable and (iv) refrain from
transferring, assigning or creating any encumbrance over their share options
under our 2003 Plan.
The
following table summarizes, as of May 31, 2007, the outstanding options granted
under our 2003 Plan to our directors, executive officers and other employees
as
a group.
|
Ordinary
Shares Underlying Options Granted
|
Exercise
Price (HK$/Share)
|
Date
of Grant
|
Date
of Expiration
|
|
|
Xiaoguang
Ren
|
184,552
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Bolin
Wu
|
150,617
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Tommy
Siu Lun Fork
|
222,924
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Shuang
Wang
|
174,914
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Min
Dong
|
70,592
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Kin
Fai Ng
|
27,564
|
25
|
November
18, 2003
|
November
17, 2013
|
|
Other
employees as a group
|
869,465
|
25
|
November
18, 2003
|
November
17, 2013
|
Amended
and Restated 2004 Plan
Our
board
of directors adopted the Amended and Restated 2004 Plan on October 21, 2005
and
our shareholders approved the Amended and Restated 2004 Plan on December
2,
2005. The Amended and Restated 2004 Plan contains certain amendments
to the 2004 Plan, including an increase in the aggregate number of ordinary
shares that may be issued under the Amended and Restated 2004 Plan from 1.8
million ordinary shares to 4.3 million ordinary shares, an addition of an
“ever-green” provision and the ability to grant share appreciation rights,
restricted share awards and performance awards.
The
Amended and Restated 2004 Plan provides for the grant of incentive share
options, within the meaning of Section 422 of the Internal Revenue Code,
to our
employees and employees of our affiliates and subsidiaries.
Our
board
of directors or a committee appointed by our board of directors administers
our
Amended and Restated 2004 Plan. The administrator has the power to determine
the
terms of the share options, including the exercise price, the number of shares
subject to each such award and the circumstances for vesting.
The
administrator determines the exercise price of options granted under our
Amended
and Restated 2004 Plan, but with respect to incentive share options, the
exercise price must at least be equal to 100.0% of the fair market value
of our
ordinary shares on the date of grant. The term of an incentive share option
may
not exceed ten years from the grant date, except that with respect to any
participant who owns 10.0% or more of the voting power of all classes of
our
outstanding stock, the term must not exceed five years from the grant date
and
the exercise price must equal at least 110.0% of the fair market value on
the
grant date.
After
termination of an employee, director or consultant, he or she may exercise
his
or her option for the period of time stated in the option agreement. Generally,
(i) if termination is due to death or disability, the option will remain
exercisable for one year following such termination; (ii) if termination
is due
to retirement, the option will remain exercisable for six months following
such
termination; and (iii) if termination is for cause, the option will be forfeited
immediately. In all other cases, the option will generally remain exercisable
for 30 days following such termination. However, an option generally may
not be
exercised after the expiration of its term.
Our
Amended and Restated 2004 Plan generally does not allow for the transfer
of
options and only the recipient of an option may exercise an award during
his or
her lifetime.
Our
Amended and Restated 2004 Plan generally provides that in the event of a
“change
of control” involving our Company, the administrator may arrange for the
successor corporation to assume or substitute an equivalent award for each
outstanding option. The administrator may in the alternative pay cash or
other
consideration in exchange for cancellation of the outstanding
options.
Our
Amended and Restated 2004 Plan will automatically terminate in 2015, unless
we
terminate it sooner. In addition, our board of directors has the authority
to
amend, alter, suspend, discontinue or terminate the Amended and Restated
2004
Plan provided such action does not impair the rights of any
participant.
The
following table summarizes, as of May 31, 2007, the outstanding options granted
under our Amended and Restated 2004 Plan to our directors, executive officers
and other employers as a group.
|
Ordinary
Shares
Underlying
Options
Granted
|
Exercise
Price
(US$/Share)
|
Date
of Grant
|
Date
of Expiration
|
|
|
Xiaoguang
Ren
|
19,286
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Bolin
Wu
|
35,357
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Tommy
Siu Lun Fork
|
17,679
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Shuang
Wang
|
20,893
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Min
Dong
|
17,679
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Dachun
Zhang
|
8,036
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Fushan
Chen
|
8,036
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Xiaomin
Sun
|
17,679
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Mark
Ming Hsun Lee
|
17,679
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
John
Yan Wang
|
17,679
|
8.6
|
February
23, 2005
|
February
22, 2015
|
|
Other
employees as a group
|
588,409
|
8.6
|
February
23, 2005
|
February
22, 2015
|
We
plan
to grant restricted share awards, subject to certain vesting requirements,
under
our Amended and Restated 2004 Plan to certain individuals.
2006
Share Incentive Plan
Our
board
of directors adopted the 2006 Share Incentive 2006 Plan, or 2006 Plan, on
October 21, 2005 and our shareholders approved the 2006 Plan on December
2,
2005. The 2006 Plan includes the ability to grant stock options, share
appreciation rights, restricted and unrestricted shares and performance awards,
or collectively, the Awards.
The
2006
Plan provides for the grant of incentive share options, within the meaning
of
Section 422 of the Internal Revenue Code, to our employees and employees
of our
affiliates and subsidiaries.
Our
board
of directors or a committee appointed by our board of directors administers
our
2006 Plan. The administrator has the power to determine the terms of
the share options, including the exercise price, the number of shares subject
to
each such award and the circumstances for vesting.
The
administrator determines the exercise price of options granted under our
2006
Plan, but with respect to incentive share options, the exercise price must
be at
least equal to 100.0% of the fair market value of our ordinary shares on
the
date of grant. The term of an incentive share option may not exceed
ten year from the grant date, except that no participant may receive Awards
during the life of the 2006 Plan that relate to more than 30.0% of the maximum
number of shares that may be issued pursuant to Awards.
After
termination of an employee, director or consultant, he or she may exercise
his
option for the period of time stated in the option
agreement. Generally, (i) if termination is due to death or
disability, the option will remain exercisable for one year following such
termination; (ii) if termination is due to retirement, the option will remain
exercisable for six months following such termination; and (iii) if termination
is for cause, the option will be forfeited immediately. In all other
cases, the option will generally remain exercisable for 30 days following
such
termination. However, an option generally may not be exercised after
the expiration of its term.
Our
2006
Plan generally does not allow for the transfer of options and only the recipient
of an option may exercise an award during his or her lifetime.
Our
2006
Plan generally provides that in the event of a “change in control” involving our
Company, the administrator may arrange for the successor corporation to assume
or substitute and equivalent award for each outstanding option. The
administrator may in the alternative pay cash or other consideration in exchange
for cancellation of the outstanding options.
Our
2006
Plan will automatically terminate in 2015, unless we terminate it
sooner. In addition, our board of directors has the
authority to amend, alter, suspend, discontinue or terminate the 2006 Plan,
provided such action does not impair the rights of any participant.
We
have
not yet granted any Awards under our 2006 Plan.
C. Board
practices
Our
board
of directors consists of six members, including four independent directors.
Our
amended and restated memorandum and articles of association, as currently
in
effect, provide for a board of directors comprised of not less than two
directors. Each of our directors holds office until a successor has been
duly
elected and appointed, unless the director was appointed by our board of
directors, in which case such director holds office until the next following
annual meeting of shareholders at which time such director is eligible for
re-election.
In
2006,
our directors met in person or passed resolutions by unanimous written
consent 15 times. Each director attended all the meetings of our board and
its committees on which he served after becoming a member of our
board.
We
have
not entered into any service agreement that provides for benefits upon
termination of service with any of our directors or executive
officers.
Duties
of directors
Our
board
of directors has the ultimate responsibility for the administration of our
affairs. Under Cayman Islands law, our directors have a duty of loyalty and
must
act honestly, in good faith and with a view to our best interests. Our directors
also have a duty to exercise the care, diligence and skills that a reasonably
prudent person would exercise in comparable circumstances. In fulfilling
their
duties to us, our directors must ensure compliance with our amended and restated
memorandum and articles of association. A shareholder may in certain
circumstances have the right to seek damages if a duty owed by our directors
is
breached.
Board
committees
Our
board
of directors has established an audit committee, a compensation committee
and a
nominating committee.
Audit
committee. Our audit committee currently consists of Dachun Zhang, Xiaomin
Sun and Mark Lee. Our board of directors has determined that all of our audit
committee members are “independent directors” within the meaning of Nasdaq
Marketplace Rule 4200(a)(15) and meet the criteria for independence set forth
in
Rule 10A-3(b)(1) of the U.S. Securities Exchange Act of 1934, as amended,
or the
Exchange Act, and that Mr. Lee has the necessary financial sophistication
under
Nasdaq Marketplace Rule 4350(d)(2)(A). Our audit committee will be responsible
for, among other things:
|
·
|
the
integrity of our financial
statements;
|
|
·
|
the
qualifications, independence and performance of our independent
registered
public accounting firm;
|
|
·
|
the
performance, budget and staffing of our internal audit
functions;
|
|
·
|
the
review and approval of all related party
transactions;
|
|
·
|
our
compliance with legal and regulatory
requirements;
|
|
·
|
the
development and implementation of corporate governance principles,
policies, codes of conduct and ethics relating to the operation
of our
board of directors and its committees as well as our company as
a
whole;
|
|
·
|
appointing,
setting the compensation for, retaining, overseeing and terminating
our
independent registered public accounting
firm;
|
|
·
|
reviewing
and approving the scope and staffing of the independent registered
public
accounting firm's annual audit
plan;
|
|
·
|
establishing
policies for the hiring of current and former employees of the
independent
registered public accounting firm;
|
|
·
|
evaluating
the performance of the officers responsible for internal audit
functions
and making recommendations regarding the responsibilities, retention
and
termination of such officers;
|
|
·
|
reviewing
and approving the critical accounting policies and practices and
related-party transactions and off-balance sheet transactions of
our
company;
|
|
·
|
reviewing
our internal controls and disclosure controls and procedures in
conjunction with our chief executive officer and chief financial
officer;
|
|
·
|
appointing
a compliance officer with respect to our corporate governance guidelines
and codes of conduct and ethics;
|
|
·
|
meeting
annually with management to discuss compliance with our corporate
governance guidelines;
|
|
·
|
coordinating
the training of directors; and
|
|
·
|
reporting
regularly to the board of
directors.
|
Compensation
committee. Our current compensation committee consists of Dachun Zhang,
Xiaomin Sun and Mark Lee. Our board of directors has determined that all
of our
compensation committee members are “independent directors” within the meaning of
Nasdaq Marketplace Rule 4200(a)(15). Our compensation committee will be
responsible for, among other things:
|
·
|
review
and approval of the compensation of our executive
officers;
|
|
·
|
recommendations
with respect to our incentive compensation plans and equity-based
plans;
|
|
·
|
approval
of awards or material amendment of any employee benefit plan or
share
option plan;
|
|
·
|
oversight
of regulatory compliance with respect to compensation matters;
and
|
|
·
|
review
and approval of any severance or similar termination payments in
excess of
US$100,000.
|
Nominating
committee. Our current nominating committee consists of Dachun Zhang,
Xiaomin Sun and Mark Lee. Our board of directors has determined that all
of our
nominating committee members are “independent directors” within the meaning of
Nasdaq Marketplace Rule 4200(a)(15). Our nominating committee will be
responsible for, among other things:
|
·
|
nomination
of director candidates to serve on our board of directors and
recommendation of appointees to the committees of the board of
directors;
|
|
·
|
recommendations
to our board of directors regarding the termination of the directorship
of
directors;
|
|
·
|
annual
evaluation of our board of directors and each of its committees
and
members;
|
|
·
|
recommendations
to our board of directors concerning the appropriate size and needs
of our
board of directors; and
|
|
·
|
annual
review of the compensation of members of the board of
directors.
|
Corporate
governance
Our
board
of directors has adopted a code of ethics for our chief executive officer
and
senior financial officers and a code of business conduct and ethics, which
is
applicable to all of our directors, officers and employees. Our code of ethics
and code of business conduct and ethics are publicly available on our website.
In addition, our board of directors has adopted a set of corporate governance
guidelines. The guidelines reflect certain guiding principles with respect
to
the structure, procedures and committees of our board of directors. The
guidelines are not intended to change or interpret any law, or our amended
and
restated memorandum and articles of association.
D. Employees
As
of
December 31, 2006, we had 658 full-time employees. Of our employees, 12 were
in
management, 26 were in finance, 68 were in administration and human resources,
424 were in research and development and 128 were in sales and
marketing.
Our
employees located in China other than Hong Kong are covered by the retirement
schemes defined by PRC local practice and regulations, which are essentially
defined contribution schemes. Certain of our employees who are located in
Hong
Kong have joined the Mandatory Provident Fund Scheme which is also a defined
contribution scheme. The amounts we paid to these defined contribution schemes
were RMB863,000, RMB2.6 million and RMB4.6 million (US$0.6 million) for 2004,
2005 and 2006, respectively. In addition, we are required by law to contribute
approximately 10.0% in Beijing, 12.0% in Shanghai and 8.0% in Guangzhou of
the
average salaries of all employees for mandatory medical benefits and
approximately 1.5% in Beijing and 2.0% in both Shanghai and Guangzhou of
the
salaries of some
employees
for unemployment benefits. The PRC government is directly responsible for
the
payments of the benefits to these employees. The amounts contributed amounted
to
RMB487,000, RMB1.5 million and RMB2.9 million (US$0.4 million) for 2004,
2005
and 2006, respectively.
Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel,
for
whom competition is intense. Our employees are not covered by any collective
bargaining agreement and we have never experienced a work stoppage. We believe
we enjoy good relations with our employees.
E. Share
ownership
The
following table sets forth information known to us with respect to the
beneficial ownership of our ordinary shares as of May 31, 2007, taking into
account the number of ordinary shares underlying our outstanding options,
by
each person who is known to us to be the beneficial owner of more than 5.0%
of
our ordinary shares; each of our directors; each of our named executive
officers; and all of our executive officers and directors as a
group.
|
Ordinary
Shares
Beneficially
Owned
|
||
|
Name
|
Number(1)
|
Percent(2)
|
|
Directors
and executive officers(3)
|
||
|
Shuang
Wang(4)
|
6,343,912
|
17.99%
|
|
Min
Dong(5)
|
6,343,912
|
17.99%
|
|
Xiaoguang
Ren(6)
|
634,195
|
1.80%
|
|
Kin
Fai Ng(7)
|
661,975
|
1.89%
|
|
Bolin
Wu(8)
|
498,296
|
1.42%
|
|
Tommy
Siu Lun Fork(9)
|
561,764
|
1.59%
|
|
Xiaomin
Sun (10)
|
8,840
|
*%
|
|
Mark
Ming Hsun Lee (11)
|
8,840
|
*%
|
|
John
Yan Wang
(12)
|
8,840
|
*%
|
|
Dachun
Zhang
(13)
|
4,018
|
*%
|
|
Fushan
Chen (14)
|
4,018
|
*%
|
|
All
directors and executive officers as a group (11 persons)
|
8,734,698
|
24.32%
|
|
5%
and above shareholders
|
||
|
Yong
Ping Duan (15)
|
4,641,212
|
13.26%
|
|
Technology
Pioneer Corp.
(16)
|
3,070,028
|
8.77%
|
|
Value
Chain International Limited(17)
|
2,002,312
|
5.72%
|
|
*
Less than 1%
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC,
and
includes those securities for which voting or investment power
with
respect to the securities is held. All the share numbers have been
adjusted to give effect to a 4-for-1 split of our ordinary shares
effected
on November 9, 2004.
|
|
(2)
|
The
number of ordinary shares outstanding used in calculating the percentage
for each listed person includes the ordinary shares underlying
options
held by such persons and exercisable within 60 days of the date
of this
annual report. Percentage of beneficial ownership is based on 34,991,834
ordinary shares outstanding as of May 31,
2007.
|
|
(3)
|
The
address of our current directors and executive officers is c/o
Ninetowns
Internet Technology Group Company Limited, 5th Floor, Union Plaza,
20
Chaowai Street, Chaoyang District, Beijing 100020
PRC.
|
|
(4)
|
Includes
(i) 4,006,215 ordinary shares held by Mr. Wang, (ii) 2,002,312
ordinary
shares held by Mr. Wang through his ownership of Value Chain, (iii)
185,361 ordinary shares underlying share options held by Mr. Wang
which
are currently exercisable or exercisable within 60 days of the
date of
this annual report, (iv) 70,592
|
|
|
ordinary
shares held by Ms. Dong, and (v) 79,432 ordinary shares underlying
share
options held by Ms. Dong which are currently exercisable or exercisable
within 60 days of the date of this annual
report.
|
|
(5)
|
Includes
(i) 70,592 ordinary shares held by Ms. Dong, (ii) 79,432 ordinary
shares
underlying share options held by Ms. Dong which are currently exercisable
or exercisable within 60 days of the date of this annual report,
(iii) 2,002,312 ordinary shares held by Ms. Dong through her
ownership of Value Chain, (iv) 4,006,215 ordinary shares held by
Mr. Wang
and (v) 185,361 ordinary shares underlying share options held by
Mr. Wang
which are currently exercisable or exercisable within 60 days of
the date
of this annual report.
|
|
(6)
|
Includes
440,000 ordinary shares held by Mr. Ren and 194,195 ordinary shares
underlying share options held by Mr. Ren which are currently exercisable
or exercisable within 60 days of the date of this annual
report.
|
|
(7)
|
Includes
634,411 ordinary shares beneficially held by Mr. Ng through his
ownership
of Oriental Plan Developments Limited, or Oriental Plan, and 27,564
ordinary shares underlying share options held by Mr. Ng which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(8)
|
Includes
330,000 ordinary shares held by Mr. Wu and 168,296 ordinary shares
underlying share options held by Mr. Wu which are currently exercisable
or
exercisable within 60 days of the date of this annual
report.
|
|
(9)
|
Includes
330,000 ordinary shares held by Mr. Fork and 231,764 ordinary shares
underlying share options held by Mr. Fork which are currently exercisable
or exercisable within 60 days of the date of this annual
report.
|
|
(10)
|
Represents
8,840 ordinary shares underlying share options held by Mr. Sun
which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(11)
|
Represents
8,840 ordinary shares underlying share options held by Mr. Lee
which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(12)
|
Represents
8,840 ordinary shares underlying share options held by Mr. Wang
which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(13)
|
Represents
4,018 ordinary shares underlying share options held by Mr. Zhang
which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(14)
|
Represents
4,018 ordinary shares underlying share options held by Mr. Chen
which are
currently exercisable or exercisable within 60 days of the date
of this
annual report.
|
|
(15)
|
Includes
3,146,696 ordinary shares held directly by Mr. Duan and 1,494,516
ordinary
shares beneficially held by Mr. Duan through his position as the
president
of Enlight Foundation, or Enlight, a non-profit family foundation
under
the laws of California. Enlight is a California corporation
that is owned by Mr. Duan. The address of
Enlight is c/o SY. Lee & Chen, 362 W. Garvey Ave., Monterey
Park, CA 91754. Mr. Duan disclaims beneficial ownership of
ordinary shares held by Enlight.
|
|
(16)
|
Technology
Pioneer is a British Virgin Islands company that is 100.0% owned
by Mr.
Lei Ding. The address of Technology Pioneer Corp. is No. 16 Ke
Yun Road, Zhong Shan Avenue, Guangzhou, The People’s Republic of China,
510655.
|
|
(17)
|
Value
Chain is a British Virgin Islands company that is 50.0% owned by
Mr. Wang,
who is our Chief Executive Officer and one of our directors, and
50.0%
owned by Ms. Dong, who is one of our executive officers and the
spouse of
Mr. Wang. The address of Value Chain is P.O. Box 957, Offshore
Incorporations Centre, Road Town, Tortola, British Virgin
Islands.
|
No
shareholder has different voting rights from other shareholders. We are not
aware of any arrangement that may, at a subsequent date, result in a change
of
control of our company.
Item
7. Major
Shareholders and Related Party Transactions.
A. Major
shareholders
For
the
details of our major shareholders, please refer to Item 6. “Directors, Senior
Management and Employees – Share Ownership.”
In
April
2006, Mr. Kin Fai Ng transferred 3,831,301 ordinary shares of our company
to Mr.
Wang.
B. Related
party transactions
Overview
Ninetowns
Technology, our predecessor, commenced business in 1995 as a vendor of computer
hardware and accessories with a view to using the proceeds from the sale
of such
products to fund research and development of enterprise software. We also
used
the sale of computer hardware and accessories to develop relationships with
PRC
government agencies, such as the PRC Inspections Administration, that were
actively pursuing the digitization of government processes. By late 2000,
our
research and development efforts resulted in the commercial launch of our
first
enterprise software, the iDeclare.CIQ basic package.
From
2000
to 2002, we underwent a transitional period in which we completed a number
of
transactions with certain parties related to our company. This resulted in
a
corporate reorganization in line with our current business strategy, which
is to
be a scalable enterprise platform products provider enabling international
trade
enterprises and trade-related PRC government agencies to streamline the
import/export process in China. These transactions included a number of sales
and purchases of equity interests in Import & Export, which holds a 49.0%
interest in iTowNet, the company that currently operates the data exchange
platforms of the PRC Inspections Administration. Also during this time, each
of
our company and our affiliated company sold one shell company to our former
employees. Our former employees used these shell companies to (i) form our
franchisee and (ii) establish one of our major customers and competitors
for
software development services.
All
of
these transactions were accounted for as acquisitions or dispositions and
resulted in minimal gain or loss to our company. By the end of 2002, we
completed our transitional period and emerged as a company that was engaged
primarily in the development and sale of enterprise software and related
software development services.
You
should note in particular that, as described more fully below some of our
officers, directors and related parties are members of the boards of directors
or shareholders of companies with which we have important business
relationships.
You
should be aware of the relationships and transactions described herein, and
that
there can be no assurance as to the effect of such relationships and
transactions on our company and its business. Our amended and restated articles
of association require that all future transactions between our company and
our
related parties be approved by our audit committee.
Transactions
with Mr. Wang and Ms. Dong
Mr.
Wang
is a director of Import & Export, which is 100.0% beneficially owned by Mr.
Wang and Ms. Dong. Import & Export in turn owns a 49.0% equity interest in
iTowNet, which is 51.0% owned by the PRC Inspections Administration. iTowNet
is
the ultimate user of substantially all the software development services
we
provide and operates the data exchange platforms that interface between
international trade enterprises using our enterprise software and the PRC
Inspections Administration’s internal electronic processing system. iTowNet
receives a fee of RMB5 for each submission made over its platforms.
Pursuant
to a right of first refusal agreement dated as of November 2, 2004, among
Import
& Export, Mr. Wang, Ms. Dong and our company, Import & Export has agreed
to sell its 49.0% interest in iTowNet to our company if, at any time while
we
are required to submit reports to the SEC, Import & Export is allowed to
sell such interest to us under relevant PRC law and policy. Our right of
first
refusal is subject to the
statutory
right of first refusal of the PRC Inspections Administration to purchase
such
interest. If we exercise our right of first refusal, we have agreed to purchase
the 49.0% interest in iTowNet at a purchase price of US$25.0 million, plus
a
compounded interest rate of 5.0% per year for each year that Import & Export
held the 49.0% interest since August 23, 2001, but deducting any dividend
or
distribution that Import & Export had previously received or receives in the
future from iTowNet. Our audit committee has approved the right of first
refusal
agreement and will need to approve the exercise of the purchase right granted
under the Right of First Refusal Agreement. Based on current PRC laws and
practice, and the stated policy of the PRC Inspections Administration, we
do not
believe the exercise of the purchase right is probable.
Ms.
Dong’s sister, Li Dong, was a shareholder and director of Beijing Regard, a
company which was our significant customer for software development services
in
2003 and competes with us for the provision of software development services
to
iTowNet and the PRC Inspections Administration. Li Dong currently does not
own
any interest in eGrid and is not a director or officer of eGrid.
Beijing
iTowNet Cyber Technology Ltd.
iTowNet
was established on August 23, 2001 and is currently the operator of the PRC
Inspections Administration’s data exchange platforms. iTowNet, a limited
liability company organized under the laws of the PRC, is currently 51.0%
owned
by the PRC Inspections Administration and 49.0% owned by Import & Export.
Import & Export is currently 72.18% owned by Yadi Yangguang and 27.82% owned
by Mr. Wang. Mr. Wang is a non-executive director and the vice-chairman of
the
board of directors of iTowNet. As the supervisor of iTowNet, Mr. Wu is
responsible for overseeing the financial operations of iTowNet, the actions
of
its board of directors and senior management and their compliance with relevant
laws and iTowNet’s charter documents.
We
provide, directly and indirectly, software development services to iTowNet
to
maintain, improve and upgrade the data exchange platforms that we assisted
them
in building. We charge iTowNet, or their service providers such as eGrid,
fees
for such services at negotiated rates, which are based on our estimated costs
plus certain mark-ups.
Under
our
software development contracts with iTowNet and eGrid, we typically agree
to
provide, among other services, design, installation, implementation and
maintenance of software systems for iTowNet. We also typically provide one-year
of free customer maintenance services commencing from the completion date
of the
project. Users of iDeclare.CIQ submit electronic declarations to the PRC
Inspections Administration over the data exchange platforms of iTowNet. iTowNet
receives a fee of RMB5 for each submission made over its platforms, including
submissions made using our enterprise software.
In
2006,
we did not recognize revenues from the provision of software development
services to iTowNet.
eGrid
Technology Ltd. (formerly Beijing Regard Technology Co.,
Ltd.)
Upon
commencement of operations in 2003, eGrid was owned by our former employees:
73.75% by Shen Sun, 18.75% by Hongmei Tian, who also owns 18.75% of Ninetowns
Enke, 5.0% by Lin Wen and 2.5% by Limin Guo. Since 2003, we have entered
into
several software development contracts with eGrid in connection with software
development services for iTowNet. Under these contracts, eGrid designed and
implemented software required by iTowNet and then sub-contracted with us
for the
coding of the software under these contracts. In 2005, through a
series of reorganization steps, eGrid was re-named and became 100% beneficially
owned by Zhonghai Xu, who is also one of our former employees and also one
of
the owners of Ninetowns Xin He.
On
March
31, 2005, we entered into a software development contract with eGrid, pursuant
to which we contracted to develop an “export electronic monitoring project
(Phase I).” On June 28, 2005, we also entered into two software
development contracts with eGrid pursuant to which we contracted to develop
a
“waste import electronic monitoring system” and an “electronic business
integrated service platform”. eGrid agreed to pay us RMB3.0 million and RMB7.0
million, respectively, for the services provided under those contracts. On
August 29, 2005, we entered into a software development contract with eGrid
pursuant to which we contracted to develop an “export electronic monitoring
project (Phase 2)”.
We
recognized net revenues of approximately RMB12.9 (US$1.7 million) from sales
of
our software development services to eGrid in 2006.
Shenzhen
Ninetowns Enke Software Technology Co., Ltd.
(formerly
Shenzhen Jinwangge Software Co., Ltd.)
In
late
2003, we decided to implement a franchise program to expand our sales
distribution network and Jing Shao and Hongmei Tian, one of our former
employees, expressed an interest in establishing such a franchisee relationship
with us. In order to do so, they needed to establish a technology company
in
China, which is burdensome, requires substantial paperwork and often involves
a
long waiting period. Yadi Yangguang, together with the other shareholders
of
Jinwangge, agreed to sell 100.0% of the equity interest in Jinwangge to Jing
Shao and Hongmei Tian in July 2003 for an aggregate consideration of RMB8.0
million. The transfer of such interests was completed in February
2004.
In
September 2003, we entered into a franchise agreement with Jinwangge for
the
distribution of iDeclare.CIQ in the southern region of China. This agreement
has
a two-year term, contains minimum sales commitments and is renewable upon
mutual
agreement of the parties within 120 days of expiration. We sell our enterprise
software to Jinwangge at a discount pursuant to a negotiated formula. On
February 10, 2004, Jinwangge was re-named “Shenzhen Ninetowns Enke Software
Technology Co., Ltd.” and was then 81.25% owned by Jing Shao and 18.75% owned by
Hongmei Tian. We entered into a franchise agreement with Ninetowns Enke on
February 14, 2004 on terms substantially identical to the terms in the franchise
agreement with Jinwangge. Pursuant to the franchise agreement, Ninetowns
Enke
agreed to a minimum sales commitment of RMB50.0 million for the two years
ending
February 14, 2006 and a sales discount of RMB1,000 per each iDeclare.CIQ
package
purchased from our company. In addition, Ninetowns Enke also agreed to act
as
our sales agent for our enterprise software after sales maintenance services
and
a sales discount of RMB750 per each maintenance contract sold to customer.
On
April 22, 2004, we agreed with Ninetowns Enke to amend the franchise agreement
to revise certain pricing terms.
In
September 2005, Hongmei Tian transferred her interest in Ninetowns Enke to
Su
Tianjian, also one of our former employees, and Ninetowns Enke is currently
81.25% owned by Jing Shao and 18.75% owned by Su Tianjian. On May 12, 2006,
we
entered into a new franchise agreement with Ninetowns Enke for iDeclare.CIQ.
This agreement has a two-year term and does not contain any minimum sales
commitment.
We
recognized net revenues of approximately RMB21.2 million (US$2.7 million)
from
sales of our software products to Ninetowns Enke in 2006.
Transaction
with Mr. Ko Jin Heng
Mr.
Ko
Jin Heng, one of the directors of Jitter Bug, is also a director and the
vice
chairman of Beijing Heng Fu Plaza Development Co. Ltd, or Beijing Heng Fu.
Jitter Bug was our principal shareholder until December 1, 2005. Beijing
Heng Fu
received a refundable deposit of RMB28.0 million (US$3.4 million) from Ninetowns
Ports after entering into a Provisional Sale and Purchase Agreement on June
15,
2004 with Ninetowns Ports and received the remainder of RMB19.3 million (US$2.3
million) on September 14, 2004. After making such payments, Ninetowns Ports
acquired the naming rights of a building in Beijing which is being constructed
by Beijing Heng Fu. Pursuant to certain sale and purchase agreements dated
July
30, 2004, Ninetowns Ports acquired from Beijing Heng Fu, subject to the receipt
of the necessary title certificates, three floors of such building. The purchase
price for the three floors was approximately 25.0% below its fair market
value,
as determined by an independent third party. In March 2005, Ninetowns Ports
also
entered into a sale and purchase agreement with Beijing Heng Fu pursuant
to
which Ninetowns Ports acquired from Beijing Heng Fu, subject to the receipt
of
the necessary title certificates, an additional floor in such building for
the
purchase price of approximately RMB18.6 million (US$2.2 million). Construction
of the building was completed at the end of 2006. We expect to move
into the building by the end of 2007.
Control
over Ronghe Tongshang
In
March
2006, Mr. Wang, Mr. Ren and Ms. Dong established Ronghe Tongshang. We
entered into a series of contractual agreements with Ronghe Tongshang and
its
current shareholders that provide us with effective control over Ronghe
Tongshang. Tootoo.com is owned by Ronghe Tongshang. In May
2007, we launched tootoo.com, our new B2B vertical search
platform. We plan to leverage our B2G expertise with our recent
acquisitions and contractual relationships to position tootoo.com as a leading
B2B search and service provider.
Control
over Baichuan
In
April
2007, in connection with our acquisition through our wholly-owned subsidiary,
Ixworth, of a 70% interest in Ample Spring, we entered into a series of
contractual agreements with Baichuan, Mr. Wang and Mr. Ren, previously
shareholders of Baichuan, which provide us with effective control over
Baichuan.
Related
party trade receivables
In
connection with the transactions described above, we had trade receivables
from
related parties amounting to RMB4.0 million (US$0.5 million) or 18.1% of
our
trade receivables as of December 31, 2006. These receivables consisted primarily
of proceeds from sales of enterprise software and fees from software development
services.
Board
memberships
Mr.
Wang
and Mr. Ren are two of the five directors of iTowNet. iTowNet is 51.0% owned
by
the PRC Inspections Administration and 49.0% owned by Import & Export.
Import & Export is in turn 100.0% beneficially owned by Mr. Wang and Ms.
Dong. Mr. Wu is the sole supervisor of iTowNet.
Stock
option grants
Please
refer to Item 6, “Directors, Senior Management and Employees — Compensation of
directors and executive officers.”
C. Interests
of experts and counsel
Not
applicable.
Item
8. Financial
Information.
A. Consolidated
statements and other financial information
Please
see our consolidated financial statements which are filed as part of this
annual
report.
Legal
proceedings
We
are
not currently involved in any material litigation and we are not aware of
any
pending or threatened litigation or similar proceedings which could reasonably
be expected, if such litigation or proceeding is decided adversely to us,
to
have a material adverse effect on our financial condition or results of
operations.
Dividend
policy
Since
our
inception, we have not declared or paid a dividend on our ordinary shares.
We do
not anticipate paying any cash dividend in the foreseeable future. We currently
intend to retain future earnings, if any, to finance our operations and the
expansion of our business. Payments of dividends by our subsidiaries in China
to
us are subject to restrictions including the restriction that foreign-invested
enterprises may only buy, sell and/or remit foreign currencies at banks
authorized to conduct foreign exchange business after providing valid commercial
documents. We do not expect any of these restrictions to have a material
and
adverse effect on our ability to receive payments of dividends from our
subsidiaries in China. There are no such similar foreign exchange restrictions
in the Hong Kong, the Cayman Islands or the British Virgin Islands.
We
rely
on dividends and fees paid to us by our subsidiaries in China to fund our
operations. In accordance with current PRC laws and regulations, our PRC
subsidiaries that were formed as domestic limited liability companies are
required to set aside 10.0% of their after-tax profits for a PRC law-mandated
reserve fund and 5-10% of their after-tax profits for a PRC law-mandated
welfare
fund each year. The actual amount set aside for the welfare fund is determined
in accordance with PRC accounting standards and regulations. Each of these
subsidiaries can stop contributing to its statutory reserve fund when the
aggregate reserved amount in the fund is equal to 50.0% or more of the
respective subsidiary’s registered capital, which is the amount of capital set
forth in its organizational documents. In contrast, our PRC subsidiaries
that
were formed as foreign-invested enterprises are required to set aside a portion
of their after-tax profits each year, as determined in accordance with PRC
accounting standards and regulations, to their reserve funds, bonus and welfare
funds for workers and staff members. Under PRC law, we are also required
to set
aside at least 10.0% of our after-tax net income each year into our reserve
fund
until the accumulated legal reserve amounts to 50.0% of registered capital.
Each
of our subsidiaries are further required to maintain a bonus and welfare
fund at
percentages determined at their sole discretion. The reserve funds and the
bonus
and welfare funds described above are not distributable as
dividends.
Our
board
of directors has complete discretion as to whether we will distribute dividends
in the future. Even if our board of directors determines to distribute
dividends, the form, frequency and amount of our dividends will depend upon
our
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors as the board
of
directors may deem relevant. Any dividend we declare will be paid to the
holders
of ADSs, subject to the terms of the deposit agreement, to the same extent
as
holders of our ordinary shares, less the fees and expenses payable under
the
deposit agreement. Any dividend we declare will be distributed by the depositary
to the holders of our ADSs. Cash dividends on our ordinary shares, including
those represented by the ADSs, if any, will be paid in U.S.
dollars.
B. Significant
changes
We
have
not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.
Item
9. The Offering and
Listing.
A. Offering
and listing details
On
December 3, 2004, we listed our ADSs, each representing one of our ordinary
shares, on the Nasdaq National Market under the symbol “NINE.”
The
following table provides the high and low trading prices for our ADSs on
the
Nasdaq National Market for (1) the years of 2005 and 2006, (2) the four quarters
in 2005 and 2006 and (3) each of the months since December 2006.
|
Sales
Price
|
||||||
|
High
|
Low
|
|||||
|
Annual
highs and lows
|
||||||
|
2005
|
$11.48
|
$4.21
|
||||
|
2006
|
$6.98
|
$4.29
|
||||
|
Quarterly
highs and lows
|
|
|
||||
|
First
Quarter 2005
|
$11.48
|
$7.75
|
||||
|
Second
Quarter 2005
|
$9.68
|
$6.80
|
||||
|
Sales
Price
|
||||||
|
High
|
Low
|
|||||
|
Third
Quarter 2005
|
$8.04
|
$4.76
|
||||
|
Fourth
Quarter 2005
|
$6.20
|
$4.21
|
||||
|
First
Quarter 2006
|
|
$6.98
|
$4.86
|
|||
|
Second
Quarter 2006
|
$5.42
|
|
$4.80
|
|||
|
Third
Quarter 2006
|
$5.95
|
$4.42
|
||||
|
Fourth
Quarter 2006
|
$5.35
|
$4.29
|
||||
|
Monthly
highs and lows
|
|
|||||
|
December
2006
|
|
$5.35
|
|
$4.29
|
||
|
January
2007
|
|
$5.26
|
|
$4.67
|
||
|
February
2007
|
|
$5.10
|
|
$4.60
|
||
|
March
2007
|
|
$4.70
|
|
$3.78
|
||
|
April
2007
|
|
$4.56
|
|
$3.75
|
||
|
May
2007
|
|
$4.36
|
|
$3.71
|
||
|
June
2007
|
$4.14
|
$3.70
|
||||
|
July
2007 (for the period to and including July 16, 2007)
|
$4.29
|
$3.74
|
B. Plan
of distribution
Not
applicable.
C. Markets
Our
ADSs,
each representing one of our ordinary shares, have been listed on the Nasdaq
National Market since December 3, 2004 under the symbol “NINE.”
D. Selling
shareholders
Not
applicable.
E. Dilution
Not
applicable.
F. Expenses
of the issue
Not
applicable.
Item
10. Additional
Information.
A. Share
capital
Not
applicable.
B. Memorandum
and articles of association
We
incorporate by reference into this annual report the description of our amended
and restated memorandum of association contained in our registration statement
on Form F-1(Registration No. 333-120184) under “Description of share
capital.” Our shareholders adopted our amended and restated
memorandum and articles of association on September 15, 2006.
C. Material
contracts
We
have
not entered into any material contracts other than in the ordinary course of
business and other than those described in Item 4, "Information on the Company"
or elsewhere in this annual report.
D. Exchange
controls
The
principal regulations governing foreign exchange in China are the Foreign
Exchange Control Rules (1996), as amended. On June 20, 1996, the People’s Bank
of China promulgated the FX Administration Rules, which became effective on
July
1,1996.
Under
the
FX Administration Rules, Renminbi is generally freely convertible for trade
and
service-related foreign exchange transactions, but not for foreign direct
investment, foreign loans or issuance of securities outside China unless the
prior approval of the SAFE is obtained.
Pursuant
to the FX Administration Rules, foreign investment enterprises in China
generally may purchase foreign exchange without the approval or review of SAFE
for trade and service-related foreign exchange transactions by providing
commercial documents evidencing these transactions. They may also retain foreign
exchange, subject to a cap approved by SAFE, under current account items.
However, the relevant PRC government authorities may limit or eliminate the
ability of foreign investment enterprises to purchase and retain foreign
currencies in the future. Foreign investment enterprises are permitted to
distribute their profits or dividends in foreign currencies out of their foreign
exchange accounts or exchange Renminbi for foreign currencies through banks
authorized to conduct foreign exchange business.
E. Taxation
Cayman
Islands taxation
The
following is a discussion of the material Cayman Islands tax consequences
relating to an investment in our ADSs. The Cayman Islands currently levy no
taxes on individuals or corporations based upon profits, income, gains or
appreciation and there is no taxation in the nature of inheritance tax or estate
duty or withholding tax applicable to us or to any holder of ADSs, or ordinary
shares.
There
are
no other taxes likely to be material to us levied by the Government of the
Cayman Islands except for stamp duties which may be applicable on instruments
executed in, or after execution brought within the jurisdiction of the Cayman
Islands. No Cayman Islands stamp duty will be payable by you in
respect of transfers of shares of Cayman Islands companies except those which
hold interests in land in the Cayman Islands. The Cayman Islands are
not party to any double taxation treaties. There are no exchange control
regulations or currency restrictions in the Cayman Islands.
We
have,
pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman
Islands, obtained an undertaking from the Governor-in-Council that:
|
·
|
no
law which is enacted in the Cayman Islands imposing any tax to be
levied
on profits or income or gains or appreciation applies to us or our
operations; and
|
|
·
|
the
aforesaid tax or any tax in the nature of estate duty or inheritance
tax
are not payable on our ordinary shares, debentures or other
obligations.
|
The
undertaking that we have obtained is for a period of 20 years from February
26,
2002.
United
States federal income taxation
Subject
to the discussion in passive foreign investment company status, discussed below,
the following is a summary of the material United States federal income tax
consequences of the purchase, ownership, and disposition of our ordinary shares
or our ADSs. This description does not provide a complete analysis
of
all
potential tax consequences. The information provided below is based on the
Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations,
proposed Treasury Regulations, Internal Revenue Service, or the IRS, published
rulings and court decisions, all as of the date hereof. These authorities may
change, possibly on a retroactive basis, or the IRS might interpret the existing
authorities differently. In either case, the tax consequences of purchasing,
owning or disposing of our ordinary shares or our ADSs could differ from those
described below.
This
description is general in nature and does not discuss all aspects of U.S.
federal income taxation that may be relevant to a particular investor in light
of the investor’s particular circumstances, or to certain types of investors
subject to special treatment under U.S. federal income tax laws, such
as:
|
·
|
banks
or financial institutions,
|
|
·
|
life
insurance companies,
|
|
·
|
tax-exempt
organizations,
|
|
·
|
dealers
in securities or foreign
currencies,
|
|
·
|
traders
in securities that elect to apply a mark-to-market method of
accounting,
|
|
·
|
persons
holding our ordinary shares or our ADSs as part of a position in
a
“straddle” or as part of a “hedging,” “conversion” or “integrated”
transaction for U.S. federal income tax
purposes,
|
|
·
|
persons
subject to the alternative minimum tax provisions of the
Code,
|
|
·
|
persons
that have a “functional currency” other than the U.S. dollar,
and
|
|
·
|
persons
owning or treated as owning 10.0% or more of any class of our
stock.
|
This
description generally applies to purchasers of our ordinary shares or our ADSs
as capital assets. This description does not consider the effect of any foreign,
state, local or other tax laws that may be applicable to particular
investors.
Investors
considering the purchase of ADSs should consult their own tax advisors regarding
the application of the U.S. federal income tax laws to their particular
situations and the consequences of U.S. federal estate or gift tax laws,
foreign, state, or local laws, and tax treaties.
U.S.
holders
As
used
herein, the term “U.S. Holder” means a beneficial owner of our ordinary shares
or our ADSs that is:
|
·
|
a
citizen or resident of the United States or someone treated as a
U.S.
citizen or resident for U.S. federal income tax
purposes;
|
|
·
|
a
corporation or other entity taxable as a corporation for U.S. federal
income tax purposes organized in or under the laws of the United
States or
any political subdivision thereof;
|
|
·
|
an
estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
|
|
·
|
a
trust, if such trust validly elects to be treated as a U.S. person
for
U.S. federal income tax purposes, or if (a) a court within the United
States can exercise primary supervision over its administration and
(b)
one or more U.S. persons have the authority to control all of the
substantial decisions of such
trust.
|
If
a
partnership, including for this purpose any entity treated as a partnership
for
U.S. tax purposes, is a beneficial owner of our ordinary shares or our ADSs,
the
U.S. tax treatment of a partner in the partnership will generally depend on
the
status of the partner and the activities of the partnership. A holder of our
ordinary shares or our ADSs that is a partnership and partners in such
partnership should consult their individual tax advisors about the U.S. federal
income tax consequences of holding and disposing of our ordinary shares or
our
ADSs.
For
U.S.
federal income tax purposes, U.S. Holders of our ADSs will be treated as owners
of the underlying shares represented by such ADSs.
If
you
are not a U.S. Holder, this subsection does not apply to you and you should
refer to “Non-U.S. Holders” below.
Taxation
of dividends and other distributions on our ordinary shares or our
ADSs
Subject
to the discussion in passive foreign investment company status, discussed below,
all distributions to a U.S. Holder with respect to our ordinary shares or our
ADSs, other than certain pro rata distributions of our ordinary shares, will
be
includible in a U.S. Holder’s gross income as ordinary dividend income when
actually or constructively received, but only to the extent that the
distribution is paid out of our current or accumulated earnings and profits.
For
this purpose, earnings and profits will be computed under U.S. federal income
tax principles. To the extent that the amount of the distribution exceeds our
current and accumulated earnings and profits, it will be treated first as a
tax-free return of your tax basis in the ordinary shares or ADSs, and to the
extent the amount of the distribution exceeds the U.S. Holder’s tax basis, the
excess will be taxed as capital gain.
Dividends
paid in Renminbi will be included in your income as a U.S. dollar amount based
on the exchange rate in effect on the date that the U.S. Holder receives the
dividend, regardless of whether the payment is in fact converted into U.S.
dollars. If the U.S. Holder does not receive U.S. dollars on the date the
dividend is distributed, the U.S. Holder will be required to include either
gain
or loss in income when the U.S. Holder later exchanges the Renminbi for U.S.
dollars. The gain or loss will be equal to the difference between the U.S.
dollar value of the amount that the U.S. Holder includes in income when the
dividend is received and the amount that the U.S. Holder receives on the
exchange of the Renminbi for U.S. dollars. The gain or loss generally will
be
ordinary income or loss from United States sources. If we distribute as a
dividend non-cash property, the U.S. Holder will generally include in income
an
amount equal to the U.S. dollar equivalent of the fair market value of the
property on the date that it is distributed.
Dividends
will constitute foreign source income for foreign tax credit limitation
purposes. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by us with respect to our ordinary shares or our ADSs
will
generally be “passive income”. The dividends will not be eligible for the
dividends-received deduction allowed to corporations. Certain dividends received
by non-corporate holders before January 1, 2009 may be subject to reduced rates
of taxation if our ordinary shares or our ADSs are readily tradable on an
established securities market in the U.S. such as The Nasdaq Stock Market and
certain holding period and other requirements are met. Dividends paid by us
will
not qualify for reduced rates if we are a passive foreign investment company
in
the year in which the dividends are paid or in the preceding taxable
year.
You
should consult your tax advisors regarding the application of these rules to
your particular circumstances.
Taxation
of disposition of ordinary shares or ADSs
Subject
to the passive foreign investment company rules discussed below, a U.S. Holder
will recognize taxable gain or loss on any sale or exchange of our ordinary
shares or our ADSs equal to the difference between the amount realized for
our
ordinary shares or our ADSs and the U.S. Holder’s tax basis in our ordinary
shares or our ADSs. The gain or loss will be capital gain or loss and will
be
long term if the U.S. Holder has held our ordinary shares or our ADSs for more
than one year. The maximum tax rate on long term capital gain is 15.0% for
taxpayers other than corporations, which maximum tax rate will increase under
current law to 20.0% for dispositions occurring during taxable years beginning
on or after January 1, 2009. The deductibility of capital losses is subject
to limitations. Any gain or loss that you recognize will generally be treated
as
United States source income or loss.
Passive
foreign investment company
It
is
likely that we will be classified as a PFIC for 2006. Special U.S. federal
income tax rules apply to U.S. holders of shares of a foreign corporation that
is classified as a PFIC for U.S. federal income tax purposes. The determination
of our PFIC status principally depends upon the composition of our assets,
including goodwill, and the amount and nature of our income from time to time.
The amount of goodwill will depend in part on the market value of our ADSs
or
ordinary shares, which may be especially volatile in a technology related
enterprise. We have limited control over these variables and accordingly there
can be no assurance that we will not be considered a PFIC for any taxable year.
To the extent we do have control over these variables, we may take steps to
reduce the material and adverse effect PFIC classification may have on our
business, financial condition and results of operations.
A
company
is considered a PFIC for any taxable year if either:
|
·
|
at
least 75.0% of its gross income is passive income,
or
|
|
·
|
at
least 50.0% of the value of its assets, based on an average of the
quarterly values of the assets during a taxable year, is attributable
to
assets that produce or are held for the production of passive
income.
|
We
will
be treated as owning our proportionate share of the assets and earning our
proportionate share of the income of any other corporation in which we own,
directly or indirectly, more than 25.0%, by value, of the stock of such
corporation.
Although
in the past we have avoided classification as a PFIC, PFIC status is re-tested
each year and depends heavily upon the facts in the relevant year. In
particular, fluctuation in the market price of our ADSs or ordinary shares
was
one factor in the analysis of our PFIC status in 2006.
Because
it is likely that we will be classified as a PFIC for 2006, a U.S. Holder of
our
ordinary shares or our ADSs will likely be subject to special tax rules with
respect to:
|
·
|
any
“excess distribution” that the U.S. Holder receives on our ordinary shares
or our ADSs and
|
|
·
|
any
gain the U.S. Holder realizes from a sale or other disposition, including
a pledge, of our ordinary shares or our
ADSs,
|
unless
the U.S. Holder makes a “mark-to-market” election as discussed
below.
Distributions
the U.S. Holder receives in a taxable year that are greater than 125.0% of
the
average annual distributions the U.S. Holder received during the shorter of
the
three preceding taxable years or the U.S. Holder’s holding period for our
ordinary shares or our ADSs will be treated as an excess distribution. Under
these special tax rules:
|
·
|
any
excess distribution or gain will be allocated ratably over your holding
period for our ordinary shares or our
ADSs,
|
|
·
|
the
amount allocated to the current taxable year, and any taxable year
prior
to the first taxable year in which we were a PFIC, will be treated
as
ordinary income in the year of the distribution or gain,
and
|
|
·
|
the
amount allocated to each other year will be subject to tax as ordinary
income at the highest tax rate in effect for that year and the interest
charge generally applicable to underpayments of tax will be imposed
on the
resulting tax attributable to each such
year.
|
The
tax
liability for amounts allocated to years prior to the year of disposition or
excess distribution cannot be offset by any net operating losses, and gains
(but
not losses) realized on the sale of our ordinary shares or our ADSs cannot
be
treated as capital, even if the U.S. Holder holds our ordinary shares or our
ADSs as capital assets.
A
U.S.
shareholder of a PFIC may avoid taxation under the excess distribution rules
discussed above by making a “qualified electing fund” election to include the
U.S. Holder’s share of our income on a current basis. However, a U.S. Holder may
make a qualified electing fund election only if the PFIC agrees to furnish
the
shareholder annually with certain tax information, and we do not presently
intend to prepare or provide such information.
Alternatively,
a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election
for stock of a PFIC to elect out of the excess distribution rules discussed
above. If a U.S. Holder makes a mark-to-market election for our ordinary shares
or our ADSs, the U.S. Holder will include in income each year an amount equal
to
the excess, if any, of the fair market value of our ordinary shares or our
ADSs
as of the close of the taxable year over the U.S. Holder’s adjusted basis in
such ordinary shares or ADSs. A U.S. Holder is allowed a deduction for the
excess, if any, of the adjusted basis of our ordinary shares or our ADSs over
their fair market value as of the close of the taxable year only to the extent
of any net mark-to-market gains on our ordinary shares or our ADSs included
in
the U.S. Holder’s income for prior taxable years. Amounts included in a U.S.
Holder’s income under a mark-to-market election, as well as gain on the actual
sale or other disposition of our ordinary shares or our ADSs, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible portion
of any mark-to-market loss on our ordinary shares or our ADSs, as well as to
any
loss realized on the actual sale or disposition of our ordinary shares or our
ADSs, to the extent that the amount of such loss does not exceed the net
mark-to-market gains previously included for such ordinary shares ADSs. A U.S.
Holder’s basis in the ordinary shares or ADSs will be adjusted to reflect any
such income or loss amounts. The tax rules that apply to distributions by
corporations which are not PFICs would apply to distributions by
us.
The
mark-to-market election is available only for stock which is regularly traded
on
a national securities exchange that is registered with the Securities and
Exchange Commission or on The Nasdaq Stock Market, or an exchange or market
that
the U.S. Secretary of the Treasury determines has rules sufficient to ensure
that the market price represents a legitimate and sound fair market value.
Under
the U.S. Treasury regulations, our ADSs or ordinary shares would generally
be
considered regularly traded if the
shares
are traded at least 15 days during each calendar quarter of the relevant
calendar year in more than de minimis quantities. You should consult your own
tax advisors as to whether a mark to market election is available or advisable
for your particular circumstances.
A
U.S.
Holder who holds our ordinary shares or our ADSs in any year in which we are
a
PFIC would be required to file IRS Form 8621 regarding distributions received
on
our ordinary shares or our ADSs and any gain realized on the disposition of
our
ordinary shares or ADSs.
Our
determination of whether we are a PFIC is not binding on the Internal Revenue
Service. If we are a PFIC in any year in which a U.S. Holder holds our ordinary
shares or our ADSs, the U.S. Holder generally will be subject to increased
U.S.
tax liabilities and reporting requirements on receipt of certain dividends
or on
a disposition of our ordinary shares or our ADSs in that year and all subsequent
years. U.S. Holders should consult their own tax advisors regarding our status
as a PFIC, the consequences of an investment in a PFIC, and the consequences
of
making a shareholder election with respect to PFIC status.
Non-U.S.
holders
A
Non-U.S. Holder generally will not be subject to U.S. federal income tax on
dividends paid by us with respect to our ordinary shares or our ADSs unless
the
income is effectively connected with the Non-U.S. Holder’s conduct of a trade or
business in the United States.
A
Non-U.S. Holder generally will not be subject to U.S. federal income tax on
any
gain attributable to a sale or other disposition of our ordinary shares or
our
ADSs unless such gain is effectively connected with the Non-U.S. Holder’s
conduct of a trade or business in the United States or the Non-U.S. Holder
is a
natural person who is present in the United States for 183 days or more and
certain other conditions exist.
Dividends
and gains that are effectively connected with a Non-U.S. Holder’s conduct of a
trade or business in the United States generally will be subject to tax in
the
same manner as they would be if the Non-U.S. Holder were a U.S. Holder, except
that the passive foreign investment company rules will not apply. Effectively
connected dividends and gains received by a corporate Non-U.S. Holder may also
be subject to an additional branch profits tax at a 30.0% rate or a lower tax
treaty rate.
Information
reporting and backup withholding
In
general, information reporting requirements will apply to dividends in respect
of our ordinary shares or our ADSs or the proceeds received on the sale,
exchange or redemption of our ordinary shares or our ADSs paid within the United
States (and in certain cases, outside the United States) to U.S. Holders other
than certain exempt recipients, such as corporations, and backup withholding
tax
may apply to such amounts if the U.S. Holder fails to provide an accurate
taxpayer identification number or to report interest and dividends required
to
be shown on its U.S. federal income tax returns. The amount of any backup
withholding from a payment to a U.S. Holder will be allowed as a credit against
the U.S. Holder’s U.S. federal income tax liability provided that the
appropriate returns are filed.
A
Non-U.S. Holder generally may eliminate the requirement for information
reporting and backup withholding by providing certification of its foreign
status to the payor, under penalties of perjury, on IRS Form
W-8BEN.
Enforceability
of civil liabilities
We
are
incorporated in the Cayman Islands because of the following advantages found
there relating to:
· 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:
|
(1)
|
the
Cayman Islands has a less developed body of securities laws as compared
to
the United States and these securities laws provide significantly
less
protection to investors; and
|
|
(2)
|
Cayman
Islands companies may not have standing to sue before the federal
courts
of the United States.
|
Our
constituent 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.
A
substantial portion of our current operations is conducted in China, and
substantially all of our assets are located in China. We also conduct part
of
our operations in Hong Kong. We have appointed CT Corporation System, 111 Eighth
Avenue, New York, NY 10011, as our agent upon whom process may be served in
any
action brought against us under the securities laws of the United States. A
majority of our directors and 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.
Conyers
Dill & Pearman, our counsel as to Cayman Islands law and Commerce &
Finance Law Offices, our counsel as to PRC law have advised us, respectively,
that there is uncertainty as to whether the courts of the Cayman Islands or
China would:
|
(1)
|
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
|
|
(2)
|
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 judgment in personam
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 thereon 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.
Commerce
& Finance Law Offices has advised us further that the recognition and
enforcement of foreign judgments are provided for under PRC Civil Procedures
Law. PRC courts may recognize and enforce foreign judgments in accordance with
the requirements of PRC Civil Procedures Law based either on treaties between
China and the country where the judgment is made or on reciprocity between
jurisdictions.
F. Dividends
and paying agents
Not
applicable.
G. Statement
by experts
Not
applicable.
H. Documents
on display
We
have
previously filed with the Commission our registration statement on Form F-1,
as
amended and prospectus under the Securities Act of 1933, with respect to our
ordinary shares.
We
are
subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the
Exchange Act, we are required to file reports and other information with the
Securities and Exchange Commission. Specifically, we are required to file
annually a Form 20-F no later than six months after the close of each fiscal
year, which close occurs on December 31. Copies of reports and other
information, when so filed, may be inspected without charge and may be obtained
at prescribed rates at the public reference facilities maintained by the
Securities and Exchange Commission at Public Reference Room, MS0102, 100 F
Street NE, Washington, DC. 20549-2521. and at the regional office of the
Securities and Exchange Commission located at 175 W. Jackson Boulevard, Suite
900, Chicago, Illinois 60604. The public may obtain information regarding the
Washington, D.C. Public Reference Room by calling the Commission at
1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that contains
reports, proxy and information statements, and other information regarding
registrants that make electronic filings with the SEC using its EDGAR system.
As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in Section
16
of the Exchange Act.
Our
financial statements have been prepared in accordance with U.S.
GAAP.
We
will
furnish our shareholders with annual reports, which will include a review of
operations and annual audited consolidated financial statements prepared in
conformity with U.S. GAAP.
I. Subsidiary
information
For
a
listing of our subsidiaries, see Item 4 of this annual report, "Information
on
the Company — Organizational structure."
Item
11. Quantitative and Qualitative
Disclosures About Market Risk.
Interest
rate risk
Our
exposure to interest rate risk for changes in interest rates relates primarily
to the interest income generated by excess cash deposited in banks. We have
not
used any derivative financial instruments to hedge interest rate risk. We have
not been exposed nor do we anticipate being exposed to material risks due to
changes in interest rates. Our future interest income may fluctuate in line
with
changes in interest rates. However, the risk associated with fluctuating
interest rates is principally confined to our cash deposits and, therefore,
we
believe our exposure to interest rate risk is minimal.
Item
12. Description of Securities Other
than Equity Securities.
Not
applicable.
PART
II
Item
13. Defaults, Dividend Arrearages
and Delinquencies.
Not
applicable.
Item
14. Material Modifications to
the Rights of Security Holders and Use of Proceeds.
Use
of proceeds
The
following "Use of Proceeds" information relates to our registration statement
on
Form F-1 (Registration No. 333 - 120184), or the Registration Statement, for
our
initial public offering and sale of 6,400,000 and 3,200,000 American Depositary
Shares by our company and the selling shareholders, for an aggregate offering
price of US$70.4 million and US$35.2 million, respectively. The Registration
Statement was declared effective by the Commission on December 1,
2004.
We
received net proceeds of approximately US$64.6 million from our initial public
offering (after deducting underwriting discounts and other expenses related
to
the offering of US$5.7 million). None of the transaction expenses included
payments to directors or officers of our company, persons owning 10.0% or more
of our equity securities or our affiliates.
As
of May
31, 2007, we have used approximately RMB100 million (US$12.8 million) of the
net
proceeds from our initial public offering for capital expenditure, comprising
approximately RMB46 million (US$5.9 million) for the expansion of existing
facilities, approximately RMB15 million (US$1.9 million) for the purchase of
real estate for new research and development centers and approximately RMB39
million (US$5.0 million) for strategic investment. None of the net proceeds
from
our initial public offering included payments to directors or officers of our
company, persons owning 10.0% or more of our equity securities or our
affiliates.
J.P.
Morgan Securities Inc., Citigroup Global Markets Inc., Lehman Brothers Inc.
and
Jefferies Broadview, a division of Jefferies & Company, Inc. were the
underwriters for our initial public offering.
Item
15T. Controls
and Procedures.
Evaluation
of disclosure controls and procedures
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have performed an evaluation
of our disclosure controls and procedures, as that term is defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that such disclosure controls and procedures are effective at the
reasonable assurance level to ensure that information required to be disclosed
in our periodic reports filed under the Exchange Act is recorded, processed,
summarized and reported, within the time period specified by the Securities
and
Exchange Commission's rules and regulations.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding
the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP.
Internal
control over financial reporting includes policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary
to
permit the preparation of the consolidated financial statements in accordance
with U.S. GAAP, and that receipts and expenditures of the Company are being
made
only in accordance with appropriate authorizations of management and directors
of the Company; and (iii) provide reasonable assurance regarding prevention
or
timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the consolidated financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance with respect to consolidated
financial statement preparation and presentation, and may not prevent or
detect
mis-statements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. As a result of
these assessments, our
management
has concluded
that our internal control over financial reporting was effective
as of
December 31, 2006 based on the criteria
established in
Internal Control
–
Integrated
Framework issued by
COSO.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control
over
financial reporting. As of December 31, 2006, the company was
considered an “accelerated foreign filer” as defined in the rules promulgated by
the U.S. Securities and Exchange Commission. Accordingly,
management’s report was not subject to attestation by the company’s independent
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this annual report.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the
fiscal year ended December 31, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Item
16A. Audit Committee
Financial Expert.
See
Item
6 of this annual report, "Directors, Senior Management and Employees — Board
practices."
Item
16B. Code of
Ethics.
Our
board
of directors has adopted a code of ethics for our chief executive officer and
senior financial officers and a code of business conduct and ethics, which
is
applicable to all of our directors, officers and employees. Our code of ethics
and code of business conduct and ethics are publicly available on our website
at
http://www.ninetowns.com/english, and such codes are filed as exhibits
to this annual report.
Item
16C. Principal Accountant Fees and
Services.
The
following table sets forth the aggregate fees in connection with certain
professional services rendered by Deloitte Touche Tohmatsu, an independent
registered public accounting firm, for the periods indicated. We did not pay
any
tax related or other fees to our principal accountants during the periods
indicated.
|
For
the year ended December 31
|
|||
|
2005
|
2006
|
2006
|
|
|
Audit
fees(1)
|
RMB2,463,000
|
RMB3,789,000
|
US$486,000
|
|
Audit
related
fees
|
372,000
|
526,000
|
67,000
|
|
Total
|
RMB2,835,000
|
RMB4,315,000
|
US$535,000
|
|
(1)
|
Audit
fees are the aggregate fees billed for each of the fiscal years for
professional services rendered by our principal accountants for their
audit and review of our annual financial statements and interim financial
statements in connection with the statutory requirement and our initial
public offering in 2004.
|
Audit
Committee Pre-Approval Policy and Procedures
Our
audit
committee will pre-approve all audit and non-audit services provided by our
independent registered public accounting firm. These services may include audit
services, audit-related services, tax services and other services, as described
above. On an annual basis, our audit committee will review and approve the
audit
services to be rendered by our independent registered public accounting firm
prior to the engagement of the service. Audit services not covered by the annual
engagement letter, audit-related services and tax services are estimated to
result in an amount of more than US$10,000 require the express approval of
our
audit committee prior to engagement. Our audit committee may delegate
pre-approval authority to one or more members of our audit committee. The
decisions of any audit committee member to whom authority is delegated to
pre-approve a service shall be presented to the full audit committee at its
next
scheduled meeting. Our Chief Financial Officer, Tommy Siu Lun Fork is required
to report to our audit committee on a quarterly basis regarding the extent
of
services actually provided and the fees for the services performed.
Item
16D. Exemptions from the Listing
Standards for Audit Committee.
None.
Item
16E. Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers.
Not
applicable.
PART
III
Item
17. Financial
Statements.
We
have
elected to provide financial statements pursuant to Item 18.
Item
18. Financial
Statements.
The
consolidated financial statements for our company are included at the end of
this annual report.
Item
19. Exhibits.
|
Exhibit
Number
|
Description
|
|
1.1*
|
Amended
and Restated Memorandum and Articles of Association of Ninetowns
Internet
Technology Group Company Limited (incorporated by reference to Exhibit
99.2 from our Form 6-K (File No. 000-51025) filed with Securities
and
Exchange Commission on October 25, 2006)
|
|
2.1*
|
Specimen
American Depositary Receipt of Ninetowns Internet Technology Group
Company
Limited (incorporated by reference to Exhibit 2.1 from our Annual
Report
on Form 20-F (Registration No. 000-51025) filed with Securities and
Exchange Commission on June 29, 2005)
|
|
2.2*
|
Specimen
Share Certificate of Ninetowns Internet Technology Group Company
Limited
(incorporated by reference to Exhibit 4.2 from our Registration Statement
on Form F-1 (Registration No. 333-120184) filed with Securities and
Exchange Commission on November 3, 2004)
|
|
4.1*
|
Shareholders’
Agreement dated October 22, 2003 among Jitter Bug Holdings Limited,
AIG Asian Opportunity Fund, L.P., American International Assurance
Company
(Bermuda) Limited, the shareholders of Ninetowns Internet Technology
Group
Company Limited (listed on Schedule 1 thereto) and Ninetowns Internet
Technology Group Company Limited (incorporated by reference to Exhibit
4.4
from our Registration Statement on Form F-1 (Registration No. 333-120184)
filed with Securities and Exchange Commission on November 3,
2004)
|
|
4.2*
|
Form
of Termination Agreement among Ninetowns Internet Technology Group
Company
Limited, Jitter Bug Holdings Limited, AIG Asian Opportunity Fund,
L.P.,
American International Assurance Company (Bermuda) Limited and certain
other shareholders of Ninetowns Internet Technology Group Company
Limited
(incorporated by reference to Exhibit 4.5 from our Registration Statement
on Form F-1 (Registration No. 333-120184) filed with Securities and
Exchange Commission on November 3, 2004)
|
|
4.3*
|
Form
of Lock-up agreement by and among Ninetowns Internet Technology Group
Company Limited and certain of its directors, executive officers
and
shareholders (incorporated by reference to Exhibit 4.6 from our
Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.4*
|
Employee
Share Option Scheme (incorporated by reference to Exhibit 10.1 from
our
Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.5*
|
Amended
and Restated 2004 Share Option Plan of Ninetowns Internet Technology
Group
Company Limited (incorporated by reference to Exhibit 4.5 from our
Annual
Report on From 20-F (Registration No. 000-51025) filed with Securities
and
Exchange Commission on June 29, 2006.
|
|
4.6
|
2006
Share Incentive Plan of Ninetowns Internet Technology Group Company
Limited
|
|
4.7*
|
Service
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group Company Limited and Shuang Wang (incorporated by reference
to
Exhibit 10.3 from our Registration Statement on Form F-1 (Registration
No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.8*
|
Service
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group
|
|
Exhibit
Number
|
Description
|
| Company Limited and Xiaoguang Ren (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (Registration No. 333-120184) filed with Securities and Exchange Commission on November 3, 2004) | |
|
4.09*
|
Service
Agreement dated September 30, 2003 between Ninetowns Internet
Technology Group Company Limited and Tommy Siu Lun Fork (incorporated
by
reference to Exhibit 10.6 from our Registration Statement on Form
F-1
(Registration No. 333-120184) filed with Securities and Exchange
Commission on November 3, 2004)
|
|
4.10*
|
Service
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group Company Limited and Kin Fai Ng (incorporated by reference to
Exhibit
10.8 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.11*
|
Service
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group Company Limited and Min Dong (incorporated by reference to
Exhibit
10.10 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.12*
|
Service
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group Company Limited and Bolin Wu (incorporated by reference to
Exhibit
10.11 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.13*
|
Service
Agreement dated November 12, 2004 between Ninetowns Internet
Technology Group Company Limited and John Yan Wang (incorporated
by
reference to Exhibit 10.36 from our Registration Statement on Form
F-1
(Registration No. 333-120184) filed with Securities and Exchange
Commission on November 30, 2004)
|
|
4.14*
|
Translation
of Form of Software Sales Agreement (incorporated by reference to
Exhibit
10.12 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.15*
|
Translation
of Franchise Agreement dated February 14, 2004 between Beijing
Ninetowns Ports Software and Technology Co., Ltd. and Shenzhen Ninetowns
Enke Software Technology Co., Ltd. (incorporated by reference to
Exhibit
10.17 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.16*
|
Translation
of Supplemental Agreement dated April 22, 2004, amending Franchise
Agreement dated February 14, 2004 (incorporated by reference to
Exhibit 10.18 from our Registration Statement on Form F-1 (Registration
No. 333-120184) filed with Securities and Exchange Commission on
November
3, 2004)
|
|
4.17*
|
Translation
of Franchise Agreement relating to “iDeclare.CIQ” software dated May 10,
2006 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and
Beijing Ninetowns Zhi Fang Software and Technology Co., Ltd. (incorporated
by reference to Exhibit 4.22 from our Annual Report on Form 20-F
(Registration No. 000-51025) filed with Securities and Exchange Commission
on June 29, 2006)
|
|
4.18*
|
Translation
of Franchise Agreement relating to “iProcess.CIQ” software dated May 10,
2006 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and
Beijing Ninetowns Zhi Fang Software and Technology Co., Ltd. (incorporated
by reference to Exhibit 4.23 from our Annual Report on Form 20-F
(Registration No. 000-51025) filed with Securities and Exchange Commission
on June 29, 2006)
|
|
†4.19
|
Translation
of Franchise Agreement relating to “Ninetowns Network Quality Supervision
Software v1.0” software dated December 26, 2006 between Beijing Ninetowns
Network and Software Co., Ltd. and Beijing Ninetowns Zhi Fang Software
and
Technology Co., Ltd.
|
|
4.20*
|
Translation
of Franchise Agreement dated May 12, 2006 between Beijing Ninetowns
Ports
Software and Technology Co., Ltd. and Shenzhen Ninetowns Enke Software
Technology Co., Ltd. (incorporated by reference to Exhibit 4.24 from
our
Annual Report on Form 20-F (Registration No. 000-51025) filed with
Securities and Exchange Commission on June 29, 2006)
|
|
†4.21
|
Translation
of Franchise Agreement relating to “Ninetowns Network Quality Supervision
Software v1.0” software dated December 26, 2006 between Beijing Ninetowns
Network and
|
|
Exhibit
Number
|
Description
|
| Software Co., Ltd. and Shenzhen Ninetowns Enke Software Technology Co., Ltd. | |
|
4.22*
|
Translation
of Franchise Agreement dated May 12, 2006 between Beijing Ninetowns
Ports
Software and Technology Co., Ltd. and Beijing Ninetowns Xin He Software
Technology Co., Ltd. (incorporated by reference to Exhibit 4.25 from
our
Annual Report on Form 20-F (Registration No. 000-51025) filed with
Securities and Exchange Commission on June 29, 2006)
|
|
†4.23
|
Translation
of Franchise Agreement relating to “Ninetowns Network Quality Supervision
Software v1.0” software dated December 26, 2006 between Beijing Ninetowns
Network and Software Co., Ltd. and Beijing Ninetowns Xin He Software
Technology Co., Ltd.
|
|
†4.24
|
Translation
of Franchise Agreement relating to “iDelare v5.0” software dated October
18, 2006 between Beijing Ninetowns Ports Software and Technology
Co., Ltd.
and Guangzhou Ninetowns Wang Li Software Co., Ltd.
|
|
†4.25
|
Translation
of Franchise Agreement relating to “Ninetowns Network Quality Supervision
Software v1.0” software dated December 26, 2006 between Beijing Ninetowns
Network and Software Co., Ltd. and Guangzhou Ninetowns Wang Li Software
Co., Ltd.
|
|
4.26*
|
Translation
of Union Plaza Lease Agreement dated February 27, 2003 between
Beijing Fu Yu Da Real Estate Development Co., Ltd. and Beijing Ninetowns
Digital Technology Limited (incorporated by reference to Exhibit
10.19
from our Registration Statement on Form F-1 (Registration No. 333-120184)
filed with Securities and Exchange Commission on November 3,
2004)
|
|
4.27*
|
Translation
of Renewal Agreement dated May 23, 2005 between Beijing Fu Yu Da
Real
Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.32 from
our
Annual Report on Form 20-F (Registration No. 000-51025) filed with
Securities and Exchange Commission on June 29, 2006)
|
|
4.28*
|
Translation
of Renewal Agreement dated August 30, 2005 between Beijing Fu Yu
Da Real
Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.33 from
our
Annual Report on Form 20-F (Registration No. 000-51025) filed with
Securities and Exchange Commission on June 29, 2006)
|
|
4.29*
|
Translation
of Renewal Agreement dated March 8, 2006 between Beijing Fu Yu Da
Real
Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.28 from
our Annual Report on Form 20-F (Registration No. 000-51025) filed
with
Securities and Exchange Commission on June 29, 2006)
|
|
4.30
|
Translation
of Renewal Agreement
dated September 20, 2006 between Beijing Fu Yu Da Real Estate Development
Co., Ltd. and Beijing Ninetowns Ports Software and Technology Co.,
Ltd.
|
|
4.31
|
Translation
of Renewal Agreement
dated December 6, 2006 between Beijing Fu Yu Da Real Estate
Development Co., Ltd. and Beijing Ninetowns Ports Software and Technology
Co., Ltd.
|
|
4.32
|
Translation
of
Renewal Agreement dated March 20, 2007 between Beijing Fu Yu Da
Real Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd.
|
|
4.33*
|
Translation
of Extension Agreement dated August 9, 2005 between Beijing Fu Yu
Da Real
Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.29 from
our Annual Report on Form 20-F (Registration No. 000-51025) filed
with
Securities and Exchange Commission on June 29, 2006)
|
|
4.34*
|
Translation
of Renewal Agreement dated March 8, 2006 between Beijing Fu Yu Da
Real
Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.30 from
our Annual Report on Form 20-F (Registration No. 000-51025) filed
with
Securities and Exchange Commission on June 29, 2006)
|
|
4.35
|
Translation
of Renewal Agreement
dated September 20, 2006 between Beijing Fu Yu Da
|
|
Exhibit
Number
|
Description
|
| Real Estate Development Co., Ltd. and Beijing Ninetowns Ports Software and Technology Co., Ltd. | |
|
4.36
|
Translation
of Renewal
Agreement of Extension 1 dated December 21,
2006 between Beijing Fu Yu Da
Real Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd.
|
|
4.37
|
Translation
of Renewal
Agreement of Extension 1 dated March 20, 2007 between Beijing Fu Yu
Da Real Estate Development Co., Ltd. and Beijing Ninetowns Ports
Software
and Technology Co., Ltd.
|
|
4.38*
|
Translation
of Extension Agreement dated December 23, 2005 between Beijing Fu
Yu Da
Real Estate Development Co., Ltd. and Beijing Ninetowns Digital Technology
Limited (incorporated by reference to Exhibit 4.31 from our Annual
Report
on Form 20-F (Registration No. 000-51025) filed with Securities and
Exchange Commission on June 29, 2006)
|
|
4.39
|
Translation
of Renewal
Agreement of Extension 2 dated June 6, 2006 between
Beijing Fu Yu Da Real Estate Development Co., Ltd. and Beijing Ninetowns
Ports Software and Technology Co., Ltd.
|
|
4.40
|
Translation
of Renewal Agreement
of Extension 2 dated December 18,
2006 between Beijing Fu Yu Da
Real Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd.
|
|
4.41
|
Translation
of Renewal Agreement
of Extension 2 dated March 20, 2007 between Beijing Fu Yu
Da Real Estate Development Co., Ltd. and Beijing Ninetowns Ports
Software
and Technology Co., Ltd.
|
|
4.42
|
Translation
of Renewal Agreement
of Extension 3 dated November 27, 2006 between Beijing Fu
Yu Da Real Estate Development Co., Ltd. and Beijing Ninetowns Ports
Software and Technology Co., Ltd.
|
|
4.43
|
Translation
of Renewal Agreement
of Extension 3 dated March 20, 2007 between Beijing Fu
Yu Da Real Estate Development Co., Ltd. and Beijing Ninetowns Ports
Software and
Technology Co., Ltd.
|
|
4.44
|
Translation
of Renewal Agreement
of Extension 4 dated December 15, 2006 between Beijing Fu Yu Da
Real Estate Development Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd.
|
|
4.45
|
Translation
of Renewal
Agreement of Extension 4 dated March 20, 2007 between
Beijing Fu Yu Da Real Estate Development Co., Ltd. and Beijing Ninetowns
Ports Software and Technology Co., Ltd.
|
|
4.46*
|
Translation
of Software Development Contract for iTowNet Customer Service System
dated
April 2, 2002 between Beijing iTowNet Cyber Technology Ltd. and
Beijing New Take Electronic Commerce Limited (incorporated by reference
to
Exhibit 10.21 from our Registration Statement on Form F-1 (Registration
No. 333-120184) filed with Securities and Exchange Commission on
November
3, 2004)
|
|
4.47*
|
Translation
of Software Development Contract for Online Declaration System dated
May 28, 2002 between Beijing iTowNet Cyber Technology Ltd. and
Beijing New Take Electronic Commerce Limited (incorporated by reference
to
Exhibit 10.22 from our Registration Statement on Form F-1 (Registration
No. 333-120184) filed with Securities and Exchange Commission on
November
3, 2004)
|
|
4.48*
|
Translation
of Software Development Contract for iTowNet Platform Tendering and
Optimization Project dated August 1, 2003 between Beijing Regard
Technology Co., Ltd. and Beijing Ninetowns Ports Software and Technology
Co., Ltd. (incorporated by reference to Exhibit 10.23 from our
Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.49*
|
Translation
of Software Development Contract for Inspection and Quarantine “Great
Customs Clearance” Project dated August 1, 2003 between Beijing
Regard Technology Co., Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 10.24
from our
Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.50*
|
Translation
of iTowNet Electronic Service Platform Technical Service Contract
dated
December 25, 2003 between Beijing iTowNet Cyber Technology Ltd. and
Beijing Ninetowns
|
|
Exhibit
Number
|
Description
|
| Ports Software and Technology Co., Ltd. (incorporated by reference to Exhibit 10.25 from our Registration Statement on Form F-1 (Registration No. 333-120184) filed with Securities and Exchange Commission on November 3, 2004) | |
|
4.51*
|
Translation
of UMA Product Sales and Service Contract dated October 8, 2003
between Beijing iTowNet Cyber Technology Ltd. and Beijing Ninetowns
Ports
Software and Technology Co., Ltd. (incorporated by reference to Exhibit
10.26 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.52*
|
Deed
of Undertaking dated August 13, 2004 by Shuang Wang and Min Dong to
AIG Asian Opportunity Fund, L.P. and American International Assurance
Company (Bermuda) Limited (incorporated by reference to Exhibit 10.27
from
our Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.53*
|
Sale
and Purchase Agreement dated October 3, 2003 among Ninetowns Internet
Technology Group Company Limited, Jitter Bug Holdings Limited, UOB
Venture
(Shenzhen) Limited, Titan I Venture Capital Co., Ltd., Titan II
Venture Capital Co., Ltd. and CFM Investments Limited — CFM Greater
China Fund (incorporated by reference to Exhibit 10.28 from our
Registration Statement on Form F-1 (Registration No. 333-120184)
filed
with Securities and Exchange Commission on November 3,
2004)
|
|
4.54*
|
Sale
and Purchase Agreement dated October 8, 2003 among Ninetowns Internet
Technology Group Company Limited, Jitter Bug Holdings Limited, China
Equity Associates L.P. and MMFI CAPI Venture Investments Limited
(incorporated by reference to Exhibit 10.29 from our Registration
Statement on Form F-1 (Registration No. 333-120184) filed with Securities
and Exchange Commission on November 3, 2004)
|
|
4.55*
|
Subscription
Agreement dated October 8, 2003 between Ninetowns Internet Technology
Group Company Limited and Ever Praise Holdings Limited (incorporated
by
reference to Exhibit 10.30 from our Registration Statement on Form
F-1
(Registration No. 333-120184) filed with Securities and Exchange
Commission on November 3, 2004)
|
|
4.56*
|
Share
Subscription Agreement dated October 9, 2003 among Ninetowns Internet
Technology Group Company Limited, Jitter Bug Holdings Limited, AIG
Asian
Opportunity Fund, L.P., American International Assurance Company
(Bermuda)
Limited, Mr. Shuang Wang and Ms. Min Dong (incorporated by
reference to Exhibit 10.31 from our Registration Statement on Form
F-1
(Registration No. 333-120184) filed with Securities and Exchange
Commission on November 3, 2004)
|
|
4.57*
|
Sale
and Purchase Agreement dated October 16, 2003 among Ninetowns
Internet Technology Group Company Limited, Jitter Bug Holdings Limited
and
Huitung Investments (BVI) Limited (incorporated by reference to Exhibit
10.32 from our Registration Statement on Form F-1 (Registration No.
333-120184) filed with Securities and Exchange Commission on November
3,
2004)
|
|
4.58*
|
Subscription
Agreement dated December 11, 2003 among Ninetowns Internet Technology
Group Company Limited, Jitter Bug Holdings Limited, Titan I Venture
Capital Co., Ltd, Titan II Venture Capital Co., Ltd. and CFM
Investments Limited — CFM Greater China Fund (incorporated by
reference to Exhibit 10.33 from our Registration Statement on Form
F-1
(Registration No. 333-120184) filed with Securities and Exchange
Commission on November 3, 2004)
|
|
4.59*
|
Subscription
Agreement dated December 11, 2003 among Ninetowns Internet Technology
Group Company Limited, Jitter Bug Holdings Limited and Ferndale Associates
Limited (incorporated by reference to Exhibit 10.34 from our Registration
Statement on Form F-1 (Registration No. 333-120184) filed with Securities
and Exchange Commission on November 3, 2004)
|
|
4.60*
|
Form
of Right of First Refusal Agreement dated as of November 2, 2004
among Ninetowns Internet Technology Group Company Limited, Ninetowns
Import & Export e-Commerce Co., Ltd., Shuang Wang and Min Dong
(incorporated by reference to Exhibit 10.35 from our Registration
Statement on Form F-1 (Registration No. 333-120184) filed with Securities
and Exchange Commission on November 3,
2004)
|
|
Exhibit
Number
|
Description
|
|
4.61*
|
Translation
of Software Development Contract for an Integrated Origin Certificate
Electronic Management System dated December 15, 2004 between Beijing
iTowNet Cyber Technology Ltd. and Beijing Ninetowns Ports Software
and
Technology Co., Ltd. (incorporated by reference to Exhibit 4.39 from
our
Annual Report on Form 20-F (Registration No. 000-51025) filed with
Securities and Exchange Commission on June 29, 2005)
|
|
4.62*
|
Translation
of Software Development Contract for Internal Decision & Support
System dated January 27, 2005 between the State Administration for
Quality
Supervision and Inspection and Quarantine of the PRC and Beijing
Ninetowns
Ports Software and Technology Co., Ltd. (incorporated by reference
to
Exhibit 4.40 from our Annual Report on Form 20-F (Registration No.
000-51025) filed with Securities and Exchange Commission on June
29,
2005)
|
|
4.63*
|
Translation
of Software Development Contract for Export Electronic Monitoring
Project
(Phase I) dated March 31, 2005 between Beijing Regard Technology
Co., Ltd.
and Beijing Ninetowns Ports Software and Technology Co., Ltd.
(incorporated by reference to Exhibit 4.41 from our Annual Report
on Form
20-F (Registration No. 000-51025) filed with Securities and Exchange
Commission on June 29, 2005)
|
|
4.64*
|
Summary
of Sale and Purchase Agreement between Beijing Ninetowns Times Electronic
Commerce Limited and Dauphin Science Business Park Construction &
Development Co., Ltd. of Beijing Zhongguancun Fengtai Science Park
(incorporated by reference to Exhibit 4.42 from our Annual Report
on Form
20-F (Registration No. 000-51025) filed with Securities and Exchange
Commission on June 29, 2005)
|
|
4.65*
|
Summary
of form of the Sale and Purchase Agreement between Beijing Ninetowns
Ports
Software and Technology Co., Ltd. and Beijing Heng Fu Plaza Development
Co., Ltd. (incorporated by reference to Exhibit 4.43 from our Annual
Report on Form 20-F (Registration No. 000-51025) filed with Securities
and
Exchange Commission on June 29, 2005)
|
|
4.66*
|
Translation
of Software Development Contract for Export Electronic Monitoring
Project
(Phase 2) dated August 29, 2005 between eGrid Technology Ltd. and
Beijing
Ninetowns Ports Software and Technology Co., Ltd. (incorporated by
reference to Exhibit 4.54 from our Annual Report on Form 20-F
(Registration No. 000-51025) filed with Securities and Exchange Commission
on June 29, 2006)
|
|
4.67*
|
Translation
of Software Development Contract for Waste Import Electronic Monitoring
dated June 28, 2005 between Beijing Regard Technology Co., Ltd. and
Beijing Ninetowns Ports Software and Technology Co., Ltd. (incorporated
by
reference to Exhibit 4.55 from our Annual Report on Form 20-F
(Registration No. 000-51025) filed with Securities and Exchange Commission
on June 29, 2006)
|
|
4.68*
|
Translation
of Software Development Contract for Electronic Business Integrated
Service Platform dated June 28, 2005 between Beijing Regard Technology
Co., Ltd. and Beijing Ninetowns Ports Software and Technology Co.,
Ltd.
(incorporated by reference to Exhibit 4.56 from our Annual Report
on Form
20-F (Registration No. 000-51025) filed with Securities and Exchange
Commission on June 29, 2006)
|
|
4.69*
|
Translation
of Software Development Contract for Electronic Monitoring System
Software
Project (Common version for Enterprise) dated August 1, 2005 between
State
Administration for Quality Supervision and Inspection and Quarantine
of
the PRC and Beijing Ninetowns Ports Software and Technology Co.,
Ltd.
(incorporated by reference to Exhibit 4.57 from our Annual Report
on Form
20-F (Registration No. 000-51025) filed with Securities and Exchange
Commission on June 29, 2006)
|
|
4.70*
|
Share
and Purchase Agreement dated September 3, 2006, among Ninetowns Digital
World Trade Holdings Limited, Beprecise Investments Limited, Global
Market
Group Limited, Global Market Group (Asia) Limited, Global Market
(Guangzhou) Co., Ltd., Pan Weijia and Pan Weinian (incorporated by
reference to Exhibit 99.4 from our Form 6-K (File No.000-51025) filed
with
Securities and Exchange Commission on September 22,
2006)
|
|
4.71
|
Investor’s
Rights Agreement dated October 19, 2006, among Beprecise Investments
Limited, Global Market Group Limited, Global Market Group (Asia)
Limited,
Global Market (Guangzhou) Co., Ltd., Pan Weijia and Pan
Weinan
|
|
4.72
|
Share
and Purchase Agreement dated April 9, 2007, among Ixworth Enterprises
Limited, Beijing Ninetowns Network and Software Co., Ltd., Fan Hui
Yang,
Zhi Sheng Limited, Ample
|
|
Exhibit
Number
|
Description
|
| Spring Holdings Limited, Beijing Baichuan Tongda Science and Technology Development Co., Ltd., Zhou Peiji and Zhou Lijun | |
|
4.73
|
Shareholders
Agreement dated April 26, 2007, among Ixworth Enterprises Limited,
Fan Hui
Yang, Zhi Sheng Limited and Ample Spring Holdings
Limited
|
|
†4.74
|
Translation
of Software Copyright Assignment Agreement dated November 10, 2006
between
Department Service Center of Dongguan Entry-Exit Inspection and Quarantine
Bureau and Beijing Ninetowns Ports Software and Technology Co.,
Ltd.
|
|
8.1
|
Subsidiaries
of Ninetowns Internet Technology Group Company Limited
|
|
11.1*
|
Code
of Business Conduct and Ethics (incorporated by reference to Exhibit
11.1
from our Annual Report on Form 20-F (Registration No. 000-51025)
filed
with Securities and Exchange Commission on June 29,
2005)
|
|
11.2*
|
Code
of Ethics for Chief Executive Officer and Senior Financial Officers
(incorporated by reference to Exhibit 11.2 from our Annual Report
on Form
20-F (Registration No. 000-51025) filed with Securities and Exchange
Commission on June 29, 2005)
|
|
12.1
|
Certification
of Chief Executive Officer pursuant to SEC Rule
13a-14(a)
|
|
12.2
|
Certification
of Chief Financial Officer pursuant to SEC Rule
13a-14(a)
|
|
13.1
|
Certification
of Chief Executive Officer pursuant to SEC Rule
13a-14(b)
|
|
13.2
|
Certification
of Chief Financial Officer pursuant to SEC Rule
13a-14(b)
|
|
15.1
|
Consent
of Deloitte Touche Tohmatsu CPA Ltd.
|
|
15.2
|
Consent
of Global Insight
|
|
15.3
|
Consent
of Conyers Dill & Pearman
|
|
15.4
|
Consent
of Commerce & Finance Law
Offices
|
|
*
|
Previously
filed with the relevant Registration Statement on Form F-1, with
the
relevant Annual Report on Form 20-F or with the relevant Periodic
Report
on Form 6-K.
|
|
†
|
Certain
portions of this Exhibit have been omitted based upon a request for
confidential treatment. The omitted portions have been separately
submitted to the Securities and Exchange
Commission.
|
Signatures
The
registrant hereby certifies that it meets all of the requirements for filing
its
annual report on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf on this 16th day
of July, 2007.
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP
COMPANY LIMITED |
|
|
By: /s/ Shuang Wang |
|
|
Name: Shuang Wang |
|
|
Title:
Chief Executive Officer
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
(Formerly
“Ninetowns Digital World Trade Holdings Limited”)
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
|
F
–
5
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To
the
Board of Directors and Shareholders of
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED:
We
have
audited the accompanying consolidated balance sheets of Ninetowns Internet
Technology Group Company Limited (formerly “Ninetowns Digital World Trade
Holdings Company Limited”), its subsidiaries, and its variable interest entity
(the "Company") as of December 31, 2005 and 2006 and
the related
consolidated statements of operations, shareholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2006 (expressed in Renminbi), and the related financial statement
schedule included in Schedule I. These consolidated financial statements
and the
related financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the related financial statement schedule based on
our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2005 and
2006
and the results of its operations and its cash flows for each of the three
years
in the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion,
the
related financial statement schedule, when considered in relation to the
basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 2 to the consolidated financial statements, in 2006 the
Company changed its method of accounting for stock-based compensation to
conform
to Statement of Financial Accounting Standard No. 123 (Revised 2004),
“Share-based Payment”, effective on January 1, 2006.
Our
audits also comprehended the translation of Renminbi amounts into United
States
dollar amounts and, in our opinion, such translation has been made in conformity
with the basis stated in Note 2. Such United States dollar amounts are presented
solely for the convenience of the readers.
/s/
Deloitte Touche Tohmatsu CPA Ltd.
Beijing,
China
July
12,
2007
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
(Formerly
“Ninetowns Digital World Trade Holdings Limited”)
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share-related data)
|
|
December
31,
|
|||||||||||
|
|
2005
|
2006
|
2006
|
|||||||||
|
|
RMB
|
RMB
|
US$
|
|||||||||
|
ASSETS
|
|
|
|
|||||||||
|
Current
assets:
|
|
|
|
|||||||||
|
Cash
and cash equivalents
|
731,474
|
598,648
|
76,709
|
|||||||||
|
Term
deposits
|
207,000
|
307,209
|
39,365
|
|||||||||
|
Trade
receivables from customers:
|
||||||||||||
|
Billed,
less allowance for doubtful accounts
|
||||||||||||
|
of
RMB4,851 in 2005 and RMB1,088 in 2006
|
17,459
|
17,943
|
2,299
|
|||||||||
|
Unbilled
|
28,537
|
25,199
|
3,229
|
|||||||||
|
Trade
receivables from related parties
|
29,752
|
3,963
|
508
|
|||||||||
|
Inventories
|
7,722
|
6,820
|
874
|
|||||||||
|
Prepaid
expenses and other current assets
|
15,295
|
28,509
|
3,653
|
|||||||||
|
Deferred
tax assets
|
-
|
1,698
|
218
|
|||||||||
|
Total
current assets
|
1,037,239
|
989,989
|
126,855
|
|||||||||
|
Property
and equipment, net
|
33,484
|
46,693
|
5,983
|
|||||||||
|
Deposits
paid for acquisition of property and equipment
|
73,040
|
73,411
|
9,407
|
|||||||||
|
Investment
under cost method
|
-
|
38,929
|
4,988
|
|||||||||
|
Acquired
intangible assets, net
|
8,440
|
22,697
|
2,908
|
|||||||||
|
Goodwill
|
193,570
|
193,570
|
24,804
|
|||||||||
|
TOTAL
ASSETS
|
1,345,773
|
1,365,289
|
174,945
|
|||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||
|
Current
liabilities:
|
||||||||||||
|
Accounts
payable and accrued expenses
|
12,039
|
14,312
|
1,833
|
|||||||||
|
Customer
deposits
|
10,639
|
10,321
|
1,323
|
|||||||||
|
Deferred
revenue
|
67,886
|
26,383
|
3,381
|
|||||||||
|
Income
taxes payable
|
5,388
|
6,334
|
812
|
|||||||||
|
Other
taxes payable
|
2,856
|
2,332
|
299
|
|||||||||
|
Total
current liabilities
|
98,808
|
59,682
|
7,648
|
|||||||||
|
Deferred
tax liability
|
-
|
627
|
80
|
|||||||||
|
Total
liabilities
|
98,808
|
60,309
|
7,728
|
|||||||||
|
Minority
interest
|
600
|
-
|
-
|
|||||||||
|
|
||||||||||||
|
Commitments
and contingencies (Note 15)
|
||||||||||||
|
|
||||||||||||
|
Shareholders'
equity:
|
||||||||||||
|
Ordinary
shares, par value RMB0.027 (HK$0.025) per
share:
8,000,000,000 shares authorized; 34,991,834
shares
issued and outstanding in 2005 and 2006
|
926
|
926
|
119
|
|||||||||
|
Additional
paid-in capital
|
861,315
|
871,642
|
111,689
|
|||||||||
|
Retained
earnings
|
395,415
|
441,343
|
56,553
|
|||||||||
|
Treasury
shares, at cost, 315,226 shares and 47,862 shares
in
2005 and 2006, respectively
|
(8,196 | ) | (1,268 | ) | (162 | ) | ||||||
|
Accumulated
other comprehensive loss
|
(3,095 | ) | (7,663 | ) | (982 | ) | ||||||
|
Total
shareholders' equity
|
1,246,365
|
1,304,980
|
167,217
|
|||||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
1,345,773
|
1,365,289
|
174,945
|
|||||||||
See
notes to consolidated financial statements.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
(Formerly
“Ninetowns Digital World Trade Holdings Limited”)
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except share-related)
|
|
Years
ended December 31,
|
|||||||||||||||
|
|
2004
|
2005
|
2006
|
2006
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
US$
|
||||||||||||
|
Net
revenues:
|
|
|
|
|
||||||||||||
|
Enterprise
software
|
|
|
|
|
||||||||||||
|
external
customers
|
146,635
|
142,534
|
92,127
|
11,805
|
||||||||||||
|
related
parties (Note 13)
|
42,085
|
60,954
|
24,706
|
3,166
|
||||||||||||
|
Software
development services
|
||||||||||||||||
|
external
customers
|
3,130
|
7,600
|
23,084
|
2,958
|
||||||||||||
|
related
parties (Note 13)
|
9,593
|
28,100
|
12,933
|
1,657
|
||||||||||||
|
Computer
hardware sales
|
104
|
678
|
398
|
51
|
||||||||||||
|
Total
net revenues
|
201,547
|
239,866
|
153,248
|
19,637
|
||||||||||||
|
Cost
of revenues:
|
||||||||||||||||
|
Enterprise
software
|
(1,528 | ) | (495 | ) |
-
|
-
|
||||||||||
|
Software
development services (including share-
based
compensation expense of nil in 2004 and
2005,
and RMB1,039 in 2006)
|
(2,970 | ) | (18,192 | ) | (16,805 | ) | (2,153 | ) | ||||||||
|
Computer
hardware sales
|
(9 | ) | (482 | ) | (134 | ) | (17 | ) | ||||||||
|
Total
cost of revenues
|
(4,507 | ) | (19,169 | ) | (16,939 | ) | (2,170 | ) | ||||||||
|
Gross
profit
|
197,040
|
220,697
|
136,309
|
17,467
|
||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling (including
share-based compensation
expense
of nil in 2004 and 2005, and RMB3,371
in
2006)
|
(15,977 | ) | (25,752 | ) | (13,604 | ) | (1,743 | ) | ||||||||
|
General
and administrative (including share-based
compensation
expense of nil in 2004 and 2005,
and
RMB4,074 in 2006)
|
(36,572 | ) | (49,538 | ) | (65,928 | ) | (8,448 | ) | ||||||||
|
Research
and development (including share-based
compensation
expense of nil in 2004 and 2005,
and
RMB1,843 in 2006)
|
(4,819 | ) | (11,249 | ) | (29,825 | ) | (3,822 | ) | ||||||||
|
Total
operating expenses
|
(57,368 | ) | (86,539 | ) | (109,357 | ) | (14,013 | ) | ||||||||
|
Government
subsidies
|
1,340
|
447
|
705
|
90
|
||||||||||||
|
Income
from operations
|
141,012
|
134,605
|
27,657
|
3,544
|
||||||||||||
|
Interest
income
|
3,768
|
17,625
|
19,302
|
2,473
|
||||||||||||
|
Income
before provision for income taxes and minority interest
|
144,780
|
152,230
|
46,959
|
6,017
|
||||||||||||
|
Provision
for income taxes
|
(1,823 | ) | (626 | ) | (1,031 | ) | (132 | ) | ||||||||
|
Income
before minority interest
|
142,957
|
151,604
|
45,928
|
5,885
|
||||||||||||
|
Minority
interest
|
(9,006 | ) |
-
|
-
|
-
|
|||||||||||
|
Net
income
|
133,951
|
151,604
|
45,928
|
5,885
|
||||||||||||
|
Net
income per share:
|
||||||||||||||||
|
Basic
|
4.96
|
4.39
|
1.32
|
0.17
|
||||||||||||
|
Diluted
|
4.74
|
4.25
|
1.30
|
0.17
|
||||||||||||
|
|
||||||||||||||||
|
Shares
used in computation:
|
||||||||||||||||
|
Basic
|
27,022,057
|
34,539,976
|
34,773,005
|
34,773,005
|
||||||||||||
|
Diluted
|
28,279,061
|
35,706,894
|
35,368,882
|
35,368,882
|
||||||||||||
See
notes
to consolidated financial statements.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
(Formerly
“Ninetowns Digital World Trade Holdings Limited”)
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
AND
COMPREHENSIVE INCOME
(In
thousands, except share-related data)
|
|
|
|
|
|
|
|
|
|
Accumulated
other
comprehensive
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Ordinary
shares
|
|
Additional
paid-in |
Treasury
shares
|
Retained
|
|
|
|
|
Comprehensive
|
||||||
|
|
Shares
|
|
Amount
|
|
capital
|
Shares
|
Amount
|
|
earnings
|
|
loss
|
|
Total
|
|
income
|
|
|
|
|
|
RMB
|
|
RMB
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance
as of January 1, 2004
|
22,780,000
|
|
604
|
|
55,066
|
-
|
-
|
|
109,860
|
|
-
|
|
165,530
|
|
|
|
|
Shares
issued for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
acquisition
of
minority interest |
2,002,312
|
|
53
|
|
181,259
|
-
|
-
|
|
-
|
|
-
|
|
181,312
|
|
|
|
|
Shares
issued upon initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
public
offering, net of
issuance costs |
6,400,000
|
|
169
|
|
531,244
|
-
|
-
|
|
-
|
|
-
|
|
531,413
|
|
|
|
|
Expiration
of put options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Issuance
of ordinary shares
|
2,964,016
|
|
79
|
|
71,662
|
-
|
-
|
|
-
|
|
-
|
|
71,741
|
|
|
|
|
Exercise
of share options
|
245,506
|
|
6
|
|
6,499
|
|
-
|
|
-
|
|
6,505
|
|
|
|||
|
Net
income
|
-
|
|
-
|
|
-
|
-
|
-
|
|
133,951
|
|
-
|
|
133,951
|
|
133,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance
as of December 31,
2004 |
34,391,834
|
|
911
|
|
845,730
|
-
|
-
|
|
243,811
|
|
-
|
|
1,090,452
|
|
|
|
|
Ordinary
shares converted to ADR shares for future exercises of share
options
|
600,000
|
15
|
15,585
|
(600,000)
|
(15,600)
|
-
|
-
|
-
|
|
|||||||
|
Issuance
of ADR shares for the exercises of employee share options
|
-
|
-
|
- |
284,774
|
7,404
|
-
|
-
|
7,404
|
|
|
||||||
|
Net
income
|
-
|
|
-
|
|
-
|
-
|
-
|
|
151,604
|
|
-
|
|
151,604
|
|
151,604
|
|
|
Foreign
currency translation adjustments
|
-
|
|
-
|
|
-
|
-
|
-
|
|
-
|
|
(3,095)
|
|
(3,095)
|
|
(3,095)
|
|
|
Balance
as of December 31, 2005
|
34,991,834
|
|
926
|
|
861,315
|
(315,226)
|
(8,196)
|
|
395,415
|
|
(3,095)
|
|
1,246,365
|
|
|
|
|
Issuance
of ADR shares for the exercises of employee share options
|
-
|
-
|
-
|
267,364
|
6,928
|
-
|
-
|
6,928
|
|
|
||||||
|
Employee
share-based compensation
|
-
|
-
|
10,327
|
-
|
-
|
-
|
-
|
10,327
|
||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
45,928
|
-
|
45,928
|
|
45,928
|
||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,568)
|
(4,568)
|
(4,568)
|
|||||||
|
|
41,360
|
|||||||||||||||
|
Balance
as of December 31, 2006
|
34,991,834
|
926
|
871,642
|
(47,862)
|
(1,268)
|
441,343
|
(7,663)
|
1,304,980
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
US$119
|
US$111,689
|
US$(162)
|
US$56,553
|
US$(982)
|
US$167,217
|
|
|||||||
|
|
|
|
|
|||||||||||||
See
notes
to consolidated financial statements.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
(Formerly
“Ninetowns Digital World Trade Holdings Limited”)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years
ended December 31,
|
|||||||||||||||
|
|
2004
|
2005
|
2006
|
2006
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
US$
|
||||||||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||||||||
|
Net
income
|
133,951
|
151,604
|
45,928
|
5,885
|
||||||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||||||
|
Provided
by operating activities:
|
||||||||||||||||
|
Loss
on disposal of property and equipment
|
-
|
263
|
511
|
65
|
||||||||||||
|
Depreciation
of property and equipment
|
1,315
|
2,877
|
6,194
|
794
|
||||||||||||
|
Amortization
of acquired intangible assets
|
805
|
2,416
|
2,943
|
377
|
||||||||||||
|
Provision
of allowance for doubtful debts
|
700
|
760
|
2,487
|
319
|
||||||||||||
|
Bad
debt recoveries
|
-
|
-
|
(4,008 | ) | (514 | ) | ||||||||||
|
Minority
interests
|
9,006
|
-
|
-
|
-
|
||||||||||||
|
Employee
share-based compensation
|
-
|
-
|
10,327
|
1,323
|
||||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||
|
Inventories
|
(7,665 | ) |
401
|
903
|
116
|
|||||||||||
|
Trade
receivables from customers
|
(13,517 | ) | (2,843 | ) |
2,854
|
366
|
||||||||||
|
Trade
receivables from related parties
|
945
|
1,188
|
27,311
|
3,500
|
||||||||||||
|
Prepaid
expenses and other current assets
|
(16,943 | ) |
16,668
|
(12,313 | ) | (1,578 | ) | |||||||||
|
Accounts
payable and accrued expenses
|
13,849
|
(7,022 | ) |
164
|
21
|
|||||||||||
|
Customer
deposits
|
-
|
10,639
|
(318 | ) | (41 | ) | ||||||||||
|
Deferred
revenue
|
26,622
|
(29,344 | ) | (41,503 | ) | (5,318 | ) | |||||||||
|
Deferred
taxes, net
|
-
|
-
|
(1,071 | ) | (137 | ) | ||||||||||
|
Income
taxes payable
|
533
|
(77 | ) |
947
|
121
|
|||||||||||
|
Other
taxes payables
|
(6,331 | ) | (1,158 | ) | (524 | ) | (67 | ) | ||||||||
|
|
||||||||||||||||
|
Net
cash provided by operating activities
|
143,270
|
146,372
|
40,832
|
5,232
|
||||||||||||
|
|
||||||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Increase
of term deposits
|
(85,249 | ) | (56,087 | ) | (100,209 | ) | (12,841 | ) | ||||||||
|
Cash
paid for investment under cost method
|
-
|
-
|
(38,929 | ) | (4,987 | ) | ||||||||||
|
Purchase
of property and equipment
|
(2,856 | ) | (31,376 | ) | (19,774 | ) | (2,534 | ) | ||||||||
|
Purchase
of intangible assets
|
-
|
-
|
(17,200 | ) | (2,204 | ) | ||||||||||
|
Deposits
paid for acquisition of property and equipment
|
(49,652 | ) | (23,388 | ) | (371 | ) | (48 | ) | ||||||||
|
Acquisition
of additional interest in subsidiaries
|
(48,637 | ) |
-
|
-
|
-
|
|||||||||||
|
Payment
for amounts due from related parties
|
6,989
|
-
|
-
|
-
|
||||||||||||
|
|
||||||||||||||||
|
Net
cash used in investing activities
|
(179,405 | ), | (110,851 | ) | (176,483 | ) | (22,614 | ) | ||||||||
|
|
||||||||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Exercise
of share options
|
6,505
|
7,404
|
6,928
|
888
|
||||||||||||
|
Return
of capital to minority shareholder upon dissolution of
a subsidiary
|
-
|
-
|
(600 | ) | (77 | ) | ||||||||||
|
Increase
(decrease) in amounts due to shareholders
|
5,360
|
(5,360 | ) |
-
|
-
|
|||||||||||
|
Proceeds
from issuance of ordinary shares, net of issuance costs
|
531,413
|
-
|
-
|
-
|
||||||||||||
|
Collection
of share subscription receivables
|
24,804
|
-
|
-
|
-
|
||||||||||||
|
Contribution
from minority shareholder of a subsidiary
|
600
|
-
|
-
|
-
|
||||||||||||
|
Repayment
of cash advance from a shareholder
|
(3,085 | ) |
-
|
-
|
-
|
|||||||||||
|
|
||||||||||||||||
|
Net
cash provided by financing activities
|
565,597
|
2,044
|
6,328
|
811
|
||||||||||||
|
|
||||||||||||||||
|
Effect
of exchange rate changes
|
-
|
(3,084 | ) | (3,503 | ) | (449 | ) | |||||||||
|
|
||||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
529,462
|
34,481
|
(132,826 | ) | (17,020 | ) | ||||||||||
|
Cash
and cash equivalents at the beginning of the year
|
167,531
|
696,993
|
731,474
|
93,729
|
||||||||||||
|
|
||||||||||||||||
|
Cash
and cash equivalents at the end of the year
|
696,993
|
731,474
|
598,648
|
76,709
|
||||||||||||
|
|
||||||||||||||||
|
Supplemental
non-cash investing activities:
|
||||||||||||||||
|
Consideration
for acquisition of subsidiaries settled
|
||||||||||||||||
|
through
issuance of shares
|
181,312
|
-
|
-
|
-
|
||||||||||||
|
|
||||||||||||||||
|
Supplemental
cash flow information:
|
||||||||||||||||
|
Cash
paid during the year for income taxes
|
1,290
|
703
|
1,156
|
148
|
See
notes
to consolidated financial statements.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
|
|
|
Ninetowns
Internet Technology Group Company Limited (previously known as “Ninetowns
Digital World Trade Holdings Limited”) ("Ninetowns") was incorporated as an
exempted limited liability company in the Cayman Islands on February 8, 2002
under the Companies Law of the Cayman Islands. At the time of its incorporation,
all of the outstanding ordinary shares of Ninetowns were held by Jitter Bug
Holdings Limited ("Jitter Bug"). Substantially all of Ninetown's business
is
conducted in the People's Republic of China (the "PRC") through its
subsidiaries. Ninetowns, its subsidiaries, and its variable interest entity
("VIE") (collectively, the "Company") are principally engaged in the sale
of
enterprise software, the provision of the related after-sales services, and
software development services in the PRC.
As
of
December 31, 2006, a summary of the subsidiaries and VIE of Ninetowns were
as
follows:
|
|
|
|
Name
of entity
|
Place
of
Incorporation/
Establishment
|
Effective
ownership interest
|
Principal
activities
|
|||
|
Subsidiaries:
|
||||||
|
Ixworth
Enterprises Limited ("Ixworth")
|
British
Virgin Islands ("BVI")
|
100%
|
Investment
holding
|
|||
|
Asia
Pacific Logistics Limited ("Asia Pacific")
|
BVI
|
100%
|
Investment
holding
|
|||
|
Better
Chance International Limited ("Better Chance")
|
BVI
|
100%
|
Investment
holding
|
|||
|
Beprecise
Investments Limited (“Beprecise”)
|
BVI
|
100%
|
Investment
holding
|
|||
|
New
Take Limited
|
Hong
Kong
|
100%
|
Investment
holding
|
|||
|
Shielder
Limited
|
Hong
Kong
|
100%
|
Investment
holding
|
|||
|
Beijing
New Take Electronic Commerce Limited ("Beijing New Take") (note
i)
|
PRC
|
100%
|
Inactive
|
|||
|
Beijing
Ninetowns Times Electronic Commerce Limited ("Beijing Ninetowns
Times")
(note i)
|
PRC
|
100%
|
Provision
of software development services
|
|||
|
Beijing
Ninetowns Digital Technology Limited ("Beijing Ninetowns Digital
Technology")
|
PRC
|
100%
|
Sale
of enterprise software and provision of the related after-sales
services,
sale of computer hardware and accessories, and provision of software
development services
|
|||
|
Beijing
Ninetowns Ports Software and Technology Co., Ltd ("Beijing Ninetowns
Ports")
|
PRC
|
100%
|
Sale
of enterprise software and provision of the related after-sales
services,
sale of computer hardware and accessories, and provision of software
development services
|
|||
|
Beijing
Ninetowns Network Software Co., Limited (“Beijing Ninetowns
Network”)
|
PRC
|
100%
|
Sale
of enterprise software and provision of the related after-sales
services,
and provision of technique consulting services
|
|||
|
Guangdong
Ninetowns Technology Co., Ltd. ("Guangdong Ninetowns")
|
PRC
|
100%
|
Sale
of enterprise software and provision of the related after-sales
services,
sale of computer hardware and accessories, and provision of software
development services
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES –
continued
|
|
Name
of entity
|
Place
of
Incorporation/
Establishment
|
Effective
ownership interest
|
Principal
activities
|
|||
|
Shanghai
New Take Digital Technology Limited ("Shanghai New Take") (note
ii)
|
PRC
|
100%
|
Sale
of enterprise software and provision of the related after-sales
services,
sale of computer hardware and accessories, and provision of software
development services
|
|
Variable
interest entity:
|
||||||
|
Beijing
Ronghe Tongshang Network Technology Limited (“Ronghe
Tongshang”)
|
PRC
|
100%
|
Provision
of online solution for international
trade
|
|
|
|
|
|
(i)
|
These
subsidiaries were incorporated as Sino-foreign joint venture limited
companies for a term of 25 years and renewable at the end of the
operating
period.
|
|
|
|
|
|
(ii)
|
Shanghai
New Take was incorporated for a term of eight years commencing
September
13, 2001, renewable at the end of the operating period The Company
initially held a 90% equity interest in Shanghai New Take and on
June 30,
2004, the Company acquired the 10% minority interest for a consideration
of RMB50.
|
Ixworth
is wholly owned by Ninetowns and was incorporated in the British Virgin Islands
on December 22, 1999. Ixworth was established for the purpose of holding
Ninetowns' investment interests. Ixworth did not have other business
activities during 2004, 2005 and 2006.
|
|
|
Prior
to
2004, Ixworth held a 90% interest in each of Beijing New Take, Beijing Ninetowns
Time, Beijing Ninetowns Digital Technology and Beijing Ninetowns Ports. During
2004, Ixworth acquired the remaining 10% interest in each of these subsidiaries
and they became wholly-owed subsidiaries of Ixworth (Note 3).
PRC
regulations prohibit direct foreign ownership of business entities providing
internet content, or ICP, services in the PRC such as the business of providing
online solution for international trade. In December 2006, Ronghe Tongshang
was
established in the PRC by three designated equity owners who are PRC citizens
and legally own Ronghe Tongshang. Pursuant to a series of contractual
arrangements with Ronghe Tongshang, the Company provides exclusive technical
consulting and management services to Ronghe Tongshang. A summary of
the major terms of the agreements are as follows:
|
|
l
|
The
Company has the sole discretion to determine the amount of the
fees it
will receive and it intends to transfer substantially all of the
economic
benefits of Ronghe Tongshang to the
Company.
|
|
|
l
|
The
equity owners irrevocably granted the Company the right to make
all
operating and business decisions for Ronghe Tongshang on behalf
of the
equity owners;
|
|
|
l
|
All
registered capital owned by the three equity owners were pledged
to the
Company as a collateral against the service fee payable to the
Company;
|
|
|
l
|
The
Company provides guarantees on the execution of all business contracts
entered by Ronghe Tongshang in its business operation. Ronghe Tongshang
pledges its assets to the Company as a collateral for such guarantee.
Through December 31, 2006, Ronghe Tongshang has not yet entered
into any
business contracts that would require guarantees from the
Ninetowns;
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES –
continued
|
|
|
l
|
The
Company may dispose of the collateralized registered capital at
its sole
discretion without limitation or restriction. The Company has the
right
and sole discretion to purchase all or part of the registered capital
from
equity owners when such purchase becomes legally
allowable;
|
|
|
l
|
The
equity owners may not dispose of or enter into any other agreements
involving the common shares without prior agreement by the
Company.
|
|
|
|
Because
the designated equity owners of Ronghe Tongshang do not have the ability
to make
business and operating decisions for Ronghe Tongshang as a result of assigning
their controlling interest to the Company, Ronghe Tongshang met the definition
as a VIE in accordance with Financial Accounting Standards Board ("FASB")
Interpretation
No. 46
(Revised), "Consolidation of Variable
Interest Entities -
an Interpretation of ARB
No. 51"
("FIN 46R"). The
Company, as the primary
beneficiary, consolidates
Ronghe Tongshang from its inception.
The
following financial statement amounts and balances of Ronghe Tongshang were
included in the accompanying consolidated financial statements as of and
for the
year ended December 31, 2006.
|
December
31, 2006
|
||||
|
RMB
|
||||
|
Total
assets
|
396
|
|||
|
Total
liabilities
|
(1,000 | ) | ||
|
Year
ended December 31, 2006
|
||||
|
RMB
|
||||
|
Total
revenue
|
-
|
|||
|
Total
net loss
|
(1,604 | ) | ||
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES
|
|
|
|
Basis
of presentation - The consolidated financial statements of the
Company have been prepared in accordance with the accounting principles
generally accepted in the United States of America ("US GAAP"). All amounts
in
the accompanying consolidated financial statements and the related notes
are
expressed in Renminbi ("RMB"). The amounts expressed in United States dollars
("US$") are presented solely for the convenience of the readers and are
translated at a rate of RMB7.8041 to US$1, the approximate rate of exchange
at
December 31, 2006. Such translations should not be construed to be the amounts
that would have been reported under US GAAP.
Basis
of consolidation - The consolidated financial statements include
the financial statements of Ninetowns and its majority-owned subsidiaries
and
VIE. All significant intercompany transactions and balances are eliminated
on
consolidation.
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
Use
of estimates - The preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the
financial statements and the reported amount of revenues and expenses during
the
reporting period. Actual results could differ from those estimates. The Company
bases its estimates on historical experience and various other factors believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that
are
not readily apparent from other sources. Significant accounting estimates
reflected in the Company's consolidated financial statements include allowance
for doubtful accounts, estimated cost to complete in a percentage of completion
arrangement, share-based compensation, estimated useful lives and impairment
of
property and equipment and acquired intangible assets, valuation of inventories,
valuation of deferred tax assets, and impairment of goodwill.
|
|
|
Cash
and cash equivalents - Cash and cash equivalents consist of cash
on hand, demand deposits and highly liquid investments, which are unrestricted
as to withdrawal and use, and have remaining maturities of three months or
less
when purchased.
|
|
|
Term
deposits - Term deposits consist of deposits placed with financial
institutions with remaining maturity of greater than three months but less
than
one year.
|
|
|
Inventories
- Inventories are stated at the lower of cost or market price. Cost is
determined by the weighted average method.
Accounts
receivable and allowance for doubtful accounts - Accounts
receivable mainly represents amounts earned and are collectible from
customers. Accounts receivable are stated at the amount the Company
expects to collect. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers
to
make the required payments and uses the specific identification method to
record
such allowances. If payments are collected from a customer whose
account balance was specifically reserved previously, the recorded allowance
against the customer's account receivable is reversed against the provision
for
bad debts. Management of the Company considers the following factors
when determining the collectibility of accounts receivable: a
customer's credit-worthiness, past collection history, and changes in a
customer's payment terms. If the financial condition of the Company's
customers were to deteriorate, adversely affecting their ability to make
payments, additional allowances would be required. Based on
management's assessment, the Company provides for estimated uncollectible
amounts through a charge to operating expenses and a credit to allowance
for
doubtful accounts. Balances that remain outstanding after the Company
has used reasonable collection efforts are written off through a charge to
the
allowance for doubtful accounts and a credit to accounts
receivable.
Changes
in the allowance for doubtful accounts were as follows:
|
|
2005
|
2006
|
||||||
|
|
RMB
|
RMB
|
||||||
|
|
|
|||||||
|
Balance
at January 1,
|
4,091
|
4,851
|
||||||
|
Provision
for allowance for doubtful debts
|
760
|
2,487
|
||||||
|
Recovery
|
(4,008 | ) | ||||||
|
Write
offs
|
-
|
(2,242 | ) | |||||
|
Balance
at December 31,
|
4,851
|
1,088
|
||||||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
Property
and equipment - Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation and amortization
are
provided on a straight-line basis over the estimated useful lives of the
assets.
Estimated useful lives of property and equipment are as follows:
|
|
|
|
|
Buildings
|
20
years
|
|
|
|
Leasehold
improvements
|
shorter
of lease term or 5 years
|
|
|
|
Furniture,
fixtures and office equipment
|
5
years
|
|
|
|
Computer
equipment
|
5
years
|
|
|
|
Motor
vehicles
|
5
years
|
|
Acquired
intangible assets - Acquired intangible assets, which consist
primarily of software development contracts, customer lists, relationships and
completed technology, are carried at cost, less accumulated amortization.
Amortization is calculated on a straight-line basis over the expected useful
life of the assets of two to five years. Amortization expenses for the years
ended December 31, 2004, 2005 and 2006 were RMB805, RMB2,416 and RMB2,943,
respectively.
|
|
|
Impairment
of long-lived assets - The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that
the
carrying amount of an asset may not be recoverable. When these events occur,
the
Company measures impairment by comparing the carrying amount of the assets
to
future undiscounted net cash flows expected to result from the use of the
assets
and their eventual disposition. If the sum of the expected undiscounted cash
flow is less than the carrying amount of the assets, the Company would recognize
an impairment loss based on the fair value of the assets.
|
|
|
Goodwill -
Goodwill represents the excess of the purchase price over the fair value
of the
identifiable assets and liabilities acquired. Goodwill is tested for impairment
annually or more frequently if events or changes in circumstances indicate
that
it might be impaired. The Group completes a two-step goodwill impairment
test.
The first step compares the fair values of each reporting unit to its carrying
amount, including goodwill. If the fair value of each reporting unit exceeds
its
carrying amount, goodwill is not impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair value,
the
second step compares the implied fair value of goodwill to the carrying value
of
a reporting unit's goodwill. The implied fair value of goodwill is determined
in
a manner similar to accounting for a business combination with the allocation
of
the assessed fair value determined in the first step to the assets and
liabilities of the reporting unit. The excess of the fair value of the reporting
unit over the amounts assigned to the assets and liabilities is the implied
fair
value of goodwill. An impairment loss is recognized for any excess in the
carrying value of goodwill over the implied fair value of goodwill. Based
on the
Company's assessment, there was no impairment of goodwill for the years ended
December 31, 2004, 2005 and 2006.
Investment
under cost method – For investment in an investee over which the
Company does not have significant influence, the Company carries the investment
at cost and recognizes income when receiving dividends from distribution
of
investee’s earnings. The Company reviews the investment under cost method for
impairment whenever events or changes in circumstances indicate that the
carrying value may no longer be recoverable. An impairment loss is recognized
in
earnings equal to the difference between the investment cost and its fair
value
at the balance sheet date of the reporting period for which the assessment
is
made. The fair value of the investment would then become the new cost basis
of
the investment. The Company invested in a cost method investment during
2006. No impairment charges were recorded during 2006.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
Income
taxes - Deferred income taxes are recognized for temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements, net operating loss carry forwards and
credits by applying enacted statutory tax rates applicable to future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Current income taxes are provided for in
accordance with the laws of the relevant taxing authorities.
Revenue
recognition– Revenue is recognized when earned, net of applicable
business taxes. Payments received in advance of revenue recognition are recorded
as deferred revenue until earned.
Revenue
from the sale of enterprise software is recognized when there is evidence
of an
arrangement, the delivery or service has occurred, the fee is fixed or
determinable, and collectibility is probable. As the Company does not have
vendor-specific objective evidence to establish the fair values of the
undelivered elements, the Company recognizes revenue from sales of enterprise
software on a straight-line basis over the service period which is typically
12
months.
|
|
|
For
certain customers, the Company installs the software at the customer's place
of
business and charges the customer a fixed fee based on actual usage of the
software. Accordingly, the Company recognizes the related revenue when the
customer uses the software.
Revenues
from software development services requiring significant production,
modification, or customization of the software are recognized over the
installation and customization period based on the percentage of completion
method as prescribed by Statement of Position No. 81-1, "Accounting for
Performance of Construction-Type and Certain Product-Type
Contracts". Percentage-of-completion is measured principally by the
percentage of actual hours incurred to date for each contract to the estimated
total hours to be incurred for each contact at completion. Revenue from software
development services also includes certain system integrations projects.
The
Company recognizes revenues for systems integrations when a written acceptance
from the customer is received after the project is completed.
|
|
|
Sales
of
computer equipment and accessories are recorded when the goods are delivered,
title is passed to the customers and the Company has no further obligations
to
provide services relating to the operation of such equipment.
The
Company reports revenue net of business taxes which amounted to RMB32,517,
RMB40,034, and RMB15,802 for the years ended December 31, 2004, 2005 and
2006,
respectively. Software revenue includes
the benefit of the rebate of value added taxes on the sales of software and
software-related services received from the Chinese tax authorities as part
of
the PRC government’s policy of encouraging of software development in the PRC.
Pursuant to certain PRC rules relating to value-added taxes, Beijing Ninetowns
Times, Beijing Ninetowns Digital Technology, and Beijing Ninetowns Ports
are
entitled to a refund of value-added taxes paid at a rate of 14% of the sales
value for self-developed software products, excluding revenues from maintenance
services and upgrade rights that are sold separately. Revenues from the sales
of
software products include the refund of such value-added tax which totaled
RMB17,382, RMB19,766, and RMB10,500 for the years ended December 31, 2004,
2005
and 2006, respectively.
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
Cost
of revenue - Cost of revenue includes production and shipping and
handling costs for products sold, and direct costs associated with the delivery
of software development and maintenance services, including salaries, employee
benefits and overhead costs associated with employees providing the related
services. Shipping and handling costs are not billable to customers. Costs
that
are directly associated with a contract accounted for under
percentage-of-completion method are initially deferred and reported as work
in
process inventory until the related revenue is recognized. Pre-contract costs
relating to a contract that is subsequently abandoned are expensed
immediately.
|
|
|
Research
and Development - Research and development expenses include
payroll, employee benefits and other costs associated with product development.
Technological feasibility for the Company's software products is reached
shortly
before the products are released for production. Costs incurred after
technological feasibility has historically been
immaterial. Accordingly, the Company expenses all research and
development costs when incurred.
|
|
|
Advertising
costs - Advertising costs are expensed in the period incurred. The
Company incurred advertising costs totaling RMB591, RMB1,979 and RMB2,281
during
the years ended December 31, 2004, 2005 and 2006, respectively.
|
|
|
Government
subsidies - Government subsidies represent amounts
granted by local governments to reward companies that have made contributions
in
the development of the electronic and software industries as well as those
companies that contribute significantly to local taxes. The Company
reports government subsidies as other operating income when it becomes due
and
receivable and the Company does not have any obligations to repay the amounts
received.
Foreign
currency translation - The functional currency of the Company's
subsidiaries and VIE established in the PRC is the RMB. The functional currency
of Ninetowns and its subsidiaries established in countries other than PRC
is the
US$. Transactions dominated in other currencies are recorded in the applicable
functional currencies at the rates of exchange prevailing when the transactions
occur. Monetary assets and liabilities denominated in other currencies are
translated into the applicable functional currencies at rates of exchange
in
effect at the balance sheet dates. Non-monetary assets and liabilities are
remeasured into the applicable functional currencies at historical exchange
rates. Exchange gains and losses are recorded in the consolidated statements
of
operations.
|
|
|
The
Company has chosen the RMB as its reporting currency. Assets and liabilities
are
translated at the exchange rates at the balance sheet date, equity accounts
are
translated at historical exchange rates and revenues, expenses, gains and
losses
are translated using the average rate for the year. Translation adjustments
are
reported as cumulative translation adjustments and are shown as a separate
component of other comprehensive loss in the statement of shareholders’
equity.
Comprehensive
income - Comprehensive income includes net income and foreign
currency translation adjustments and is reported as a component of consolidated
statements of shareholders’ equity.
Foreign
currency risk - The RMB is not a freely convertible currency. The
State Administration for Foreign Exchange under the authority of the People's
Bank of China controls the conversion of the RMB into foreign currencies.
The
value of the RMB is subject to changes in central government policies and
to
international economic and political developments affecting supply and demand
in
the China Foreign Exchange Trading System market. Cash and cash equivalents
and
term deposits of the Company included aggregate amounts of RMB795,836 at
December 31, 2005 and RMB830,155 at December 31, 2006 which were denominated
in
RMB.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES -
continued
|
Concentration
of credit risk - Financial instruments that potentially expose the
Company to significant concentrations of credit risk consist primarily of
cash
and cash equivalents, trade receivables, and term deposits. The Company places
its cash and cash equivalents with financial institutions with high-credit
ratings and quality. The Company conducts credit evaluations of customers
and
generally does not require collateral or other security from its customers.
The
Company establishes an allowance for doubtful accounts primarily based upon
the
age of the receivables and factors surrounding the credit risk of specific
customers.
Fair
value of financial instruments - The carrying amounts of cash and
cash equivalents, term deposits, trade receivables, and accounts payable
approximate their fair value due to the short-term nature of these
instruments.
Share-based
compensation - The Company grants stock options to its employees
and directors. Prior to January 1, 2006, the Company accounted for employee
share-based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion 25"), and
its
related interpretations which required the Company to record a compensation
charge for the excess of the fair value for the stock at the grant date over
the
amount an employee must pay to acquire the stock. The compensation expense
is
recognized over the applicable service period, which is usually the vesting
period.
In
December 2004, the Financial Accounting Standards Board ("FASB'') issued
Statements of Financial Accounting Standard ("SFAS") No. 123R, which is a
revision of SFAS No. 123, "Accounting for Stock-Based Compensation'' and
supersedes APB Opinion No. 25. Effective January 1, 2006, the Company adopted
SFAS No.123R and recognized compensation cost on a straight-line basis over
the
requisite service period which is the vesting period. The Company elected
the
modified prospective method. Under this method, share-based compensation
expense
recognized includes: (a) compensation expense for all share-based compensation
awards granted prior to, but not yet vested as of January 1, 2006 based on
the
fair value as of the grant date, and (b) compensation expense for all
share-based compensation awards granted on or subsequent to January 1, 2006,
based on grant-date fair value.
|
|
|
For
share-based compensation awards that were granted prior to January 1, 2006
that
are not yet vested and continue to be reported under APB Opinion 25, the
following is the Company's pro forma net income that would have been reported
if
such awards were accounted for under SFAS 123(R):
|
|
Years
ended December 31,
|
|||||||||||
|
|
2004
|
2005
|
2006
|
|||||||||
|
|
RMB
|
RMB
|
RMB
|
|||||||||
|
|
|
|
|
|||||||||
|
Net
income, as reported
|
133,951
|
151,604
|
45,928
|
|||||||||
|
Add:
Share-based compensation, as reported
|
-
|
-
|
10,327
|
|||||||||
|
Less:
Share-based compensation determined using the
|
||||||||||||
|
fair
value method
|
(484 | ) | (14,616 | ) | (10,384 | ) | ||||||
|
|
||||||||||||
|
Pro
forma net income
|
133,467
|
136,988
|
45,871
|
|||||||||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
|
Weighted
average shares used in computation
|
|
|
|
|||||||||
|
Basic
|
27,022,057
|
34,539,976
|
34,773,005
|
|||||||||
|
|
||||||||||||
|
Diluted
|
28,279,061
|
35,706,894
|
35,368,882
|
|||||||||
|
Net
income per share:
|
|
|
|
|||||||||
|
Basic,
as reported
|
4.96
|
4.39
|
1.32
|
|||||||||
|
Basic
– pro forma
|
4.94
|
3.97
|
1.32
|
|||||||||
|
Diluted,
as reported
|
4.74
|
4.25
|
1.30
|
|||||||||
|
Diluted
- pro forma
|
4.72
|
3.84
|
1.30
|
|||||||||
The
fair
value of each option granted is estimated on the date of grant using the
minimum
value method for options granted before Ninetowns became a public company,
as
permitted for non-public companies, and using the Black-Scholes option pricing
model for options granted after Ninetowns became a public company, with the
following assumptions used for grants during the years ended December 31,
2004,
2005 and 2006.
|
|
The
2003 Plan
|
The
2004 Plan
|
||||||
|
Options
grants
|
|
|
||||||
|
|
|
|
||||||
|
Weighed
average risk-free rate of return
|
5 | % | 5 | % | ||||
|
Weighted
average expected option life
|
9.875
years
|
6.25
years
|
||||||
|
Weighted
average volatility rate
|
N/A
|
55 | % | |||||
|
Weighted
average dividend yield
|
0 | % | 0 | % | ||||
Net
income per share - Basic net income per share is computed by
dividing net income attributable to ordinary shareholders by the weighted
average number of ordinary shares outstanding during the year. Diluted net
income per ordinary share reflects the potential dilution that could occur
if
securities or other contracts to issue ordinary shares were exercised into
ordinary shares. Ordinary share equivalents are excluded from the computation
of
the diluted net income per share in periods when their effect would be
anti-dilutive.
Embedded
derivatives -
Embedded
derivative
instruments are bifurcated and accounted for separately from the host
instrument as assets
or
liabilities if they are not clearly and closely related to the host
instrument. Multiple embedded derivatives within the same host
instrument that are required to be bifurcated are bundled together and reported
as a single, compound
embedded derivative
instrument. Embedded derivative instruments that are required to be
bifurcated are marked to market on each balance sheet date. Changes
in the fair values between balance sheet dates are reported in the accompanying
consolidated statements
of
operations.
Reclassification
-
Certain
amounts in the 2004 and
2005 consolidated financial
statements have been reclassified to conform to the 2006 presentation.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
2.
|
SUMMARY
OF PRINCIPAL ACCOUNTING POLICIES –
continued
|
Recently
Issued
Accounting
Pronouncements – In
February 2006, the FASB issued SFAS
No. 155, “Accounting for
Certain Hybrid Financial Instruments-an amendment of FASB Statements No.
133 and
140.” SFAS No. 155 amends
SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities”,
to permit fair value remeasurement for
any hybrid financial instrument with an embedded derivative that otherwise
would
require bifurcation, provided that the whole instrument is accounted for
on a
fair value basis. SFAS No. 155 amends SFAS
No. 140, “Accounting for the
Impairment or
Disposal of Long-Lived Assets”, to allow a qualifying
special-purpose
entity to hold a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS
No. 155 applies to all financial
instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after
September 15, 2006, with earlier application allowed. The Company does not
expect the adoption of SFAS No. 155 to have
a material impact on its consolidated
results of operations and financial condition.
In
June
2006, the FASB ratified the provisions of the Emerging Issue Task Force Issue
No. 06-3 “How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement” (“EITF 06-3”), which
requires the Company to disclose how it accounts for taxes imposed on and
concurrent with a specific revenue-producing transaction. EITF 06-3 will
be
effective for the Company starting January 1, 2007. The Company does not
believe
that the application of EITF 06-03 will have a material effect on its financial
position, cash flow and results of operations.
In
July
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognize and disclose in its financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 became effective
for the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of adopting FIN
48 and
its impact on its consolidated financial position, results of operations,
and
cash flows.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which
defines fair value, establishes a framework for measuring fair value and
expands
disclosures about fair value measurements. SFAS No.157 applies under other
accounting pronouncements that require or permit fair value measurements
and
accordingly does not require any new fair value measurements. SFAS No.157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating whether the adoption of SFAS No. 157 will have a material
effect on its consolidated results of operations and financial
position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, Including an amendment of FASB
Statement No. 115". SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value. SFAS
No. 159 requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand
the
effect of the company's choice to use fair value on its earnings. It
also requires entities to display the fair value of those assets and liabilities
for which the Company has chosen to use fair value on the face of the balance
sheet. SFAS No. 159 is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. The Company is
currently evaluating whether the adoption of SFAS No. 159 will have a material
effect on its consolidated results of operations and financial
position.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
3.
|
ACQUISITION
|
|
|
|
In
June
of 2004, the Company acquired the 10% minority interests in Better Chance
and
Asia Pacific from an affiliated entity. The aggregate purchase price of
RMB229,897 (US$27,806) consisted of (i) RMB34,265 (US$4,140) in cash, (ii)
the
assumption of loans payable to the selling affiliate from the selling
affiliate's equity owners of RMB14,368 (US$1,736), and (iii) the issuance
of
2,002,312 shares of the Company's ordinary shares with a fair value of RMB90.63
(US$10.95) per share on the commitment date for a total value of RMB181,506
(US$21,930). The Company used a market-based approach to estimate the fair
value
of the shares issued.
|
|
|
The
Company's purchase price was allocated as follows:
|
|
RMB
|
|||
|
|
|
|||
|
Net
tangible assets
|
26,280
|
|||
|
Intangible
assets
|
11,661
|
|||
|
Goodwill
|
191,956
|
|||
|
|
||||
|
Total
consideration
|
229,897
|
|||
Intangible
assets consisted of RMB279 of software development contracts, RMB6,131 of
customer lists and relationships, and RMB5,251 of completed technology. Acquired
intangible assets are amortized over the estimated useful lives of two years
for
software development contracts, five years for customer lists and relationships,
and five years for completed technology.
|
4.
|
INVENTORIES
|
Inventories
consisted of the following:
|
|
December
31,
|
|||||||
|
|
2005
|
2006
|
||||||
|
|
RMB
|
RMB
|
||||||
|
|
|
|
||||||
|
Computer
accessories
|
2,276
|
5,777
|
||||||
|
Third
party software products
|
5,277
|
1,041
|
||||||
|
Other
supplies
|
16
|
2
|
||||||
|
Work
in progress
|
153
|
-
|
||||||
|
|
||||||||
|
|
7,722
|
6,820
|
||||||
Inventories
were purchased for software development service projects after the requirements
for such projects were determined. No obsolete or impaired
inventories were considered necessary because inventories were purchased
only
for on-going software development service projects where the specific inventory
requirements have been agreed to in contracts with the customers and the
customers must pay a significant deposit for such projects prior to their
inception. Work in progress represented software development projects
that had been initiated but the related contracts between the Company and
the
customers had not yet been signed.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
5.
|
PREPAID
EXPENSES AND OTHER CURRENT ASSETS
|
|
|
|
Prepaid
expense and other current assets consisted of the following:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
RMB
|
RMB
|
|||||||
|
Prepaid
expenses
|
7,675
|
10,383
|
||||||
|
Deposits
for exhibition, office rental and utilities
|
4,550
|
10,885
|
||||||
|
Interest
receivable for term deposits
|
1,970
|
6,602
|
||||||
|
Value
added tax recoverable
|
1,013
|
425
|
||||||
|
Other
receivables
|
87
|
214
|
||||||
|
15,295
|
28,509
|
|||||||
Prepaid
expenses primarily consisted of prepaid amounts in connection with the purchase
of computer hardware for resale.
|
6.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment, net consisted of the following:
|
|
December
31,
|
|||||||
|
|
2005
|
2006
|
||||||
|
|
RMB
|
RMB
|
||||||
|
|
|
|||||||
|
Buildings
|
18,789
|
20,108
|
||||||
|
Leasehold
improvements
|
5,104
|
8,244
|
||||||
|
Furniture,
fixtures and office equipment
|
2,798
|
3,216
|
||||||
|
Computer
equipment
|
10,250
|
23,940
|
||||||
|
Motor
vehicles
|
3,651
|
3,746
|
||||||
|
|
||||||||
|
Total
|
40,592
|
59,254
|
||||||
|
Less:
accumulated depreciation and
|
||||||||
|
amortization
|
(7,108 | ) | (12,561 | ) | ||||
|
|
||||||||
|
Property
and equipment, net
|
33,484
|
46,693
|
||||||
|
|
|
Depreciation
and amortization expenses for the years ended December 31, 2004, 2005 and
2006
were RMB1,315, RMB2,877 and RMB6,194, respectively.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
7.
|
INVESTMENT
UNDER COST METHOD
|
|
|
In
September 2006, the Company entered into a subscription agreement
with
Global Market Group Limited ("Global Market") to subscribe 1,940,000
Series A preferred shares, which represents 16.25% of the fully
dilute
equity interest in Global Market on an if-converted basis, for
a cash
consideration of RMB38,929 (US$5,000). Because the Company cannot
exercise
significant influence, the investment is accounted for under the
cost
method. Global Market is engaged in the business of Chinese B2B
trade
facilitator and is headquartered in the Guangdong province,
PRC.
|
The
subscription agreement contains put and call options. The call option
gives the Company a right to acquire a variable number of Global Market's
ordinary shares at a nominal price of US$1 in the event Global Market's earnings
fall below a predetermined level or receive cash if additional earnings
requirements are not met. The put option gives Global Market a right
to repurchase up to 285,000 of issued ordinary shares from the Company at
a
nominal price of US$1 when Global Market's earnings are above a predetermined
level. The put and call options are accounted for as embedded
derivatives and because they are not clearly and closely related to the Series
A
preferred share agreement, they should be bifurcated and marked to market
on
each balance sheet date. These embedded derivatives are bundled
together and reported as a single, compound embedded derivative
instrument. As of December 31, 2006, the fair value of this bundled
derivative instrument was not material because the Company had only had its
investment in Global Market for a short period of time and Global Market's
projected operating results are expected to be within a reasonable range
that
will not cause a significant change in the Company's investment
value.
|
8.
|
ACQUIRED
INTANGIBLE ASSETS, NET
|
|
|
|
Acquired
intangible assets, net consisted of the following:
|
|
December
31,
|
|||||||
|
|
2005
|
2006
|
||||||
|
|
RMB
|
RMB
|
||||||
|
|
|
|||||||
|
Software
development contracts
|
279
|
279
|
||||||
|
Customer
lists and relationships
|
6,131
|
6,131
|
||||||
|
Completed
technology
|
5,251
|
5,251
|
||||||
|
Acquired
software
|
-
|
17,200
|
||||||
|
Total
|
11,661
|
28,861
|
||||||
|
Less:
accumulated amortization
|
(3,221 | ) | (6,164 | ) | ||||
|
|
||||||||
|
Acquired
intangible assets, net
|
8,440
|
22,697
|
||||||
Amortization
expenses for the years ended December 31, 2004, 2005, and 2006 were RMB805,
RMB2,416, and RMB2,943 respectively. For each of the next five years
through 2011, annual amortization expenses of the acquired intangible assets
will be approximately RMB5,716, RMB5,716, RMB4,958, RMB3,440, and RMB2,867,
respectively.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
9.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
|
|
|
Accounts
payable and accrued expenses included the following:
|
December
31,
|
||||||||
|
2005
|
2006
|
|||||||
|
RMB
|
RMB
|
|||||||
|
Salary
and wages
|
2,427
|
4,381
|
||||||
|
Staff
welfare
|
730
|
|||||||
|
Professional
fees
|
2,499
|
|||||||
|
Accounts
payable and office expenses payable
|
4,771
|
4,131
|
||||||
|
Accrued
expenses
|
1,612
|
1,009
|
||||||
|
12,039
|
14,312
|
|||||||
|
10.
|
PROVISION
FOR INCOME TAXES
|
|
|
|
Ninetowns
is a tax exempted company incorporated in the Cayman Islands. No provision
for
Hong Kong Profits Tax has been made as the subsidiaries incorporated in Hong
Kong had no assessable profits earned or derived from Hong Kong during the
three
years ended December 31, 2004, 2005 and 2006. The subsidiaries incorporated
in
the PRC other than Hong Kong are governed by the Income Tax Law of PRC
Concerning Foreign Investment and Foreign Enterprises and various local income
tax laws (the "Income Tax Laws").
|
|
|
Beijing
New Take and Beijing Ninetowns Times were awarded the certificate of "New
and
High Technology Enterprise" by Beijing Municipal Science and Technology
Committee on March 30, 2001 and were exempted from the enterprise income
tax for
the two years ended December 31, 2002, followed by a 50% tax reduction for
the
three years ended December 31, 2005 at an income tax rate of 7.5%. Commencing
from January 1, 2006, Beijing New Take and Beijing Ninetowns Times were subject
to an enterprise income tax rate of 15%.
|
|
|
Beijing
Ninetowns Digital Technology is qualified as a "New and High Technology
Enterprise" and is subject to an enterprise income tax rate of 15%.
|
|
|
Shanghai
New Take was exempted from enterprise income tax for the two years ended
December 31, 2004, followed by a 50% tax reduction for the three years ending
December 31, 2007 at an income tax rate of 16.5%. Commencing on January 1,
2008,
Shanghai New Take will be subject to an enterprise income tax rate of
33%.
|
|
|
Beijing
Ninetowns Ports was awarded the certificate of "New and High Technology
Enterprise" and is exempted from the enterprise income tax for the three
years
ended December 31, 2005, followed by a 50% tax reduction for the three years
ending December 31, 2008 at an income tax rate of 7.5%.
Guangdong
Ninetowns has been awarded the certificate of “New and High Technology
Enterprise” and is exempted from the enterprise income tax for the two years
ending December 31, 2007. Guangdong Ninetowns will be subjected to an enterprise
income tax rate of 15% beginning on January 1, 2008.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
10.
|
PROVISION
FOR INCOME TAXES – continued
|
Beijing
Ninetowns Network Software has been awarded the certificate of “New and High
Technology Enterprise” and is exempted from the enterprise income tax for the
three years ending December 31, 2008, followed by a 50% tax reduction for
the
three years ending December 31, 2011 at an income tax rate of 7.5%.
Beijing
Ronghe Tongshang was newly established in 2006 and does not have any business
operations in 2006. Ronghe Tongshang is qualified as a “New and High Technology
Enterprise” and is subject to an enterprise income tax rate of 15%.
During
the years ended December 31, 2004, 2005 and 2006, if the Company’s subsidiaries
in the PRC had not been awarded tax holidays or had special tax concessions,
they would have recorded additional provision for income taxes totaling
RMB49,635, RMB43,235, and RMB11,251, respectively. The Company’s net
income would have been decreased by RMB46,407, RMB43,235 and RMB11,251. Basic
net income per share would have been decreased to RMB3.23, RMB3.14, and RMB0.99,
and diluted net income per share would have been decreased to RMB3.10, RMB3.04,
and RMB0.97 for the years ended December 31, 2004, 2005, and 2006,
respectively.
Provision
for income taxes consisted of the following:
|
December
31
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Current
tax
|
1,823
|
626
|
2,102
|
|||||||||
|
Deferred
tax
|
-
|
-
|
(1,071 | ) | ||||||||
|
1.823
|
626
|
1,031
|
||||||||||
|
|
As
of December 31, 2006, significant temporary differences between
the tax
basis and financial statement basis of accounting for assets and
liabilities that gave rise to deferred taxes were principally related
to
the following:
|
|
December
31, 2006
|
||||
|
RMB
|
||||
|
Current
deferred tax assets:
|
||||
|
Short-term
deferred revenue
|
2,260
|
|||
|
Less:
valuation allowance
|
(562 | ) | ||
|
Current
deferred tax assets
|
1,698
|
|||
|
Non-current
deferred tax assets (liabilities):
|
||||
|
Net
operating loss carried forward
|
4,610
|
|||
|
Accelerated
depreciation of equipment
|
(627 | ) | ||
|
Less:
valuation allowance
|
(4,610 | ) | ||
|
Non-current
deferred tax assets (liabilities)
|
(627 | ) | ||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
10.
|
PROVISION
FOR INCOME TAXES – continued
|
The
Company has operating loss carried forwards totaling RMB30,652 for the year
ended December 31, 2006. Of the amount, net operating loss carried forwards
of
RMB30,168 from the PRC subsidiaries will expire on various dates from December
31, 2007 to December 31, 2010. Net operating loss carried forward of
RMB484 for the Hong Kong subsidiaries may be carried forward
indefinitely.
As
of
December 31, 2006, a valuation allowance of RMB4,610 was provided against
deferred tax assets arising from net operating loss carry-forward and short-term
deferred revenue of certain PRC subsidiaries and VIE due to the uncertainty
of
realization. Adjustment will be made to the valuation allowance if events
occur
in the future that indicates changes in the amount of deferred tax assets
that
may be realized.
The
Company operates through multiple subsidiaries and a VIE and the valuation
allowances are considered separately for each subsidiary and VIE. The
Company does not file consolidated tax returns, therefore, losses and deferred
taxes from one subsidiary or VIE may not be used to offset another subsidiary
or
VIE's earnings or deferred taxes.
Reconciliation
between the provision for income taxes computed by applying the PRC statutory
income tax rate of 33% to income before income taxes and the actual provision
for income taxes is as follows:
|
|
Years
ended December 31,
|
|||||||||||
|
|
2004
|
2005
|
2006
|
|||||||||
|
|
|
|
|
|||||||||
|
PRC
statutory income tax
|
33.0 | % | 33.0 | % | 33.0 | % | ||||||
|
Expenses
not deductible for tax purposes
|
3.4 | % | 10.2 | % | 2.9 | % | ||||||
|
Permanent
differences
|
(1.2 | %) | (5.9 | %) | (5.1 | %) | ||||||
|
Tax
exemption and tax relief granted
|
||||||||||||
|
to
PRC subsidiaries
|
(34.7 | %) | (36.9 | %) | (28.6 | %) | ||||||
|
Others
|
0.8 | % |
-
|
-
|
||||||||
|
|
1.3 | % | 0.4 | % | 2.2 | % | ||||||
|
11.
|
OTHER
TAXES PAYABLE
|
|
|
December
31,
|
|||||||
|
|
2005
|
2006
|
||||||
|
|
RMB
|
RMB
|
||||||
|
|
|
|
||||||
|
Individual
income tax withholding
|
196
|
209
|
||||||
|
Business
tax payable
|
1,877
|
2,491
|
||||||
|
Value
added taxes payable, net
|
783
|
(368 | ) | |||||
|
|
2,856
|
2,332
|
||||||
|
|
|
The
Company's subsidiaries in the PRC other than Hong Kong are subject to a 17%
value added tax on revenues from the sales of hardware to customers and,
in
addition, are subject to business taxes and value added taxes at the rates
of 5%
and 3%, on service revenues from software development and sales of software,
respectively. Value added taxes payable for hardware sales is reported net
of
value added taxes paid for inventory purchases. The Company is also required
to
withhold PRC individual income taxes on employees' payroll for remittance
to the
tax authorities.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
12.
|
NET
INCOME PER SHARE
|
|
|
|
The
following table sets forth the computation of basic and diluted income per
share
for the periods indicated:
|
|
Years
ended December 31,
|
|||||||||||
|
|
2004
|
2005
|
2006
|
|||||||||
|
|
|
|
|
|||||||||
|
Numerator
used in basic net income per
share:
|
||||||||||||
|
Net
income
|
133,951
|
151,604
|
45,928
|
|||||||||
|
Shares
(denominator):
|
||||||||||||
|
Weighted
average ordinary shares
outstanding
|
27,022,057
|
34,539,976
|
34,773,005
|
|||||||||
|
Plus:
incremental shares from assumed
conversion
of stock options
|
1,257,004
|
1,166,918
|
595,877
|
|||||||||
|
Weighted
average ordinary shares
outstanding
used in computing diluted
net
income per ordinary share
|
28,279,061
|
35,706,894
|
35,368,882
|
|||||||||
|
Net
income per ordinary share - basic
|
4.96
|
4.39
|
1.32
|
|||||||||
|
Net
income per ordinary share - diluted
|
4.74
|
4.25
|
1.30
|
|||||||||
|
13.
|
RELATED
PARTY TRANSACTIONS AND BALANCES
|
|
|
|
Purchase
of office spaces
|
|
|
In
June
2004, the Company acquired office premises with an aggregate purchase price
of
RMB47,339 from a company affiliated with a director of Jitter Bug. In
2005, the Company acquired an additional office space from the same seller
for a
consideration of RMB18,617. Through December 31, 2006, the Company had paid
the
full amount of the purchase of RMB65,956. Because the acquired office
spaces was still under construction as of December 31, 2005 and 2006, the
amount
paid was reported as deposits paid for the acquisition of property and equipment
in the accompanying consolidated balance sheets.
Software
development services
|
|
|
During
the years ended December 31, 2004, 2005 and 2006, the Company provided software
development services to Beijing iTowNet Cyber Technology Ltd. ("Beijing
iTownNet") in which two of the Company's senior management serve as director
and
supervisor.
The
Company provides software development services to eGrid Technology Ltd.
("eGrid") which in turn provides the services to Beijing iTowNet. The Company
recognized net revenues of RMBnil, RMB22,160, and RMB7,263 from services
provided indirectly to Beijing iTowNet through eGrid during 2004, 2005 and
2006,
respectively. For the years ended December 31, 2004, 2005 and 2006,
RMB3,593, RMB270,
and
RMBnil were recognized from software development services provided directly
to
Beijing iTowNet. The Company also provided platform maintenance services
to
Beijing iTowNet directly as well as indirectly through eGrid during the years
ended December 31, 2004, 2005 and 2006, and recognized net revenues of RMB6,000,
RMB5,670, and RMB5,670, respectively, from such services.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
13.
|
RELATED
PARTY TRANSACTIONS AND BALANCES –
continued
|
Sales
of enterprises software:
|
|
|
The
Company has an agreement with Shenzhen Ninetowns Enke Software Technology
Co.,
Ltd. ("Ninetowns Enke"), a company owned by two of the Company's senior
management, for the distribution of the Company's enterprise software in
the
southern region of the PRC. During the years ended December 31, 2004, 2005
and
2006, the Company recognized net revenues of RMB25,245, RMB47,500 and RMB21,240,
respectively, from the sales of enterprise software to Ninetowns
Enke.
The
Company sold software products to Beijing iTowNet, directly and indirectly,
amounting to RMB16,840, RMB13,454 and RMB3,466 in the years ended December
31,
2004, 2005 and 2006, respectively.
|
|
|
Other:
|
|
|
In
November 2004, the Company entered into an option agreement to acquire 49%
of
ownership interest in Beijing iTowNet exercisable at the Company's option.
In
the event such purchase becomes permissible under the relevant laws of the
PRC
and the Company exercises its option, the purchase price will be RMB206,915
(US$25 million) plus an amount calculated at 5% per year compounded annually
for
the years the selling company held an ownership interest in iTowNet less
any
dividends or distributions the selling company received during its ownership
of
Beijing iTowNet.
Related
party balances:
Trade
receivables at December 31, 2005 and 2006 included RMB21,447 and RMB11,407
from
Beijing iTowNet, RMB17,319 and RMB15,739 from eGrid, and RMB18,507
and RMB1,183 from Ninetowns Enke, respectively. The amounts were unsecured,
interest free, and repayable on demand. No allowances for bad debt were recorded
against related party receivables at December 31, 2005 and 2006.
|
|
|
|
|
|
|
14.
|
SHARE
OPTION PLANS
|
|
|
|
The
2003 Plan
|
|
|
On
November 18, 2003, Ninetowns granted 2,574,400 options to certain employees
and
directors for the purchase of 2,574,400 ordinary shares at an exercise price
of
RMB26 (HK$25) per share. The options will vest over three years at 25% per
year
through November 18, 2006. Any option not exercised will expire on November
17,
2013. The 2003 Plan will remain in effect for ten years starting from the
date
of adoption.
As
of
December 31, 2005 and 2006, options to purchase 2,044,120 and 1,716,653 ordinary
shares were outstanding, respectively. As of December 31, 2005 and 2006,
there
were no options available under the 2003 Plan for future grants.
|
|
|
The
2004 Plan (as amended)
|
|
|
Under
the
2004 Plan, as amended, Ninetowns may grant options to its employees for the
purchase of up to 4.3 million ordinary shares at prices to be determined
by
Ninetowns' Board of Directors. The 2004 Plan, as amended also permits
Ninetowns to grant share appreciation rights, restricted share awards, and
performance awards. The Amended and Restated 2004 Plan will automatically
terminate in 2015, unless Ninetowns terminates it earlier.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
|
|
|
14.
|
SHARE
OPTION PLANS – continued
|
The
2004 Plan (as amended) – continued
On
February 23, 2005, Ninetowns granted 890,000 options to certain employees
to
purchase 890,000 ordinary shares at an exercise price of RMB71 (US$8.6) per
share which was the closing fair value of Ninetowns' ordinary shares the
day
before the grant date. The options will vest over four years at 25% per year
from the grant date. Any options granted but not exercised will expire on
February 22, 2015.
|
|
|
As
of
December 31, 2005 and 2006, options to purchase 890,000 and 784,294 ordinary
shares were outstanding, respectively. As of December 31, 2005 and 2006,
3,410,000 options to purchase ordinary shares were available under the 2004
Plan, as amended, for future grants.
The
2006 Plan
In
December 2005, the shareholders of Ninetowns approved the 2006 stock incentive
plan (the "2006 Plan") which allows the Company to offer a variety of
share-based awards to employees and employees of the Company's affiliates
and
subsidiaries including share options, restricted shares, and other similar
awards. The exercise price must be at least equal to 100% of the fair market
value of the ordinary shares on the grant date. The 2006 Plan will be
automatically terminated in 2015. At December 31, 2006, the Company had not
granted any options or other types of awards under the 2006 Plan.
A
summary
of the share option activities was as follows:
|
Years
ended December
31,
|
||||||||||||||||||||||||
|
2004
|
2005
|
2006
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Number
|
Average
|
Number
|
average
|
Number
|
average
|
|||||||||||||||||||
|
of
options
|
Exercise
price
|
of
options
|
exercise
price
|
of
options
|
exercise
price
|
|||||||||||||||||||
|
Outstanding
at beginning of
year
|
2,574,400
|
26
|
2,328,894
|
26
|
2,877,097
|
39
|
||||||||||||||||||
|
Granted
|
-
|
-
|
890,000
|
71
|
-
|
-
|
||||||||||||||||||
|
Exercised
|
(245,506 | ) |
26
|
(284,774 | ) |
26
|
(267,364 | ) |
26
|
|||||||||||||||
|
Cancelled
|
-
|
-
|
(57,023 | ) |
71
|
(108,786 | ) |
46
|
||||||||||||||||
|
Outstanding
at end of
year
|
2,328,894
|
26
|
2,877,097
|
39
|
2,500,947
|
40
|
||||||||||||||||||
|
Exercisable
at end of
year
|
398,094
|
26
|
1,400,520
|
26
|
1,920,366
|
31
|
||||||||||||||||||
The
intrinsic value per share of the 2003 Plan and the 2004 Plan (as amended)
as of
December 31, 2006 was RMB11.24 and RMBnil, respectively. At December 31,
2006,
both the aggregate intrinsic value of options outstanding and options
exercisable were approximately RMB19,295.
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
14.
|
SHARE
OPTION PLANS – continued
|
The
following table summarizes share options outstanding on December 31,
2006:
|
Options
outstanding
|
Options
exercisable
|
||||||||||||||||||||
|
Weighted
|
|||||||||||||||||||||
|
average
|
Weighted
|
Weighted
|
|||||||||||||||||||
|
remaining
|
Fair
value
|
average
|
average
|
||||||||||||||||||
|
Number
|
contractual
|
per
share
|
exercise
|
Number
|
exercise
|
||||||||||||||||
|
outstanding
|
life
|
at
grant
date
|
price
|
exercisable
|
price
|
||||||||||||||||
|
(RMB)
|
(RMB)
|
||||||||||||||||||||
|
Ordinary
shares
|
|||||||||||||||||||||
|
RMB26 (HK$25)
|
1,716,653
|
7.875
|
RMB0.297
(HK$0.286)
|
26
|
1,716,653
|
26
|
|||||||||||||||
|
RMB71 (US$8.6)
|
784,294
|
8.167
|
RMB40.42
(US$4.896)
|
71
|
203,713
|
71
|
|||||||||||||||
|
2,500,947
|
7.967
|
40
|
1,920,366
|
31
|
|||||||||||||||||
|
15.
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
Commitments
The
Company has operating lease agreements principally for its office properties
in
the PRC. Such leases have remaining terms ranging from 12 to 24 months and
are
renewable subject to negotiation. Rental expense was RMB4,439, RMB6,581 and
RMB7,552, for the years ended December 31, 2004, 2005 and 2006,
respectively.
|
|
|
Future
minimum lease payments under non-cancellable operating lease agreements at
December 31, 2006 were as follows:
|
|
RMB
|
|||
|
|
|
|||
|
Year
ending December 31:
|
|
|||
|
2007
|
1,959
|
|||
|
2008
|
155
|
|||
|
|
||||
|
Total
|
2,114
|
|||
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
15.
|
COMMITMENTS
AND CONTINGENCIES – continued
|
Contingencies
On
March
16, 2007, the PRC National People’s Congress adopted the 2008 PRC Enterprise
Income Tax Law, which will become effective on January 1, 2008. The 2008
PRC
Enterprise Income Tax Law imposes a tax rate of 25% on all enterprises,
including foreign-invested enterprises, and terminates most of the tax
exemptions, reductions, and preferential treatments available under current
tax
laws and regulations. However, under the 2008 PRC Enterprise Income Tax Law,
enterprises that were established before March 16, 2007 and are already enjoying
preferential tax treatments will continue to enjoy them (i) for a period
of five
years from January 1, 2008, in the case of preferential tax rates, or (ii)
until
the expiration of such term, in the case of preferential tax exemption or
reduction for a specified period.
Under
the
2008 PRC Enterprise Income Tax Law, companies recognized as “high and new
technology enterprises strongly supported by the State” will be entitled to a
preferential tax rate of 15%, but the 2008 PRC Enterprise Income Tax Law
does
not define “high and new technology enterprises strongly supported by the
State.” Under the 2008 PRC Enterprise Income Tax Law, each of Ninetowns'
subsidiaries will continue to be entitled to the tax preferential treatment
they
currently enjoy until such treatment expires. However, because the PRC State
Council has not promulgated the detailed rules for the 2008 PRC Tax Law,
Ninetowns' subsidiaries may not qualify as “high and new technology enterprises
strongly supported by the State” and therefore may not be entitled to a
preferential enterprise income tax rate after the current preferential tax
treatment expires.
|
16.
|
SEGMENT
INFORMATION
|
|
|
|
As
of
December 31, 2006, the Company has three reportable segments: the enterprise
software segment, the software development services segment, and the computer
hardware sales segment. The enterprise software segment is engaged in the
development, distribution and sale of software products, the provision of
customer maintenance services to the end-users, and the research and development
of new enterprise software. The software development services segment is
responsible for the development and integration of software in accordance
with
the customers' specifications and requirements. The computer hardware sales
segment is engaged in the sale of computer hardware and
accessories.
|
|
|
The
Company's chief operating decision maker is the Chief Executive Officer.
Segment
information provided to the chief operating decision maker is prepared using
the
accounting principles and the relevant financial regulations applicable to
enterprises with foreign investment as established by the Ministry of Finance
in
the PRC ("PRC GAAP"). The principal differences between PRC GAAP and US GAAP
as
they relate to the Company are primarily (i) revenue recognition from the
sale
of enterprise software, (ii) the classification of PRC value added tax refund,
and (iii) the recognition of share-based compensation expenses.
The
Company's reportable segments offer different products and services. Each
reportable segment is assigned a member of senior management who has knowledge
about the products and services, specific operational risks, and opportunities
associated with the segment.
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
16.
|
SEGMENT
INFORMATION – continued
|
The
following is a summary of financial information relating to each segment
expressed under PRC GAAP:
|
|
Year
ended December 31, 2004
|
|||||||||||||||
|
|
|
Software
|
|
|
||||||||||||
|
|
Enterprise
|
development
|
Computer
|
|
||||||||||||
|
|
software
|
services
|
hardware
sales
|
Total
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
RMB
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Net
revenues from external customers
|
135,885
|
3,130
|
104
|
139,119
|
||||||||||||
|
Net
revenues from related parties
|
52,277
|
9,593
|
-
|
61,870
|
||||||||||||
|
Gross
profit
|
186,634
|
9,753
|
95
|
196,482
|
||||||||||||
|
|
Year
ended December 31, 2005
|
|||||||||||||||
|
|
|
Software
|
|
|
||||||||||||
|
|
Enterprise
|
development
|
Computer
|
|
||||||||||||
|
|
software
|
services
|
hardware
sales
|
Total
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
RMB
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Net
revenues from external customers
|
109,022
|
7,600
|
678
|
117,300
|
||||||||||||
|
Net
revenues from related parties
|
39,081
|
28,100
|
-
|
67,181
|
||||||||||||
|
Gross
profit
|
147,278
|
17,838
|
196
|
165,312
|
||||||||||||
|
|
|
|
|
Year
ended December 31, 2006
|
|||||||||||||||
|
|
|
Software
|
|
|
||||||||||||
|
|
Enterprise
|
development
|
Computer
|
|
||||||||||||
|
|
software
|
services
|
hardware
sales
|
Total
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
RMB
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
Net
revenues from external customers
|
73,123
|
23,084
|
398
|
96,605
|
||||||||||||
|
Net
revenues from related parties
|
11,450
|
12,933
|
-
|
24,383
|
||||||||||||
|
Gross
profit
|
84,573
|
20,251
|
264
|
105,088
|
||||||||||||
The
Company does not allocate operating expenses to individual segments when
making
decisions about allocating resources to the segments and assessing their
performance.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
16.
|
SEGMENT
INFORMATION – continued
|
The
following is a reconciliation of the amounts presented for reportable segments
under PRC GAAP to the consolidated totals reported under US GAAP:
|
|
|
|
|
Years
ended December 31,
|
|||||||||||
|
|
2004
|
2005
|
2006
|
|||||||||
|
|
RMB
|
RMB
|
RMB
|
|||||||||
|
|
|
|
|
|||||||||
|
Net
revenues from external customers under PRC GAAP
|
139,119
|
117,300
|
96,605
|
|||||||||
|
U.S.
GAAP adjustments:
|
||||||||||||
|
Differences
in the timing of revenue recognition
|
(1,838 | ) |
21,232
|
11,455
|
||||||||
|
PRC
value added tax refund
|
12,588
|
12,280
|
7,549
|
|||||||||
|
|
||||||||||||
|
Total
net revenues from external customers under US GAAP
|
149,869
|
150,812
|
115,609
|
|||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Net
revenues from related parties under PRC GAAP
|
61,870
|
67,181
|
24,383
|
|||||||||
|
U.S.
GAAP adjustments:
|
||||||||||||
|
Differences
in the timing of revenue recognition
|
(14,986 | ) |
14,387
|
10,304
|
||||||||
|
PRC
value added tax refund
|
4,794
|
7,486
|
2,952
|
|||||||||
|
|
||||||||||||
|
Total
net revenues from related parties under US GAAP
|
51,678
|
89,054
|
37,639
|
|||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Gross
profit under PRC GAAP
|
196,482
|
165,312
|
105,088
|
|||||||||
|
U.S.
GAAP adjustments:
|
||||||||||||
|
Differences
in the timing of revenue recognition
|
(16,824 | ) |
35,619
|
21,759
|
||||||||
|
PRC
value added tax refund
|
17,382
|
19,766
|
10,501
|
|||||||||
|
Share-based
compensation expenses
|
-
|
-
|
(1,039 | ) | ||||||||
|
|
||||||||||||
|
Gross
profit under US GAAP
|
197,040
|
220,697
|
136,309
|
|||||||||
|
Operating
expenses
|
(57,368 | ) | (86,539 | ) | (109,357 | ) | ||||||
|
Government
subsidies
|
1,340
|
447
|
705
|
|||||||||
|
Income
from operations
|
141,012
|
134,605
|
27,657
|
|||||||||
|
Interest
income
|
3,768
|
17,625
|
19,302
|
|||||||||
|
|
||||||||||||
|
Income
before income tax expenses
|
144,780
|
152,230
|
46,959
|
|
|
|
The
Company primarily operates in the PRC. All the long-lived assets of the Company
are located in the PRC and the Company does not allocate such assets to
individual segments.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
17.
|
MAJOR
CUSTOMERS
|
|
|
|
Details
of the customers accounting for 10% or more of net revenue are as
follows:
|
|
Years
ended December 31,
|
|||||||||||
|
Customer
|
2004
|
2005
|
2006
|
|||||||||
|
A
|
20 | % | 18 | % | 9 | % | ||||||
|
B
|
-
|
10 | % | 11 | % | |||||||
|
C
|
12 | % |
*
|
-
|
||||||||
|
D
|
14 | % | 20 | % | 14 | % | ||||||
|
E
|
15 | % | 12 | % |
*
|
|||||||
|
|
|
|
|
*
Represents less than 10% of total net
revenue.
|
Trade
receivable from one customer totaled 39% and 45% of total trade receivables
at
December 31, 2005 and 2006, respectively.
|
18.
|
EMPLOYEE
BENEFIT PLANS
|
Employees
of the Company located in the PRC other than Hong Kong are covered by the
retirement schemes defined by local practice and regulations, which are
essentially defined contribution schemes. The calculation of contributions
for
the eligible employees is based on 20% of the applicable payroll costs. Certain
employees of the Company who are located in Hong Kong have joined the Mandatory
Provident Fund ("MPF") Scheme which is also a defined contribution scheme.
The
contribution to the MPF Scheme is calculated based on the rules set out in
the
MPF Ordinance in Hong Kong which is 5% on the relevant income of the employee
with a specific ceiling. The expenses paid by the Company to these defined
contribution schemes were RMB863, RMB2,566, and RMB4,587 for the years ended
December 31, 2004, 2005, and 2006, respectively.
|
|
|
In
addition, the Company is required by law to contribute approximately 10%
and
0.3% of applicable salaries of certain employees for medical and unemployment
benefits and workers compensation, respectively. The PRC government is directly
responsible for the payments of the benefits to these employees. The amounts
contributed were RMB487, RMB1,523, and RMB2,889 for the years ended December
31,
2004, 2005, and 2006, respectively.
|
|
|
|
19.
|
STATUTORY
RESERVES
|
|
|
|
As
stipulated by the relevant laws and regulations applicable to China's foreign
investment enterprises, Ninetown's subsidiaries in the PRC other than Hong
Kong
are required to make appropriations from net income as determined under PRC
GAAP
to non-distributable reserves which include a general reserve, an enterprise
expansion reserve and a staff welfare and bonus reserve. Wholly-owned PRC
subsidiaries are not required to make appropriations to the enterprise expansion
reserve but appropriations to the general reserve are required to be made
at not
less than 10% of profit after tax as determined under PRC GAAP. The staff
welfare and bonus reserve is determined by the board of directors.
|
|
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
(In thousands, except share and share-related data)
(In thousands, except share and share-related data)
|
19.
|
STATUTORY
RESERVES – continued
|
The
general reserve is used to offset future extraordinary losses. The subsidiaries
may, upon a resolution of the shareholders, convert the general reserve into
capital. The staff welfare and bonus reserve is used for the collective welfare
of the employees of the subsidiaries. The enterprise expansion reserve is
used
for the expansion of the subsidiaries' operations and can be converted to
capital subject to approval by the relevant authorities. These reserves
represent appropriations of retained earnings determined according to PRC
laws
and may not be distributed. There were no appropriations to these statutory
reserves by Ninetown's subsidiaries in the PRC during 2004 and 2006. RMB28,553
was appropriated to the reserves by Beijing Ninetowns Ports
during the year ended December 31, 2005.
|
|
|
|
20.
|
RESTRICTED
NET ASSETS
|
Relevant
PRC Statutory laws and regulations permit payments of dividends by Ninetown's
PRC subsidiaries and VIE from their retained earnings, if any, as determined
in
accordance with PRC accounting standards and regulations. In addition, the
general reserve (Note 19), which requires annual appropriations of 10% of
after-tax profit should be set as aside prior to the payment of dividends.
As a
result of these PRC laws and regulations, the Company's PRC subsidiary and
variable interest entity are restricted in their abilities to transfer a
portion
of their net assets to the Company. As of December 31, 2006, the amount of
restricted net assets was approximately RMB522,535.
|
21.
|
SUBSEQUENT
EVENTS
|
In
April,
2007, the Company entered into a definitive agreement to acquire 70% of the
equity interest in Ample Spring Holdings Limited ("Ample Spring") through
the
purchase of Ample Spring's ordinary shares for approximately RMB209 million
(US$27 million) payable in cash. Ample Spring provides B2B search
services. The Company expects to accelerate the development of its B2B business
through this acquisition.
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
SCHEDULE
1 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE
SHEETS
(In
thousands, except share-related data)
|
|
December
31,
|
|||||||||||
|
|
2005
|
2006
|
2006
|
|||||||||
|
|
RMB
|
RMB
|
US$
|
|||||||||
|
ASSETS
|
|
|
|
|||||||||
|
Current
assets:
|
|
|
|
|||||||||
|
Cash
and cash equivalents
|
139,142
|
73,589
|
9,430
|
|||||||||
|
Prepaid
expenses and other current assets
|
348
|
9,041
|
1,158
|
|||||||||
|
Amounts
due from a subsidiary
|
674,895
|
678,803
|
86,980
|
|||||||||
|
|
||||||||||||
|
Total
current assets
|
814,385
|
761,433
|
97,568
|
|||||||||
|
Investment
in a subsidiary
|
436,208
|
548,403
|
70,271
|
|||||||||
|
TOTAL
ASSETS
|
1,250,593
|
1,309,836
|
167,839
|
|||||||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current
liabilities:
|
Other
payables
|
3,705
|
4,856
|
622
|
|||||||||
|
Amount
due to a subsidiary
|
523
|
-
|
-
|
|||||||||
|
|
||||||||||||
|
Total
current liabilities
|
4,228
|
4,856
|
622
|
|||||||||
|
|
||||||||||||
|
Shareholders'
equity:
|
||||||||||||
|
Ordinary
shares, par value RMB0.027 (HK$0.025) per share:
|
||||||||||||
|
8,000,000,000
shares authorized; 34,991,834 shares issued and
|
||||||||||||
|
outstanding
in 2005 and 2006
|
926
|
926
|
119
|
|||||||||
|
Additional
paid-in capital
|
861,315
|
871,642
|
111,689
|
|||||||||
|
Retained
earnings
|
395,415
|
441,343
|
56,553
|
|||||||||
|
Treasury
shares, at cost, 315,226 shares and 47,862 shares in 2005
and
2006, respectively
|
(8,196 | ) | (1,268 | ) | (162 | ) | ||||||
|
Accumulated
other comprehensive loss
|
(3,095 | ) | (7,663 | ) | (982 | ) | ||||||
|
|
||||||||||||
|
Total
shareholders' equity
|
1,246,365
|
1,304,980
|
167,217
|
|||||||||
|
|
||||||||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
1,250,593
|
1,309,836
|
167,839
|
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
SCHEDULE
1 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS
OF OPERATIONS
(In
thousands)
|
|
Years
ended December 31,
|
|||||||||||||||
|
|
2004
|
2005
|
2006
|
2006
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
US$
|
||||||||||||
|
|
|
|
|
|
||||||||||||
|
General
and administrative expenses
|
(10,972 | ) | (21,702 | ) | (20,509 | ) | (2,628 | ) | ||||||||
|
Loss
from operations
|
(10,972 | ) | (21,702 | ) | (20,509 | ) | (2,628 | ) | ||||||||
|
Interest
income
|
604
|
9,101
|
5,504
|
705
|
||||||||||||
|
Other
income
|
306
|
411
|
-
|
-
|
||||||||||||
|
Loss
before equity in earnings of subsidiaries
|
(10,062 | ) | (12,290 | ) | (15,005 | ) | (1,923 | ) | ||||||||
|
Equity
in earnings of subsidiaries
|
144,013
|
163,794
|
60,933
|
7,808
|
||||||||||||
|
Net
income
|
133,951
|
151,604
|
45,928
|
5,885
|
||||||||||||
|
|
||||||||||||||||
|
Net
income per share
|
||||||||||||||||
|
Basic
|
4.96
|
4.39
|
1.32
|
0.17
|
||||||||||||
|
Diluted
|
4.74
|
4.25
|
1.30
|
0.17
|
||||||||||||
|
|
||||||||||||||||
|
Shares
used in computation:
|
||||||||||||||||
|
Basic
|
27,022,057
|
34,539,976
|
34,773,005
|
34,773,005
|
||||||||||||
|
Diluted
|
28,279,061
|
35,706,894
|
35,368,882
|
35,368,882
|
||||||||||||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
SCHEDULE
1 - CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
(CONTINUED)
STATEMENTS
OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE
INCOME
(In
thousands, except share-related data)
|
|
|
|
|
|
|
|
|
|
Accumulated
other
comprehensive
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Ordinary
shares
|
|
Additional
paid-in |
Treasury
shares
|
Retained
|
|
|
|
|
Comprehensive
|
||||||
|
|
Shares
|
|
Amount
|
|
capital
|
Shares
|
Amount
|
|
earnings
|
|
loss
|
|
Total
|
|
income
|
|
|
|
|
|
RMB
|
|
RMB
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance
as of January 1, 2004
|
22,780,000
|
|
604
|
|
55,066
|
-
|
-
|
|
109,860
|
|
-
|
|
165,530
|
|
|
|
|
Shares
issued for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
acquisition
of
minority interest |
2,002,312
|
|
53
|
|
181,259
|
-
|
-
|
|
-
|
|
-
|
|
181,312
|
|
|
|
|
Shares
issued upon initial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
public
offering, net of
issuance costs |
6,400,000
|
|
169
|
|
531,244
|
-
|
-
|
|
-
|
|
-
|
|
531,413
|
|
|
|
|
Expiration
of put options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Issuance
of ordinary shares
|
2,964,016
|
|
79
|
|
71,662
|
-
|
-
|
|
-
|
|
-
|
|
71,741
|
|
|
|
|
Exercise
of share options
|
245,506
|
|
6
|
|
6,499
|
|
-
|
|
-
|
|
6,505
|
|
|
|||
|
Net
income
|
-
|
|
-
|
|
-
|
-
|
-
|
|
133,951
|
|
-
|
|
133,951
|
|
133,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Balance
as of December 31,
2004 |
34,391,834
|
|
911
|
|
845,730
|
-
|
-
|
|
243,811
|
|
-
|
|
1,090,452
|
|
|
|
|
Ordinary
shares converted to ADR shares for future exercises of share
options
|
600,000
|
15
|
15,585
|
(600,000)
|
(15,600)
|
-
|
-
|
-
|
|
|||||||
|
Issuance
of ADR shares for the exercises of employee share options
|
-
|
-
|
- |
284,774
|
7,404
|
-
|
-
|
7,404
|
|
|
||||||
|
Net
income
|
-
|
|
-
|
|
-
|
-
|
-
|
|
151,604
|
|
-
|
|
151,604
|
|
151,604
|
|
|
Foreign
currency translation adjustments
|
-
|
|
-
|
|
-
|
-
|
-
|
|
-
|
|
(3,095)
|
|
(3,095)
|
|
(3,095)
|
|
|
Balance
as of December 31, 2005
|
34,991,834
|
|
926
|
|
861,315
|
(315,226)
|
(8,196)
|
|
395,415
|
|
(3,095)
|
|
1,246,365
|
|
|
|
|
Issuance
of ADR shares for the exercises of employee share options
|
-
|
-
|
-
|
267,364
|
6,928
|
-
|
-
|
6,928
|
|
|
||||||
|
Employee
share-based compensation
|
-
|
-
|
10,327
|
-
|
-
|
-
|
-
|
10,327
|
||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
45,928
|
-
|
45,928
|
|
45,928
|
||||||
|
Foreign
currency translation adjustments
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,568)
|
(4,568)
|
(4,568)
|
|||||||
|
|
41,360
|
|||||||||||||||
|
Balance
as of December 31, 2006
|
34,991,834
|
926
|
871,642
|
(47,862)
|
(1,268)
|
441,343
|
(7,663)
|
1,304,980
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
US$119
|
US$111,689
|
US$(162)
|
US$56,553
|
US$(982)
|
US$167,217
|
|
|||||||
|
|
|
|
||||||||||||||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
SCHEDULE
1 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(CONTINUED)
STATEMENTS
OF CASH FLOWS
(In
thousands)
|
|
Years
ended December 31,
|
|||||||||||||||
|
|
2004
|
2005
|
2006
|
2006
|
||||||||||||
|
|
RMB
|
RMB
|
RMB
|
US$
|
||||||||||||
|
Cash
flows from operating activities:
|
|
|
|
|
||||||||||||
|
Net
income
|
133,951
|
151,604
|
45,928
|
5,885
|
||||||||||||
|
Adjustments
to reconcile net loss to net cash
|
||||||||||||||||
|
used
in operating activities:
|
||||||||||||||||
|
Equity
in earnings of subsidiaries
|
(144,013 | ) | (163,794 | ) | (60,933 | ) | (7,808 | ) | ||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||
|
Prepaid
expenses and other current assets
|
(16,871 | ) |
16,670
|
(8,889 | ) | (1,139 | ) | |||||||||
|
Other
payables
|
10,806
|
(7,101 | ) |
1,305
|
167
|
|||||||||||
|
Amount
due to subsidiary
|
367
|
50
|
(516 | ) | (66 | ) | ||||||||||
|
|
||||||||||||||||
|
Net
cash used in operating activities
|
(15,760 | ) | (2,571 | ) | (23,105 | ) | (2,961 | ) | ||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Increase
in amounts due from subsidiaries
|
(50,563 | ) | (405,969 | ) | (45,857 | ) | (5,876 | ) | ||||||||
|
Net
cash used in investing activities
|
(50,563 | ) | (405,969 | ) | (45,857 | ) | (5,876 | ) | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Exercise
of share options
|
6,505
|
7,404
|
6,928
|
887
|
||||||||||||
|
Increase
(decrease) in amounts due to shareholders
|
5,360
|
(5,360 | ) |
-
|
-
|
|||||||||||
|
Proceeds
from issuance of ordinary shares, net of
issuance
costs
|
531,413
|
-
|
-
|
-
|
||||||||||||
|
Collection
of subscription receivables
|
24,804
|
-
|
-
|
-
|
||||||||||||
|
Decrease
in cash advance from a shareholder
|
(3,085 | ) |
-
|
-
|
-
|
|||||||||||
|
|
||||||||||||||||
|
Net
cash provided by financing activities
|
564,997
|
2,044
|
6,928
|
887
|
||||||||||||
|
|
||||||||||||||||
|
Effect
of exchange rate changes
|
-
|
(15,635 | ) | (3,519 | ) | (451 | ) | |||||||||
|
|
||||||||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
498,674
|
(422,131 | ) | (65,553 | ) | (8,399 | ) | |||||||||
|
Cash
and cash equivalents at the beginning of
|
||||||||||||||||
|
the
year
|
62,599
|
561,273
|
139,142
|
17,829
|
||||||||||||
|
|
||||||||||||||||
|
Cash
and cash equivalents at the end of the year
|
561,273
|
139,142
|
73,589
|
9,430
|
||||||||||||
|
|
||||||||||||||||
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY
LIMITED
Notes
to
Schedule I:
Basis
of
preparation
The
parent-company only condensed financial information of Ninetowns is prepared
using the same accounting policies as set out in the Company’s consolidated
financial statements except that Ninetowns uses the equity method to account
for
its investments in a subsidiary.
Amounts
due from and due to subsidiaries
Amounts
due from a subsidiary represented amounts loaned to Ixworth for its investments
in the Company's PRC subsidiaries. Amount due to subsidiary of RMB523 at
December 31, 2005 represented expenses paid by one of the Company's subsidiaries
on behalf of the Company. Amounts due from a subsidiary are
non-interest bearing, uncollateralized and do not have specified payment
terms. Amount due to subsidiary was payable within one year and was
repaid during 2006.
*
* * * *
* * * *
F
-
37