Form 20-F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
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o |
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934 |
OR
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
OR
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o |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
Date
of event requiring this shell company report
For the transition period from to
Commission file number 000-51025
Ninetowns Internet Technology Group Company Limited
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
22nd Floor, Building No.1,
Capital A Partners, No.20 Gong Ti East Road,
Chaoyang District Beijing 100020,
The Peoples Republic of China
(Address of principal executive offices)
Contact Person: Tommy Siu Lun Fork
Chief Financial Officer
Phone: +852-9021-9597
Facsimile: +852-2868-4483
Address: 22nd Floor, Building No. 1, Capital A Partners,
No.20 Gong Ti East Road, Chaoyang District Beijing 100020, China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered |
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35,791,834 ordinary shares
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Nasdaq Global Market |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Securities
for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
American Depositary Shares,
each representing one ordinary share, par value HK$0.025 per share
(Title of Class)
Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report.
35,791,834 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.
o Yes þ No
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. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o 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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ |
Indicate by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this
filing:
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U.S. GAAP þ
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International Financial Reporting Standards as issued
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Other o |
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by the International Accounting Standards Board o |
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If Other has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow. o Item 17 þ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). o Yes þ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
o Yes o No
Introduction
This annual report on Form 20-F includes our audited consolidated financial statements for the
years ended December 31, 2007, 2008 and 2009, and as of December 31, 2008 and 2009. References to
2007, 2008, 2009, 2010 and 2011 are, where appropriate, references to the years ended or
ending December 31, 2007, 2008, 2009, 2010 and 2011, 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 Peoples 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 industrys 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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our anticipated capital expenditures and our ability to fund such expenditures; |
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our expectations about growth in demand for our products and services; |
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acquisitions or investments in businesses, products or technologies that are complementary
to our own; |
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our ability to adjust to technological change; and |
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our belief about the effects of government regulation on our business. |
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.
ii
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 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, 2007, 2008 and 2009, and the balance sheet data as of
December 31, 2008 and 2009, 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 2005 and 2006, and the balance sheet data as of December 31,
2005, 2006 and 2007, 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 and |
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For the years ended December 31, |
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per ADS data |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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2009(1) |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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US$ |
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Statement of operations data: |
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Total net revenues: |
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Enterprise software and related
customer maintenance services |
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203,488 |
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116,833 |
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77,327 |
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84,965 |
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58,387 |
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8,554 |
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Software development services |
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35,700 |
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36,017 |
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25,642 |
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19,458 |
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17,363 |
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2,544 |
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Computer hardware sales |
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678 |
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398 |
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Food sales and services |
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94 |
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18,004 |
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2,637 |
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239,866 |
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153,248 |
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102,969 |
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104,517 |
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93,754 |
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13,735 |
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Cost of revenues: |
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Enterprise software and related
customer maintenance services |
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(495 |
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Software development services |
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(18,192 |
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(16,805 |
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(17,748 |
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(12,423 |
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(11,552 |
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(1,692 |
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Computer hardware sales |
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(482 |
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(134 |
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Food sales and services |
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(76 |
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(17,046 |
) |
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(2,498 |
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(19,169 |
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(16,939 |
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(17,748 |
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(12,499 |
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(28,598 |
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(4,190 |
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In thousands, except per share and |
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For the years ended December 31, |
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per ADS data |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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2009(1) |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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US$ |
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Gross profit |
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220,697 |
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136,309 |
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85,221 |
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92,018 |
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65,156 |
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9,545 |
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Operating expenses: |
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Selling and marketing |
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(25,752 |
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(13,604 |
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(32,379 |
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(21,942 |
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(17,369 |
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(2,546 |
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General and administrative |
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(49,538 |
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(65,928 |
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(73,636 |
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(75,523 |
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(62,877 |
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(9,212 |
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Research and development |
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(11,249 |
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(29,825 |
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(25,026 |
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(18,566 |
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(17,373 |
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(2,545 |
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Allowance for doubtful accounts, net |
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(22,395 |
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(2,881 |
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(26,259 |
) |
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(3,847 |
) |
1
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In thousands, except per share and |
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For the years ended December 31, |
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per ADS data |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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2009(1) |
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RMB |
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RMB |
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RMB |
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RMB |
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RMB |
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US$ |
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Impairment of goodwill |
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(193,570 |
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Total operating expenses |
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(86,539 |
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(109,357 |
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(347,006 |
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(118,912 |
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(123,878 |
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(18,150 |
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Government subsidies |
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447 |
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705 |
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1,015 |
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Income (loss) from operations |
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134,605 |
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27,657 |
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(260,770 |
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(26,894 |
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(58,722 |
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(8,605 |
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Interest income |
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17,625 |
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19,302 |
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13,885 |
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7,026 |
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4,280 |
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627 |
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Gain on sales of short-term
investments |
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43,546 |
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9,866 |
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35,474 |
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5,196 |
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Change in fair value of marketable
options |
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27,684 |
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4,056 |
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Gain from disposal of investment
under cost method |
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2,187 |
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Other income |
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358 |
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3,974 |
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582 |
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Income (loss) before income tax and
non-controlling interests |
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152,230 |
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46,959 |
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(203,339 |
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(7,457 |
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12,690 |
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1,856 |
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Income tax expense |
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(626 |
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(1,031 |
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(3,130 |
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(836 |
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(4,100 |
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(601 |
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Income (loss) from continuing operations
before non-controlling interests |
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151,604 |
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45,928 |
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(206,469 |
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(8,293 |
) |
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8,590 |
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1,255 |
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Loss from discontinued operations, net of
tax |
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(30,115 |
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(166,802 |
) |
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(7,347 |
) |
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(1,076 |
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Net income (loss) |
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151,604 |
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45,928 |
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(236,584 |
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(175,095 |
) |
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1,243 |
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179 |
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Attributable to non-controlling
interests-discontinued operations |
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6,053 |
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5,483 |
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89 |
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13 |
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Attributable to the Company |
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151,604 |
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45,928 |
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(230,531 |
) |
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(169,612 |
) |
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1,332 |
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192 |
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Income (loss) from continuing operations
per share: |
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Basic |
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4.39 |
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1.32 |
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(5.90 |
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(0.24 |
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0.25 |
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0.04 |
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Diluted |
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4.25 |
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1.30 |
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(5.90 |
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(0.24 |
) |
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0.25 |
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0.04 |
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Income (loss) from discontinued
operations per share: |
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Basic |
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(0.69 |
) |
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(4.61 |
) |
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(0.21 |
) |
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(0.03 |
) |
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Diluted |
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(0.69 |
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(4.61 |
) |
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(0.21 |
) |
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(0.03 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share and ADS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
4.39 |
|
|
|
1.32 |
|
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
4.25 |
|
|
|
1.30 |
|
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
|
146,372 |
|
|
|
40,832 |
|
|
|
(2,941 |
) |
|
|
(33,881 |
) |
|
|
(26,478 |
) |
|
|
(3,879 |
) |
Net cash (used in) provided by investing
activities |
|
|
(110,851 |
) |
|
|
(176,483 |
) |
|
|
57,193 |
|
|
|
(37,366 |
) |
|
|
(76,858 |
) |
|
|
(11,260 |
) |
Net cash provided by financing activities |
|
|
2,044 |
|
|
|
6,328 |
|
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except share, |
|
As
of December 31, |
|
per share and per ADS data |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009(1) |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalent |
|
|
731,474 |
|
|
|
598,648 |
|
|
|
649,863 |
|
|
|
576,642 |
|
|
|
473,448 |
|
|
|
69,361 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
853 |
|
|
|
670 |
|
|
|
790 |
|
|
|
116 |
|
Trade receivables, net
of allowance for
doubtful accounts,
from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
external customers |
|
|
17,459 |
|
|
|
18,775 |
|
|
|
31,096 |
|
|
|
27,938 |
|
|
|
12,452 |
|
|
|
1,824 |
|
related parties |
|
|
29,752 |
|
|
|
28,330 |
|
|
|
6,350 |
|
|
|
6,005 |
|
|
|
5,669 |
|
|
|
830 |
|
Term deposits |
|
|
207,000 |
|
|
|
307,209 |
|
|
|
26,000 |
|
|
|
28,000 |
|
|
|
25,000 |
|
|
|
3,663 |
|
Total assets |
|
|
1,345,773 |
|
|
|
1,365,289 |
|
|
|
1,171,180 |
|
|
|
953,325 |
|
|
|
979,591 |
|
|
|
143,511 |
|
Deferred revenue |
|
|
67,886 |
|
|
|
26,383 |
|
|
|
32,472 |
|
|
|
21,392 |
|
|
|
10,453 |
|
|
|
1,531 |
|
Total liabilities |
|
|
98,808 |
|
|
|
60,309 |
|
|
|
92,793 |
|
|
|
53,145 |
|
|
|
57,255 |
|
|
|
8,388 |
|
Total equity of the
Company |
|
|
1,246,365 |
|
|
|
1,304,980 |
|
|
|
1,072,904 |
|
|
|
900,180 |
|
|
|
922,425 |
|
|
|
135,136 |
|
Number of ordinary
shares outstanding
(2) |
|
|
34,991,834 |
|
|
|
34,991,834 |
|
|
|
34,991,834 |
|
|
|
35,791,834 |
|
|
|
35,791,834 |
|
|
|
35,791,834 |
|
2
|
|
|
(1) |
|
For the convenience of the reader, RMB amounts are expressed in U.S.
dollars at the rate of RMB6.8259 to US$1.00, the noon buying rate in
effect on December 31, 2009 as quoted by the Federal Reserve Bank of
New York. |
|
(2) |
|
In 2008, 800,000 of the Companys ordinary shares were converted into
American Depositary Shares to facilitate our employees cashless
exercise of vested stock options and non-vested shares. Stock options
for 6,186 ordinary shares were exercised in 2008. 120,536 previously
non-vested shares became vested in 2009. |
|
(3) |
|
Certain reclassifications of previous reported amounts have been made
to conform to the current period presentation. These reclassifications
are primarily due to the presentation of discontinued
business-to-business operations. |
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 translation 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 RMB6.8259 to US$1.00, the noon buying rate in effect as of December 31,
2009. We make no representation that any Renminbi amounts could have been, or could be, converted
into U.S. dollars 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 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noon Buying Rate |
|
|
|
Period End |
|
|
Average (1) |
|
|
Low |
|
|
High |
|
|
|
(RMB per US$1.00) |
|
|
2004 |
|
|
8.2765 |
|
|
|
8.2768 |
|
|
|
8.2774 |
|
|
|
8.2764 |
|
2005 |
|
|
8.0702 |
|
|
|
8.1936 |
|
|
|
8.2765 |
|
|
|
8.0702 |
|
2006 |
|
|
7.8041 |
|
|
|
7.9723 |
|
|
|
8.0702 |
|
|
|
7.8041 |
|
2007 |
|
|
7.2946 |
|
|
|
7.6058 |
|
|
|
7.8127 |
|
|
|
7.2946 |
|
2008 |
|
|
6.8225 |
|
|
|
6.9477 |
|
|
|
7.2946 |
|
|
|
6.7800 |
|
2009 |
|
|
6.8259 |
|
|
|
6.8307 |
|
|
|
6.8470 |
|
|
|
6.8176 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
|
|
6.8268 |
|
|
|
6.8269 |
|
|
|
6.8295 |
|
|
|
6.8258 |
|
February |
|
|
6.8258 |
|
|
|
6.8285 |
|
|
|
6.8330 |
|
|
|
6.8258 |
|
March |
|
|
6.8258 |
|
|
|
6.8262 |
|
|
|
6.8254 |
|
|
|
6.827 |
|
April |
|
|
6.8247 |
|
|
|
6.8256 |
|
|
|
6.8229 |
|
|
|
6.8275 |
|
May |
|
|
6.8305 |
|
|
|
6.8275 |
|
|
|
6.8245 |
|
|
|
6.831 |
|
June(2) |
|
|
6.8267 |
|
|
|
6.8298 |
|
|
|
6.8267 |
|
|
|
6.8323 |
|
|
|
|
(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 June 18, 2010. |
3
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 related customer maintenance services and software development
services that are either used by the State Administration for Quality Supervision and Inspection
and Quarantine of the PRC, or the PRC Inspections Administration, or by regional PRC inspection and
quarantine bureaus, 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 (i) sales of enterprise software and related customer maintenance services and (ii)
software development services that will be used in connection with the PRC Inspections
Administration filings. Net revenues from sales of enterprise software and related customer
maintenance services for PRC Inspections Administration filings accounted for 75.1%, 81.3% and
62.3% of our total net revenues in 2007, 2008 and 2009, 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.
4
For example, Beijing iTowNet Cyber Technology Ltd., or iTowNet, has developed its own platform for
providing software development services and now provides software development services directly to
its customers, such as the PRC Inspections Administration, that are similar to the software
development services that we provide to our customers. As a result, iTowNet became one of our
competitors in our software development services business. Due to the fact that iTowNet is
majority owned by the PRC Inspections Administration, our software development services relating to
the PRC Inspections Administration could become obsolete, which would result in the reduction or
loss of substantially all of our revenues from that business.
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 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 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 Administrations 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 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 has had a material adverse
effect on our results of operations and on our future profitability. For example, we sold, together
with our franchisees, approximately 2,200, 1,000, 400 and 210 software packages of iDeclare.CIQ
during the first quarter of 2007, 2008, 2009 and 2010, respectively.
We are in the process of diversifying our business focus to include other businesses in addition to
the sales of our enterprise software and related customer maintenance services 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 a significant portion of our total net revenues from the sales of our enterprise
software and related customer maintenance services, and the provision of software development
services in 2009. 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. Such expansion includes selective investment and acquisition
opportunities in various industries, including real estate, consumer goods, healthcare and retail
businesses. 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 and related
customer maintenance services or the provision of software development services.
From 2006 to 2008, we focused on developing our business-to-business, or B2B, business and
strategy. We launched our new B2B vertical search platform, tootoo.com in May 2007 through which we
offered our B2B
business and services. In March 2009, we announced our decision to wind down our B2B business in
light of the recent major changes in the global economic environment.
5
In 2009, we expanded our research and development initiatives to focus on the development of our
business-to-consumer, or B2C, e-commerce platform. In April 2010, we began offering our B2C
e-commerce food and household products platform through our web portal, www.tootoo.cn, on a trial
basis in the Beijing metropolitan area. In addition, we focused on guaranteeing delivery of fresh
produce from our warehouses directly to our customers located in a particular residential community
in Beijing.
As our B2C business is currently under development, we may not successfully introduce it as one of
our primary businesses. We do not have a significant operating history with respect to our B2C
business upon which you can evaluate our business and prospects. Furthermore, as part of our
operation and 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 new businesses, and any failure to do so
may limit our future growth and materially and adversely affect 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, 2010, 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 18.01% 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, we understand from publicly available
information that Mr. Yong Ping Duan, or Mr. Duan, and Technology Pioneer Corp., or Technology
Pioneer, beneficially own 19.76% and 8.58% of our American Depositary Shares, or ADSs,
respectively. Mr. Duan and Technology Pioneer will also have substantial influence over the
outcome of most corporate actions. As a result, Mr. Wang, Ms. Dong, Mr. Duan and Technology
Pioneer 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, Mr. Duan and Technology Pioneer 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, the operator of the PRC
Inspections Administrations data exchange platforms and electronic processing system. iTowNet 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 Administrations 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. Wangs 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 iTowNets charter documents.
iTowNet has developed its own platform for providing software development services and now provides
software development services directly to its customers, such as the PRC Inspections
Administration, that are similar to the software development services that we provide to our
customers. As a result, iTowNet became one of our
competitors in our software development services business. Due to the fact that iTowNet is
majority owned by the PRC Inspections Administration, our software development services relating to
the PRC Inspections Administration could become obsolete, which would result in the reduction or
loss of substantially all of our revenues from that business.
6
We derived RMB2.9 million, RMB2.5 million and RMB2.3 million (US$0.3 million), or 2.8%, 2.4% and
2.4% of our total net revenues in 2007, 2008 and 2009, respectively, from Shenzhen Ninetowns Enke
Software Technology Co., Ltd., or Ninetowns Enke, which is our related party and also one of our
franchisees. We derived RMB6.4 million, RMB12.0 million and RMB9.3 million (US$1.4 million), or
6.2%, 11.5% and 9.9% of our total net revenues in 2007, 2008 and 2009, respectively, from Guangzhou
Ninetowns Wang Li Software Co., Ltd., or Ninetowns Wang Li, which is our related party and also one
of our franchisees.
We cannot assure you that our transactions with Ninetowns Enke and Ninetowns Wang Li 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
Ninetowns Enke and Ninetowns Wang Li. See Item 7 of this annual report, Major Shareholders and
Related Party Transactions Related party transactions.
Since a significant part of our total net revenues prior to 2007 was generated from software
development services, a decline in demand for those services starting in 2007 resulted in a
significant reduction in our net revenues from the provision of software development services and
our total net revenues.
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
Technology Ltd., or eGrid, to iTowNet. Net revenues from the provision of software development
services, either directly to iTowNet or indirectly to iTowNet through eGrid, accounted for
approximately 8.4% of our total net revenues and 35.9% of our net revenues from the provision of
software development services in 2006. However, we did not derive any revenue from iTowNet and
eGrid in 2007 and 2008 and only derived RMB0.4 million from iTowNet in 2009. As a result, we expect
the demand for our software development services to decline over time.
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, 2010, 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) Ninetowns Wang Li and (iv) Ninetowns
Enke, who as a result of their purchases of enterprise software and related customer maintenance
services 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 and related customer maintenance
services from Ninetowns Zhi Fang were RMB17.6 million, RMB18.5 million and RMB16.9 million
(US$2.5 million), which represented 17.1%, 17.7% and 18.1% of our total net revenues for
2007, 2008 and 2009, respectively. |
|
|
|
Our net revenues from sales of our enterprise software and related customer maintenance
services from Ninetowns Xin He were RMB23.8 million, RMB21.3 million and RMB17.4 million
(US$2.6 million), which represented 23.1%, 20.3% and 18.6% of our total net revenues for 2007, 2008 and 2009,
respectively. |
7
|
|
|
Our net revenues from sales of our enterprise software and related customer maintenance
services from Ninetowns Wang Li were RMB6.4 million, RMB12.0 million and RMB9.3 million
(US$1.4 million), which represented 6.2%, 11.5% and 9.9% of our total net revenues for
2007, 2008 and 2009, respectively. |
|
|
|
Our net revenues from sales of our enterprise software and related customer maintenance
services from Ninetowns Enke were RMB2.9 million, RMB2.5 million and RMB2.3 million (US$0.3
million) or 2.8%, 2.4% and 2.4% of our total net revenues in 2007, 2008 and 2009,
respectively. |
To our knowledge, none of our franchisees are PRC government agencies.
eGrid and iTowNet have historically been our two largest customers for software development
services, but revenues from eGrid and iTownet have been insignificant since 2007. 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, 2009, our total net trade receivables amounted to approximately RMB18.1 million
(US$2.7 million), of which our net trade receivables from related parties amounted to RMB5.7
million (US$0.8 million). Our total net trade receivables as of December 31, 2009 represented
approximately 2.6% of our total current assets. As of December 31, 2009, we had an allowance for
doubtful debts of approximately RMB31.4 million (US$4.6 million). We have written off trade
receivables of RMB0.3 million (US$38,269) identified as uncollectible against corresponding
allowances as of December 31, 2009. If any of our franchisees or any of our other customers fails
to pay, or delays payment on, all or part of these receivables, we would be required to make
additional allowances for doubtful debts and our profitability and financial position could be
affected.
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 53.5% 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. In 2009, we
offered customer
maintenance service contracts to approximately 18,400 users, so that approximately 13.1% of the
total number of users due for a maintenance contract renewal in 2009 paid for the renewal.
However, we believe that not all of our users and potential users were accustomed to being charged
for this type of service. In 2009, we recognized approximately RMB51.4 million (US$7.5 million)
from the provision of customer maintenance services, including the fees we collected from the
Pay-Per-Transaction users.
8
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 and related customer maintenance services accounted for approximately 75.1%,
81.3% and 62.3% of our total net revenues in 2007, 2008 and 2009, respectively. Any of the
following events could materially reduce our total net revenues.
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any decrease in the demand for or price of iDeclare.CIQ or any increase in competition
to iDeclare.CIQ, including but not limited to as a result of the PRC Inspections
Administrations and iTowNets endorsement of a comparable product, |
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any failure by our company to develop additional enterprise software, any significant
shift in our marketing efforts, |
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any lasting or prolonged interruption that prevents our enterprise software from
delivering data to government entities due to system failures or other factors, |
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any other adverse development specific to iDeclare.CIQ, or |
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a significant slowdown of Chinas economy. |
In February 2006, the PRC Inspections Administration promoted and distributed a software product
that 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
significantly and will likely continue to decline. Additionally, as a result of the slowdown in
Chinas economy caused in part by the recent global crisis in the financial services and credit
markets, our sales of iDeclare.CIQ have also been negatively impacted. See Item 3D of this annual
report, Risk factors Risks related to our business we may be adversely affected by the
slowdown of Chinas economy caused in part by the recent global crisis in the financial services
and credit markets. For example, we sold, together with our franchisees, approximately 210
software packages of iDeclare.CIQ during the first quarter of 2010, which is significantly lower
than the approximately 1,000 and 400 software packages of iDeclare.CIQ sold by our company and our
franchisees during the first quarter of 2008 and 2009, respectively.
9
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 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 pursue opportunities relating to the needs of international trade
enterprises making government filings in China. Our competitors may have greater marketing,
programming, research and development, capital and other resources than we do. These resources
could enable our competitors to take aggressive action to gain market share. Additionally, we 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 managements attention, which may have an
adverse effect on our ability to manage our business and expose us to potential risks.
In 2009, we expanded our research and development initiatives to focus on the development of our
B2C e-commerce platform. In April 2010, we began initially offering our B2C e-commerce food and
household products platform through our web portal, www.tootoo.cn, on a trial basis in the Beijing
metropolitan area.
If we are presented with additional opportunities, we may acquire additional complementary
companies, products or technologies, or invest in new businesses. We plan to pursue selective
investment and acquisition opportunities in various industries, including real estate, consumer
goods, healthcare and retail 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 managements 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.
10
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 Chinas 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. At times
our ability to find and train new employees who have the requisite business experience may not meet
the growing demands of our business. As the PRC economy continues to develop, demand for personnel
with the skills that we require 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, provide software
development services to PRC government agencies or develop and expand our business.
If we continue to grant employee share options and other share-based compensation in the future,
our net income could be materially and adversely affected.
We have the 2003 Plan, the Amended and Restated 2004 Plan, and the 2006 Share Incentive Plan, or
collectively, the Plans. As of December 31, 2009, we granted options under the Plans with the
right to purchase a total of 5,208,969 ordinary shares and we granted 460,383 non-vested shares, of
which 1,036,966 unexercised options and 41,591 unvested non-vested shares had been returned to the
pool of our share-based awards as a result of resignation from employment by a few former
employees.
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.
11
Our failure to adequately manage our business expansion could result in a deterioration in our
results of operations and financial condition.
Our plans for expansion into new business opportunities 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 business
expansion 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 business 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. 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.
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 softwares 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.
12
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 comparable 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. We cannot assure you
that such company will not take actions against us for trademark infringement. We have registered
our trademark in the United States and we are in the process of registering our other trademarks in
China under the food and beverage categories.
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.
Any reduction of our preferential tax treatment as a PRC high and new technology enterprise could
materially reduce our net income.
We receive from the PRC government a 14.0% rebate for value added tax on sales of software and
software-related services, or VAT rebate. For our B2C business, the revenue from our self-grown
goods is exempt from VAT. 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 governments tax policies or because a
subsidiary or variable interest entities, or VIE, 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 National Peoples Congress adopted the 2008 PRC Enterprise Income Tax Law
(the New Income Tax Law), which went into effect on January 1, 2008. The New Income Tax Law
imposes a unified income tax rate of 25% for domestic and foreign enterprises. New and High
Technology Enterprise will enjoy a favorable tax rate of 15%. The New Income Tax Law also provides
a five-year transitional period for those enterprises established before March 16, 2007, which
enjoy a favorable income tax rate less than 25% under the previous income tax laws, to gradually
change their rates to 25%. In addition, the New Income Tax Law provides grandfather treatment for
enterprises which were qualified as New and High Technology Enterprises under the previous
income tax laws and were established before March 16, 2007, if they continue to meet the criteria
for New and High Technology Enterprises after January 1, 2008.
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The New and High Technology Enterprise status allows qualifying enterprises to be eligible for a
preferential 15% tax rate for three years. At the conclusion of the three year period, the
qualifying enterprise has the option to renew its New and High Technology Enterprise status for an
additional three years if such enterprises business operations continue to qualify for New and
High Technology Enterprise status. At the conclusion of the renewed period, the enterprise would
have to go through a new application process to renew its New and High Technology Enterprise
status. As of December 2009, we received certifications of New and High Technology Enterprise
status for Beijing Ninetowns Ports Software and Technology Co., Ltd., or Ninetowns Ports, and
Guangdong Ninetowns Technology Co., Ltd., or Guangdong Ninetowns, which qualify them for the
preferential 15% tax rate for tax year 2009.
Under the New Income Tax Law, if the PRC subsidiaries and VIEs wish to qualify for a preferential
rate for years commencing on or after January 1, 2008, they will need to qualify as a High and New
Technology Enterprise Strongly Supported by the State under the new rules. Until the PRC
subsidiaries and VIEs receive official approval for this new status, they will be subject to the
statutory 25% tax rate. As the New Income Tax Law and its implementation rules only recently went
into effect, there are uncertainties on their future interpretation and implementation.
Furthermore, under the New Income Tax Law a resident enterprise, which includes an enterprise
established outside of the PRC with management located in the PRC, will be subject to PRC income
tax. If the PRC tax authorities subsequently determine that the Company and its subsidiaries
registered outside the PRC should be deemed a resident enterprise, the Company and its subsidiaries
registered outside the PRC will be subject to the PRC income tax at a rate of 25%.
There
are significant uncertainties under the New Enterprise Income Tax Law, or the New EIT Law,
which became effective on January 1, 2008, regarding our PRC enterprise income tax liabilities,
such as tax on dividends paid to us by our PRC subsidiaries. The New EIT Law also contains
uncertainties regarding possible PRC withholding tax on dividends we pay to our shareholders
outside of China and gains realized from the transfer of our shares by our shareholders outside of
China.
We are a holding company incorporated in the Cayman Islands, which indirectly holds, through New
Take Limited., or New Take and Shielder Limited., or Shielder, which are Hong Kong companies, our
equity interest in our PRC subsidiaries. The New EIT Law and its implementation rules, both of
which became effective on January 1, 2008, provide that China-sourced income of foreign
enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally be
subject to PRC withholding tax at a rate of 10.0%, unless there are applicable treaties that reduce
such rate. Under a special arrangement between China and Hong Kong, such dividend withholding tax
rate is reduced to 5.0% if a Hong Kong resident enterprise owns over 25.0% of the PRC company
distributing the dividends. As New Take and Shielder, are Hong Kong companies and own 90.0% of
Beijing New Take Electronic Commerce Limited, or Beijing New Take, and Beijing Ninetowns Times
Electronic Commerce Limited, or Ninetowns Times, respectively, dividends that Beijing New Take and
Ninetowns Times pay New Take and Shielder, respectively, will be subject to a withholding tax at
the rate of 5.0%, provided that New Take and Shielder and our company are not considered to be PRC
tax resident enterprises. Furthermore, according to the Circular regarding the Implementation of
Dividend-related Provisions in the Tax Treaty issued by the State Administration of Taxation on
February 22, 2009, if the main purpose of an offshore arrangement is to obtain a preferential tax
treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed
by the relevant offshore entity. As New Take and Shielder are intermediate holding companies and
not engaged in any commercial activities in Hong Kong, the tax authorities may regard the main
purpose of New Take and Shielder as obtaining a lower withholding tax rate
of 5.0%. As a result, the tax authorities could levy a higher withholding tax rate to dividends
received by New Take and Shielder from Beijing New Take and Ninetowns Times.
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Furthermore, the implementation rules of the New EIT Law provide that, (i) if the enterprise that
distributes dividends is domiciled in the PRC, or (ii) if gains are realized from transferring
equity interests of enterprises domiciled in the PRC, then such dividends or capital gains are
treated as China-sourced income. It is unclear how domicile will be interpreted. It may be
interpreted as the jurisdiction where the enterprise is a tax resident. Therefore, if we and New
Take and Shielder are considered as PRC tax resident enterprises for tax purposes, any dividend we
pay to our shareholders outside of China or ADS holders as well as gains realized by such
shareholders or ADS holders from the transfer of our shares or ADSs will be regarded as
China-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10.0%.
The Chinese tax authorities have clarified that distributions made out of pre-January 1, 2008
retained earnings will not be subject to the withholding tax. Current tax expense for the year
ended December 31, 2009 includes an estimated withholding tax related to dividends in excess of
pre-January 1, 2008 retained earnings paid by our Chinese subsidiaries to our overseas holding
companies.
Additionally, under the New EIT 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, or EIT, at the rate of
25.0% on its global income. However, the New Income Tax Law does not define the term de facto
management bodies. Certain members of our board of directors and our management are currently
located in the PRC and if they remain located in the PRC after the effective date of the New EIT
Law, we may be considered to be a resident enterprise and therefore may be subject to the EIT at
the rate of 25.0% on our global income in the PRC.
Changes in PRC policies on dividend distribution may materially and adversely affect our business
and results of operations and dividends payable by us to our foreign investors.
Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region
for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on
Income signed on August 21, 2006, or the Hong Kong Tax Treaty, a company incorporated in Hong Kong,
such as our subsidiaries New Take and Shielder, will be subject to withholding income tax at a rate
of 5% on dividends it receives from its PRC subsidiaries if it holds a 25% or more interest in that
particular PRC subsidiary at the time of the distribution, or 10% if it holds less than a 25%
interest in that subsidiary. In addition, the PRC State Administration of Taxation promulgated the
Administrative Measures for Non-resident Enterprises to Enjoy Treatments under Tax Treaties (for
Trial Implementation) on October 27, 2009, or Circular 601, which provides that tax treaty benefits
will be denied to conduit or shell companies without business substance, and a beneficial
ownership analysis will be used based on a substance-over-the-form principle to determine whether
or not to grant tax treaty benefits. It is unclear at this early stage whether Circular 601 applies
to dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary. It is possible
however, that under Circular 601, our subsidiaries New Take and Shielder would not be considered as
the beneficial owner of any such dividends, and that such dividends would as a result be subject
to income tax withholding at the rate of 10% rather than the favorable 5% rate applicable under the
Hong Kong Tax Treaty.
If our currently available tax benefits relating to the withholding income tax on the dividends
received from New Take and Shielder become unavailable as a result of the changes in the tax
arrangement between the PRC and Hong Kong as mentioned above or for any other reason, our financial
condition and results of operations could be adversely affected.
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It is likely that we would be considered a passive foreign investment company for 2009, 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 2009. 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 10 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 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.
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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 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 governments 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 governments 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.
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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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level of government involvement in the economy; |
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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. |
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 certain VIEs 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.
18
If the PRC government determines that the VIE structure for operating our business does not comply
with PRC government restrictions on foreign investment in the telecommunications industry, we could
face severe penalties.
Various regulations in China currently restrict or prevent foreign-invested entities from engaging
in the telecommunications services, including Internet-related businesses such as B2B and B2C
e-commerce. Because of these restrictions, our B2B operations in the PRC have been conducted
through our VIEs, Beijing Ronghe Tongshang Network Technology Limited, or Ronghe Tongshang, and
Beijing Baichuan Tongda Science and Technology Development Co., Ltd., or Baichuan, both of which
are PRC companies which are effectively controlled by our subsidiary, Beijing Ninetowns Suitable
Estate Co., Ltd., formerly known as Beijing Ninetowns Network and Software Co., Ltd., or Ninetowns
Suitable Estate, through a series of contractual arrangements.
A circular issued by Ministry of Industry and Information Technology (formerly the Ministry of
Information Industry), or MIIT, in July 2006, or the MIIT circular, reiterated the regulations on
foreign investment in the telecommunications businesses. Under this circular, a domestic company
that holds a license for the provision of Internet information service, or an ICP license, or a
license to conduct any value-added telecommunications business in China, is prohibited from
leasing, transferring or selling the license to foreign investors in any form, and from providing
any assistance, including providing resources, sites or facilities, to foreign investors to conduct
value-added telecommunications businesses in China.
Furthermore, the relevant trademarks and domain names that are used in the value-added
telecommunications business must be owned by the local ICP license holder or its shareholders. The
circular further requires each ICP license holder to have the necessary facilities for its approved
business operations and to maintain such facilities in the regions covered by its license. In
addition, all value-added telecommunications service providers are required to maintain network and
information security in accordance with the standards set forth under relevant PRC regulations. Due
to a lack of interpretative materials from the regulators, it is uncertain whether MIIT would
consider our corporate structures and contractual arrangements as a kind of foreign investment in
telecommunications services. Therefore, it is unclear what impact this circular will have on us or
the other Chinese Internet companies that have adopted the same or similar corporate structures and
contractual arrangements as ours.
In the opinion of our PRC counsel, (i) the ownership structure and the business and operation model
of each of Ninetowns Network and our VIEs are in compliance with applicable PRC laws and
regulations in all material aspects, and (ii) each contract that Ninetowns Suitable Estate entered
into with our VIEs and their shareholders is valid and binding, and will not result in any
violation of PRC laws or regulations currently in effect. However, there are substantial
uncertainties regarding the interpretation and application of PRC laws and regulations, including
the MIIT circular discussed above. Accordingly, we cannot assure you that the PRC regulatory
authorities will ultimately take a view that is consistent with the opinion of our PRC counsel.
If we are found to be in violation of any existing or future PRC laws or regulations, including the
MIIT circular, the relevant regulatory authorities would have broad discretion in dealing with such
violation, including levying fines, confiscating our income, revoking Ronghe Tongshangs or
Baichuans business or operating licenses, requiring us to
restructure the relevant ownership structure or operations, and requiring us to discontinue all or
any portion of our related operations. Any of these actions could cause significant disruption to
our business operations.
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Ninetowns Networks contractual arrangements with Ronghe Tongshang and Baichuan and their
shareholders may not be as effective in providing control over them and such shareholders may have
potential conflicts of interest with us.
We do not have ownership interest in our VIEs and we conduct substantially all of our B2B and B2C
e-commerce operations through contractual arrangements that Ninetowns Suitable Estate entered into
with Ronghe Tongshang and Baichuan and their shareholders. Such contractual arrangements are
designed to provide us with effective control over our VIEs. We depend on our VIEs to hold and
maintain certain licenses necessary for our B2B and B2C e-commerce businesses. Our VIEs also own
all of the necessary intellectual properties, facilities, employees and other assets relating to
the operation of our B2B and B2C e-commerce business.
Contractual arrangements may not be as effective in providing us with control over our VIEs as
direct ownership. If we had direct ownership of our VIEs, we would be able to exercise our rights
as a shareholder to effect changes in the board of directors of our VIEs, which in turn could
effect changes, subject to any applicable fiduciary obligations, at the management level. Due to
our VIE structure, we have to rely on contractual rights to effect control and management of our
VIEs, which exposes us to the risk of potential breach of contract by the shareholders of our VIEs.
In addition, as both of our VIEs are jointly owned by their shareholders, it may be difficult for
us to change our corporate structure if such shareholders refuse to cooperate with us.
The shareholders of our VIEs may breach, or cause our VIEs to breach, the contracts for a number of
reasons. For example, their interests as shareholders of our VIEs and the interests of our company
may conflict and we may fail to resolve such conflicts; the shareholders may believe that breaching
the contracts will lead to greater economic benefit for them; or the shareholders may otherwise act
in bad faith. If any of the foregoing were to happen, we may have to rely on legal or arbitral
proceedings to enforce our contractual rights, including specific performance or injunctive relief,
and claiming damages. Such arbitral and legal proceedings may cost us substantial financial and
other resources, and result in disruption of our business, and we cannot assure you that the
outcome will be in our favor.
In addition, as all of these contractual arrangements are governed by PRC law and provide for the
resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with
PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal
environment in the PRC is not as developed as in other jurisdictions, such as the United States. As
a result, uncertainties in the PRC legal system could further limit our ability to enforce these
contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC
government authorities or courts take a view that such contracts contravene PRC laws and
regulations or are otherwise not enforceable for public policy reasons. In the event we are unable
to enforce these contractual arrangements, we may not be able to exert effective control over our
VIEs, and our ability to conduct our business may be materially and adversely affected.
The laws and regulations governing the telecommunications industry in China are evolving and
subject to future changes. We may fail to obtain or maintain all applicable permits and approvals.
The telecommunications industry in China is highly regulated by the PRC government. Various
regulatory authorities of the PRC central government, such as the State Council, the MIIT, the
General Administration of Press
and Publication, the Ministry of Culture and the Ministry of Public Security, are empowered to
issue and implement regulations governing various aspects of the telecommunications industry.
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We are required to obtain applicable permits, approvals from or registration with different
regulatory authorities in order to operate our websites. If we fail to maintain any of our permits,
approvals or registrations or to apply for permits, approvals or registrations on a timely basis,
we may be subject to various penalties, including fines and the discontinuation or restriction of
our operations.
As the telecommunications industry is at an early stage of development in China, new laws and
regulations may be adopted from time to time to require additional licenses and permits other than
those we currently have, and address new issues that arise. In addition, substantial uncertainties
exist regarding the interpretation and implementation of current and any future PRC laws and
regulations applicable to the telecommunications industry. We cannot assure you that we will be
able to obtain timely, or at all, required licenses or any other new license required in the
future. We cannot assure you that we will not be found in violation of any current PRC laws or
regulations should their interpretations change, or that we will not be found in violation of any
future PRC laws or regulations.
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 three leases for properties that we use as employee housing or as our
offices for technical support centers in Guangdong Province, China. None of the lessors can provide
copies of their title certificates to us. 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, H5N1 influenza, or avian influenza, or H1N1 influenza, or swine flu, 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 infection among poultry were reported by several countries in Asia, including
China in 2005. In March 2007, February 2008, and early 2009, several fatal cases of avian influenza
were reported in various provinces across China. In April 2009, lethal outbreaks of swine flu were
reported by several economies around the world, including Hong Kong and various provinces across
China. In early June 2009, the World Health Organization declared the outbreak to be a pandemic,
while noting that most of the illnesses were of moderate severity. The PRC Ministry of Health has
reported several hundred deaths caused by the swine flu. If there is a recurrence of an outbreak
of SARS, avian influenza or swine flu, it may adversely affect our total net revenues, growth and
profits. For instance, a recurrence of SARS, avian influenza, swine flu 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.
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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 VIEs 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.
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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
VIEs 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.
All participants in our existing equity compensation plans who are PRC citizens may be required to
register with SAFE. We may also face regulatory uncertainties that could restrict our ability to
adopt additional equity compensation plans for our directors, employees and other parties under PRC
law.
On April 6, 2007, the capital account department of SAFE issued the Operating Procedures for
Administration of Domestic Individuals Participating in the Employee Stock Option Plan or Stock
Option Plan of An Overseas Listed Company, Hui Zong Fa 2007 No. 78, or Circular 78. It is not clear
at this time whether Circular 78 covers only equity compensation plans that provide for the grant
of stock options or any type of equity compensation plan, such as a plan which authorizes the grant
of restricted share awards. For any plan that is so covered and was adopted by a non-PRC listed
company (such as our company) after April 6, 2007, Circular 78 requires all participants who are
PRC citizens to register with and obtain approvals from SAFE prior to their participation in the
plan. In addition, Circular 78 also requires PRC citizens to register with SAFE and make the
necessary applications and filings by July 5, 2007 if they participated in an overseas listed
companys covered equity compensation plan prior to April 6, 2007. We believe that the registration
and approval requirements contemplated in Circular 78 will be burdensome and time consuming.
If it is determined that our equity compensation plans are subject to Circular 78, failure to
comply with such provisions may subject us and the participants of our equity compensation plans
who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity
compensation to our personnel, which is currently a significant component of the compensation of
many of our PRC employees. In that case, our business operations may be materially adversely
affected.
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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 or semi-annual 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. |
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. In recent years, 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.
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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 law 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.
25
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, and we rely on dividends from our Chinese subsidiaries and servicing,
licensing and other fees paid to our Chinese subsidiaries by our Chinese affiliated entities and
their subsidiaries, including servicing 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.
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 until the
cumulative amount of such reserves reaches 50% of its registered capital. 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 59.7% of our total
consolidated net assets as of December 31, 2009.
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.
Pursuant to the New EIT Law, which went into effect on January 1, 2008, dividends payable by a
foreign invested enterprises, or FIEs, to its foreign investors are subject to a 10% withholding
tax, unless the foreign investors jurisdiction of incorporation has a tax treaty with China that
provides for a different withholding arrangement. The Cayman Islands, where we are incorporated,
does not have a tax treaty with China. Although the New EIT Law contemplates the possibility of
exemptions from withholding taxes for China-sourced income of FIEs, the Chinese tax authorities
have not promulgated any related implementation rules and it remains unclear whether we would be
able to obtain exemptions from Chinese withholding taxes for dividends distributed to us by our
Chinese subsidiaries.
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
shareholders than would shareholders of a corporation incorporated in a jurisdiction of the United
States.
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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:
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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 |
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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 shareholders 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 VIEs 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
managements 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.
27
We are required to implement additional controls and procedures in finance and accounting systems
to satisfy U.S. 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 upgraded and implemented 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,
2009 was effective. During the audit of our 2009 financial statements, our independent registered
public accounting firm did not identify any material weaknesses. 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.
Our ordinary shares or ADSs may be deemed as penny stock, which imposes significant restrictions on
broker-dealers recommending our securities for purchase.
The SECs regulations define penny stock to include securities that have a market price of less
than US$5.00 per share, subject to certain exceptions. These regulations include the following
requirements: broker-dealers must deliver, prior to the transaction, a disclosure schedule prepared
by the SEC relating to the penny stock market; broker-dealers must disclose the commissions payable
to the broker-dealer and its registered representative; broker-dealers must disclose current
quotations for the securities; if a broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealers presumed control over the market; and a broker-dealer
must furnish its customers with monthly statements disclosing recent price information for all
penny stocks held in the customers account and information on the limited market in penny stocks.
Additional sales practice requirements are imposed on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. For these types of transactions,
the broker-dealer must make a special suitability determination for the purchaser and must have
received the purchasers written consent to the transaction prior to sale. If our ordinary shares
or ADSs become subject to these penny stock rules, these disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for our securities, if
such trading market should ever develop. Accordingly, this may result in a lack of liquidity in our
ordinary shares or ADSs, and investors may be unable to sell our securities at prices considered
reasonable by them.
28
We may be required to vacate our principal office as a result of a third-party lawsuit against the
developer of our principle office.
We signed a Pre-sale Contract for Commodity House in Beijing Municipality with Beijing Hengfu
Square Development Company Limited, or Hengfu, to purchase a total 7,992 square meters in Baifu
International Tower, or Baifu Tower, which is where our principal office is located. As of June 26,
2010, we have not obtained the ownership certificate of our principal office as a result of a
third-party lawsuit against Baifu Towers developer.
We were recently notified that Hengfu was sued by an un-related third party for Hengfus alleged
failure to pay certain debts owed to such third party. We believe that in January 2010, the
Beijing First Intermediate Peoples Court, or the Court, promulgated a public order to seize Baifu
Tower. As a result of such lawsuit and seizure, the Court may require us to vacate our principal
office so that the Court can sell Baifu Tower. Even though we believe that the likelihood of the
Courts sale of Baifu Tower is remote, we may have to relocate our principal office if the Court
does sell Baifu Tower, which may affect our business.
Item 4. Information on the Company.
A. History and development of the Company
Our predecessor, Beijing Ninetowns Technology Group Limited, or 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 the computer
hardware and accessories.
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 14, 2002 and then to Ninetowns Digital World Trade Holdings Limited on
April 7, 2003.
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 Global 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.
On September 27, 2006, we changed our name to Ninetowns Internet Technology Group Company
Limited.
On April 2, 2008, we established Beijing Ninetowns Software Co., Ltd., or Ninetowns Software, a PRC
company with a registered capital of RMB100 million. Ninetowns Software is wholly-owned by
Ninetowns Ports.
On May 23, 2008, we established Dongguan Ninetowns Software Technology Co., Ltd., or Dongguan
Ninetowns, a PRC company with a registered capital of RMB5 million. Ninetowns Ports and Ninetowns
Network contributed RMB2 million and RMB3 million in exchange for a 40% and 60% equity interest in
Dongguan Ninetowns, respectively.
On January 12, 2009, we formed NineKitchens e-Catering Services Holdings Limited, a British Virgin
Islands company, which changed its name to Nine Masters (China) E-Catering Services Holdings
Company Limited on February 2, 2009, and subsequently changed its name to Ninetowns Land Group
Limited, or Ninetowns Land, on February 5, 2010. Ninetowns Land is wholly-owned by Ixworth
Enterprises Limited., or Ixworth.
29
On February 6, 2009, we formed Ninetowns Organic Agricultural Holdings Limited, or Organic
Agricultural, a British Virgin Islands company. Organic Agricultural is wholly-owned by Ixworth.
On February 19, 2009, Guangzhou Yuejiu Inspection Services Limited terminated its registration with
Administration of Industry & Commerce of Guangzhou City.
On February 26, 2009, we established Beijing Ninetowns Sky Eco-agriculture Co., Ltd., or Sky
Eco-agriculture, a PRC company with a registered capital of RMB50 million. Sky Eco-agriculture is
wholly owned by Ronghe Tongshang.
On March 13, 2009, we acquired a 100% equity interest through Shanghai New Take Digital Technology
Co., Ltd., or Shanghai New Take, in Shanghai Meihuilong Catering Services Co., Ltd., or Meihuilong,
for a consideration of RMB100,000. Shanghai New Take transferred all equity interest in Meihuilong
to Ninetowns Software on May 7, 2009 for a consideration of RMB0.5 million. We terminated Shanghai
New Takes registration with the relevant governmental authorities and liquidated Shanghai New Take
in January 2010.
On May 5, 2009, we established Guangdong Nine Masters E-Catering Management Co., Ltd., or Guangdong
Nine Masters, a PRC company with a registered capital of RMB50 million. Guangdong Nine Masters is
wholly-owned by Ninetowns Software. We are in the process of terminating its registration with the
relevant governmental authorities.
On June 9, 2009, we established Shanghai Tootoo Eco-agriculture Co., Ltd, or Tootoo
Eco-agriculture, a PRC company with a registered capital of RMB5 million. Shanghai Tootoo is
wholly-owned by Sky Eco-agriculture.
On April 11, 2010, we changed the name of Beijing Ninetowns Network and Software Co., Ltd. to
Beijing Ninetowns Suitable Estate Co., Ltd..
On January 5, 2010, we formed China Genotown Development Holding Limited, or Genotown, a British
Virgin Islands company. Genotown is wholly owned by Ninetowns Land.
We
conduct our business in China through ten PRC subsidiaries, namely (i) Beijing New Take, (ii)
Beijing Ninetowns Digital Technology Limited, or Ninetowns Digital, (iii) Ninetowns Times, (iv)
Ninetowns Ports, (v) Meihuilong, (vi) Guangdong Ninetowns, (vii) Ninetowns Suitable Estate, (viii)
Dongguan Ninetowns, (ix) Ninetowns Software and
(x) Guangdong Nine Masters;
and two VIEs, namely (i) Ronghe Tongshang and (ii) Baichuan,
which we effectively control, through a series of contractual agreements entered into in 2006, 2007
and 2009. Our principal executive offices are located at 22nd Floor, Building No. 1, Capital A
Partners, No.20 Gongti East Road, Chaoyang District Beijing 100020, Peoples Republic of China. Our
telephone number in China is (86 10) 65899922. 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 2007, 2008 and 2009, which totaled approximately RMB191.6 million,
RMB55.7 million and RMB 10.8 million (US$1.6 million), respectively, consisted primarily of
purchase of property and equipment, as well as acquisition of interests in subsidiaries and other
investments. During 2007 and 2008, we paid deposits for the acquisition of property and equipment
in the amounts of RMB34.8 million and nil respectively. We paid deposits of RMB4.8 million (US$0.7
million) for the acquisition of property and equipment in 2009. We anticipate that we will incur
capital expenditures in 2010 of approximately RMB6.8 million (US$1.0 million) to purchase equipment
and software products to support our new software development projects and development of
our new business initiatives and services. We expect to use our cash flow from operations and our
available cash to fund such capital expenditures to execute our business strategy.
30
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; |
|
(ii) |
|
electronic application to the PRC Inspections Administration for goods inspection; |
(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 consist 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 (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 Chinas 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 Administrations 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.
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, approximately
691,000 foreign-invested companies were approved to do business in China as of April 30, 2010, 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 April 30, 2010, only approximately
162,000 engaged in electronic import/export declaration processing. We believe approximately
143,000, or approximately 88.3%, of such users use our enterprise software to complete the
declaration process with the PRC Inspections Administration.
31
In August 2005, the PRC Inspections Administration selected our company as the winning bidder in
connection with the PRC Inspections Administrations 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 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. The distribution of
free software products had a significant adverse effect on our business, our results of operations
and profitability. For example, we sold, together with our franchisees, approximately 210 software
packages of iDeclare.CIQ during the first quarter of 2010, which is significantly lower than the
approximately 1,000 and 400 software packages of iDeclare.CIQ sold by our company and franchisees
during the first quarter of 2008 and 2009, respectively.
In May 2007, the PRC Inspections Administration selected our company as one of the winning bidders
in connection with the PRC Inspections Administrations request for proposals for servicing the
free import/export e-filing software provided by the PRC Inspections Administration. In 2008, we
believe that the PRC Inspections Administration decreased its efforts to promote its free software
and we believe there is uncertainty surrounding the PRC Inspections Administrations future
promotional plans for its free software. Our financial outlook from maintenance servicing of the
free software product has been negatively impacted for the reasons stated above. As a result, we
revised the financial performance assumptions of our business-to-government, or B2G division, which
incorporates our enterprise software and related customer maintenance services and software
development services reporting units, and re-assessed the goodwill in connection with our pre-IPO
acquisitions. Accordingly, we recorded a one-time non-cash goodwill impairment charge of RMB193.6
million in the fiscal year 2007.
In 2008 and 2009, we derived 81.3% and 62.3% of our total net revenues from sales of enterprise
software and related customer maintenance services and 18.6% and 18.5% from software development
services. Specifically, we recognized net revenues from sales of our enterprise software and
related customer maintenance services of RMB77.3 million, RMB85.0 million and RMB 58.4 million
(US$8.6 million) in 2007, 2008 and 2009, respectively. We believe there were approximately 138,000,
140,900 and 142,300 licensees of our enterprise software registered on their data exchange
platforms as of December 31, 2007, 2008 and 2009, respectively.
In 2009, we expanded our research and development initiatives to focus on development of our B2C
e-commerce platform. In April 2010, we began offering our B2C organic food and other household
products platform through our web portal, www.tootoo.cn, on a trial basis in the Beijing
metropolitan area. In addition, we focused on guaranteeing delivery of fresh produce from our
warehouses directly to our customers located in a particular residential community in Beijing. As
our B2C business is currently in a trial stage, it is uncertain whether we will successfully
establish it as one of our primary businesses.
We will be offering our guaranteed fresh delivery services to a particular residential community
in Beijing. We utilize carefully planned delivery routes and various state-of-the-art refrigeration
equipment and specially equipped vehicles to achieve Unbroken Cold Chain Logistics for our fresh
food delivery service. We are able to efficiently control product storage and movement at a low
cost through the use of our proprietary product tracking system,
warehouse management system and delivery data management system, all of which are supported by
advanced information technology.
32
In 2010, we aim to continue our efforts in expanding B2C food initiatives by enhancing our
competitive advantages and upgrading our products and services. We plan to leverage our existing
quality control related expertise and experience to expand our product offerings as future
opportunities present themselves. Specifically, we believe our Unbroken Cold Chain Logistics
could give us a unique advantage in the e-commerce and service industries due to the superb quality
of our products and services. We also plan to pursue selective investment and acquisition
opportunities in various industries including real estate, consumer goods, healthcare and retail
businesses. We intend to increase our revenues primarily by leveraging and strengthening our market
reputation, enhancing value for our clients through broader product offerings and improved customer
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 and promotion
of free software products by the PRC Inspections Administration to end-users and the uncertainties
related to expansion into new businesses, 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 Administrations 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 Administrations own internal electronic processing systems, to
design enterprise software with optimal compatibility with the PRC Inspections Administrations
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
Administrations 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 Administrations 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.
33
Reduction of costs associated with declaration filings
We believe our enterprise software significantly reduces the costs associated with the 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 importers or exporters 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
Administrations 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 Administrations 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:
|
|
we helped build the PRC Inspections Administrations system for accepting and processing
electronic declarations, |
34
|
|
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 April 30, 2010, our enterprise software is being used by approximately 88.3% 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 Administrations and international trade enterprises declaration processing
and other trade-related requirements. We continue to work closely with the PRC Inspections
Administration to refine our enterprise software to reflect changes in the PRC Inspections
Administrations 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 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 Administrations data exchange
platforms, thus making it difficult to use pirated copies of our enterprise software.
35
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 sales team and our franchisees, we maintain three 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. We believe
our management teams (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
While we regularly review and refine our strategic initiatives for our B2G business, we will
continue our effort in expanding our B2C food initiative through the development of our B2C
e-commerce platform. As our B2C business is currently in a trial stage, it is uncertain whether we
will successfully establish it as one of our primary businesses. We will be offering our
guaranteed fresh delivery services to the selected residential community in Beijing. We utilize
carefully planned delivery routes and various state-of-the-art refrigeration equipment and
specially equipped vehicles to achieve Unbroken Cold Chain Logistics for our fresh food delivery
service. We are able to efficiently control product storage and movement at a low cost through the
use of our warehouse management system and delivery data management system, all of which are
supported by our self-designed internal system. We believe Chinas rapidly growing e-commerce
market will 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. 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.
With respect to the new B2C business, we will focus on the establishment of market reputation and
expansion of market penetration by providing high quality products and services.
36
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 three technical support centers operated and maintained
by us and 40 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 and services 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 2009, we expanded our research and development initiatives to focus on development of our B2C
e-commerce platform and in 2010, we plan to continue expanding our efforts in our B2C food
initiatives by enhancing our competitive advantages and upgrading our products and services.
We also plan to pursue selective investment and acquisition opportunities in various industries
including real estate, consumer goods, healthcare and retail businesses.
37
Products and services
In 2008 and 2009, we derived 81.3% and 62.3% of our total net revenues from sales of enterprise
software and related customer maintenance services, 18.6% and 18.5% of our total net revenues from
provision of software development services.
The products and services we offered in 2009 included the following:
Enterprise software
We sold two enterprise software products: (i) iDeclare.CIQ and (ii) iQM.
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, such as site visits to carry
out maintenance procedures and automatic updates of software relating to changes in codes
associated with goods, countries and regions and changes to import/export regulations. In 2007,
2008 and 2009, we generated RMB76.5 million, RMB79.5 million and RMB 57.8 million (US$8.5 million),
respectively, of net revenues from sales of the iDeclare.CIQ basic package and related customer
maintenance services (including the per transaction fees as described below), which represented a
substantial portion of our net revenues from sales of enterprise software in each of those periods.
Prior to 2008, we provided a Pay-Per-Transaction option to our customers in Dongguan. In 2008, we
expanded the Pay-Per-Transaction option to various customers in other areas, who did not want to
pay the annual maintenance fees. Net revenues from sales of enterprise software included RMB21.7
million, RMB27.0 million and RMB 28.7 million (US$4.2 million) of such per-use fees, representing
28.1%, 31.8% and 49.1% of our net revenues for sales of enterprise software in 2007, 2008 and 2009,
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.
38
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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|
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.CIQs 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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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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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:
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Traditional paper-based filing method |
|
iDeclare.CIQ electronic filing method |
declaration form filled manually
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electronic input minimizes mistakes arising
from illegible handwriting |
declaration form physically submitted to the
PRC Inspections Administration
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submission of electronic declaration form
reduces cost and time |
long waiting time in the process of declaration
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no physical queue-up for submission required |
incomplete information or mistakes in
declaration form cause delay, stress and
additional costs
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built-in error detection function helps
prevent omissions and mistakes |
39
iQM series
Our iQM product series was introduced in 2007. The most recently launched version of our iQM
product series is used by international trade enterprises to collect, analyze, monitor, correct and
track product quality-related data from the raw material stages to final production. Our iQM
product series is also used to provide disqualification alerts and assist with order processing and
laboratory management.
Our iQM product series provides the following functions to our enterprise customers: (i) the
declaration of electronic supervision data, (ii) enterprise quality management, (iii) a mobile
business platform and (iv) statistics and quality analyses. Our iQM product series is a production
quality management application that connects enterprises and the electronic supervision system of
the PRC Inspections Administration via the Internet. Our product focuses on live production
procedures at our enterprise customers facilities by utilizing real-time data collection and
supervision of the main aspects of production procedures, including information regarding
management of raw materials, certain production procedures, monitoring of finished goods and
storage management, all in accordance with the requirements of the Hazard Analysis Critical Control
Point, or HACCP, and ISO 9001 quality management systems. HACCP is a process control system which
identifies where potential hazards may occur in the food production process chain and implements
stringent preventative measures. ISO 9001 is one among a series of documents that define certain
requirements for quality management system standards. Since all of the data collected using our iQM
product series can be transferred directly to the PRC Inspections Administration, our iQM product
series significantly improves the efficiency level for governmental inspection of enterprises that
use our product and the overall efficiency of the export process.
Currently, our iQM product series is available only in Guangdong Province, China on a trial basis
and the available versions of our products are industry-specific, ranging from toys and food
processing, aquatic and livestock breeding and vegetation planting. We recognized RMB5.5 million
and RMB0.6 million (US$81,000) in net revenues from sales of iQM and related software maintenance
services in 2008 and 2009, respectively. As of March 31, 2010, we had approximately 1,000
enterprise customers who use our iQM product series. In the short term, we do not expect any
significant change in net revenue from sale of iQM and will maintain services to existing
customers.
iProcess CIQ Series
In 2007, we generated an insignificant amount of revenue from the iProcess CIQ Series and did not
generate revenue from such product in 2008 and 2009.
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 enhancement 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.
We generally recognize revenue from software development services based on a percentage of the work
that is completed and do not recognize any revenue until a contract is signed with customers.
40
Products under development
B2C Business
In April 2010, we began offering our platform of B2C organic food and other household products
through our web portal, www.tootoo.cn, on a trial basis in the Beijing metropolitan area. Our B2C
business is currently in a trial stage, which means it is uncertain whether we will successfully
establish it as one of our primary businesses.
Production and hardware design
In the past, 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 had production arrangements with several outside contractors under which they
provide all necessary outsourced production services related to our enterprise software. Currently,
we generally distribute our iDeclare enterprise software through the Internet and therefore incur
minimal outsourcing costs and costs associated with packaging and shipping of software.
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
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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acceptance of our products and services in China; |
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|
the strength of our relationships with the PRC Inspections Administration, the PRC Customs
and other PRC government agencies; |
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our ability to attract and retain users; |
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our ability to develop new software products and services; |
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PRC government regulation of software sales and development; and |
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general economic conditions in China. |
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.
41
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. The
certificate is renewable every three years and our current certificate is valid until July 25,
2010. 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 franchisees 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 franchises, 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, 2009, we had a sales and marketing force consisting of approximately 40 people,
serving mainly the southern regions of China for our enterprise software. Our sales and marketing
representatives also perform customer maintenance services.
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 our franchisees
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, 2009, we have four
franchisees, Ninetowns Enke, Ninetowns Zhi Fang, Ninetowns Xin He and Ninetowns Wang Li.
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|
Our franchise relationship with Ninetowns Enke began in February 2004. Ninetowns Enke is
also our sales agent for sale of after sales maintenance services for our enterprise
software to our customers. In June 2009, we entered into a new franchise agreement with
Ninetowns Enke for our software product, iQs under the iProcess.CIQ series. In October
2009, we entered into a new franchise agreement with Ninetowns Enke for our software
product, iDeclare.CIQ basic package. Each of these franchise agreements expires on December
31, 2010 and does not contain any minimum sales commitment. |
|
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|
Our relationship with Ninetowns Zhi Fang began in 2005. In June 2009, we entered into a
new franchise agreement with Ninetowns Zhi Fang for our software product, iQs under the
iProcess.CIQ series. In October 2009, we entered into a new franchise agreement with
Ninetowns Zhi Fang for our software product, iDeclare.CIQ basic package. Each of these
franchise agreements expires on December 31, 2010 and does not contain any minimum sales
commitment. |
42
|
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|
Our relationship with Ninetowns Xin He began in 2006. In June 2009, we entered into a
new franchise agreement with Ninetowns Xin He for our software product, iQs under the
iProcess.CIQ series. In October 2009, we entered into a new franchise agreement with
Ninetowns Xin He for our software product, iDeclare.CIQ basic package. Each of the
franchise agreements with Ninetowns Xin He expires on December 31, 2010 and does not
contain any minimum sales commitment. |
|
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|
Our relationship with Ninetowns Wang Li began in 2006. In June 2009, we entered into a
new franchise agreement with Ninetowns Wang Li for our software product, iQs under the
iProcess.CIQ series. In October 2009, we entered into a new franchise agreement with
Ninetowns Wang Li for our software product, iDeclare.CIQ basic package. Each of these
franchise agreements with Ninetowns Wang Li expires on December 31, 2010 and does not
contain any minimum sales commitment. |
|
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Our franchisees provide customer maintenance services to our enterprise software users.
We intend to focus on establishing new franchisee arrangements in the future. |
For 2007, 2008 and 2009, net revenues from the sale of enterprise software and related customer
maintenance services generated by our franchisees amounted to approximately RMB50.7 million,
RMB54.3 million and RMB 45.9 million (US$6.7 million), respectively.
Customers
In 2009, our customers for sales of enterprise software and related customer maintenance services
include 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 2007, 2008
and 2009, our four largest enterprise software customers, which consisted of our franchisees,
accounted for approximately 65.9%, 63.8% and 78.6%, respectively, of our net revenues from sales of
enterprise software and related customer maintenance services.
Our customers for software development services include the PRC Inspections Administration,
iTowNet, eGrid and other third party customers. iTowNet and eGrid accounted for substantially all
of our net revenues for provision of software development services in 2006. In 2007, 2008 and
2009, we did not generate any revenue from provision of software development services to eGrid. In
2007, 2008 and 2009, we generated nil, nil, and RMB 0.4 million (US$51,275) from provision of
software development services to iTowNet.
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 free customer maintenance services we provide in connection with our software products
generally include:
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after-sales software maintenance; |
|
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help-desk via telephone; and |
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non-specific enhancement of the software on a when-and-if-available basis. |
43
The paid customer maintenance services we provide in connection with our software products
generally include:
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|
site visits to carry out maintenance procedures; |
|
|
support via facsimile and email; |
|
|
updates and enhancement to the software through the Internet and our website; |
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automatic updates of software relating to changes in codes associated with goods, countries
and regions and changes to import/export software; and |
|
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training for new updates to our enterprise software. |
Our franchisees also provide customer maintenance services, including help-desk support via
telephone or e-mail, site visits for maintenance procedures and software training.
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, 2007, 2008 and 2009, we had together
with our four franchisees, 192, 155 and 133 customer service and technical support personnel,
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 Administrations 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 historically, one
of our major customers in our software development business, to provide software development
services to iTowNet. iTowNet has developed its own platform for providing software development
services and now provides software development services directly to its customers, such as the PRC
Inspections Administration, that are similar to the software development services that we provide
to our customers. As a result, iTowNet became one of our competitors in our software development
services business.
We believe that the principal factors upon which we compete are:
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reputation in the market; |
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understanding of the needs of PRC international trade-related government agencies, such as
the PRC Inspections Administration, as well as endorsements from such agencies; |
|
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the quality of our products and services; |
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responsiveness to the needs of users; |
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installed base of international trade enterprise customers; |
44
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cost-effectiveness; and |
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, 2009, we had registered 50 software copyrights and 17 trademarks in China and
one registered trademark for our name Ninetowns in the United States. We are in the process of
registering certain of our other trademarks in 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.
Winding Down of B2B Business and Focus on Business Opportunities
On October 19, 2006, our indirect wholly-owned subsidiary, Beprecise Investments Limited, or
Beprecise, acquired a 16.25% interest in Global Market Group Limited, or Global Market, a leading
Chinese B2B trade facilitator headquartered in Guangzhou. However, our equity interest in Global
Market decreased to 9.9% in March 2008 due to dilution caused by Global Markets financing
activities. In November 2008, Global Market re-purchased approximately 300,000 of its series A
shares from us for approximately US$1.1 million which resulted in a net gain for us of
approximately RMB2.2 million and a further decrease of our equity interest in Global Market to
9.03%. In June 2010, we entered into a share purchase agreement with Global Market, under which
the Global Market and Shanghai International Growth Investment Limited purchased 24,714,225 Series
A preferred shares from us for a cash consideration of RMB26.4 million (US$3.9 million). Our equity interest
in Global Market was further reduced to 3.55%. On April 27, 2007, Ixworth, our wholly owned
subsidiary, acquired a 70.0% interest in Ample Spring Holdings Limited, a related party of
Baichuan, a leading Chinese B2B vertical search engine operator. We launched our new B2B vertical
search platform, tootoo.com in May 2007, through which we offered our B2B business and services.
We launched the second generation of tootoo.com in June 2007. On December 14, 2007, we acquired a
19.8%
interest in Hangzhou Tophere Info-Tech Inc, a leading Chinese business-to-business food and
beverage trade facilitator headquartered in Hangzhou.
45
Throughout 2007, 2008 and the first fiscal quarter of 2009, we focused our efforts on developing
our B2B business. However, in March 2009, we announced our decision to wind down our B2B business.
This decision was made in light of the recent major changes in the global economic environment and
is expected to enable Ninetowns to better manage its investments for long-term growth.
We plan to leverage our existing quality control related expertise and experience to develop and
expand our business offerings as future opportunities present themselves. Specifically, we believe
our expertise and experience in B2G software development, quality control and e-service solutions,
along with the infrastructure developed in the course of our B2B expansion, such as our online
search technology, quality risk control algorithm and our quality-driven supplier evaluation
system, are tools that give us a unique advantage in the e-commerce and service industries. We also
plan to pursue selective investment and acquisition opportunities in various industries including
real estate, consumer goods, healthcare and retail businesses.
In 2010 and 2011, we will continue our efforts in our B2C food initiatives by enhancing our
competitive advantages and upgrading our products and services.
Regulation
Regulation relating to the food safety
On February 28, 2009, the National Peoples Congress issued the Food Safety Law of the Peoples
Republic of China, or the Food Safety Law, to assure food safety and safeguard peoples health and
life, which became effective from June 1, 2009. On July 20, 2009, the State Council promulgated the
Regulation on the Implementation of the Food Safety Law, or the Regulation, and the Regulation
became effective on the same day. According to the Food Safety Law and the Regulation, the State
implements a licensing system for food production and trading, any organization or individual
engaged in food production or trading activities shall obtain the food production license or food
distribution license.
Under the Food Safety Law, any food producer or trader engaged in food production or trading
activities without a license, shall have any and all illegal benefits confiscated by the relevant
authorities and be subjected to a fine up to 10 times the total value of the commodity.
Regulation relating to Road Transport
On April 30, 2004, the State Council promulgated the Regulation on Road Transport, or the
Regulation. According to the Regulation, the State implements a licensing system for road
transport, any organization or individual engaged in goods road transport shall obtain the road
transport operating license.
Under the Regulation, any road transport operator engaged in road transport activities without a
license, shall have operation suspended, any and all illegal benefits confiscated, be subjected to
a fine and shall face criminal charges if their acts constitute crimes.
Regulation relating to the Internet Information Service
On September 25, 2000, the State Council promulgated the Regulation on Internet Information
Services of the Peoples Republic of China, or the Regulation, which became effected on the same
day. According to the regulation, Internet information service is divided into two categories:
profitable Internet information service and non-profitable Internet information service, and the
State established a licensing system for profitable Internet information service and a filing
system for non-profitable Internet information service. Under the Regulation, any organization or
individual engaged in profitable Internet information service shall obtain a license for
value-added telecommunication services, or the Service License (ICP license).
46
Under the Regulation, those who violate the Regulation by providing profitable Internet information
service without obtaining the Service License or by providing service not contained in the Service
License shall be ordered to redress their violations and their illegal income be confiscated. A
penalty shall be imposed. In a serious case, the website shall be ordered to close.
Regulation relating to the Animal Epidemic Prevention
On January 1, 1998, the National Peoples Congress issued the Law of The Peoples Republic of China
on Animal Epidemic Prevention, or the Law, amended on August 30, 2007, which became effected in
January 1, 2008. On January 21, 2010, the Ministry of Agriculture promulgated the measures on
examining the requirements for animal epidemic prevention, or the Measures, which became effected
on May 1, 2010. In accordance with the Law and the Measures, any organization or individual engaged
in raising animals shall obtain a certificate of animal epidemic prevention.
Under the Law, those who violate the Law by raising animals without obtaining the certificate of
animal epidemic prevention shall be ordered to redress their violations and be subjected to a fine.
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 Peoples 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 and on October 31, 2007, 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 requirements 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.
47
In the opinion of our PRC counsel, Commerce & Finance Law Offices, the ownership structures,
businesses and operations of our subsidiaries and VIEs in China comply with applicable PRC laws in
all material aspects, 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.
48
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 Peoples Congress on September 7, 1990
and effective from June 1, 1991 as amended on October 27, 2001, 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 Chinas 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 the 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 applicants 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 March 1, 2009, the MIIT issued the new Measures Concerning Software Products Administration,
which became effective on April 10, 2009, to regulate and administer software products and promote
the development of the software industry in China.
Pursuant to the new Measures Concerning Software Products Administration, software products are
required to be registered and filed with the MIIT or the provincial software industry authorities.
Before the provincial software industry authorities issue software products registration numbers
and software products registration certificates to the applicants, the application materials should
be filed with the MIIT and the software products should be announced without objection for a
seven-day period. To produce software products in China, the software production units should have
the copyright of the software or are licensed to produce such software products. 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 terms as well as the technical
services to be provided by the distribution agent. The MIIT and other relevant departments may
carry out supervision and inspection over the development, production, operation and import/export
activities of software products in China.
49
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, or EIT, for two years starting from the first profit-making year of
operations and a 50.0% relief from the PRC EIT 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 EIT 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 in 1997 and 2008. On June 20, 1996, the Peoples 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.
50
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); and (iii) the
Company Law (1993), as amended in 2005.
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 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. The restricted portion of their net assets amounted to
approximately RMB 550.3 million (US$80.6 million), or 59.7% of our total consolidated net assets as
of December 31, 2009.
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; |
51
|
|
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
The 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, the 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 1990s, 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 Peoples 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.
52
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 Regulations of the Peoples Republic of China on Origin of Imported
and Exported Goods issued on September 3, 2004, which became effective on January 1, 2005, 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 Peoples Republic of China on Import and Export Commodity Inspection adopted by the
Standing Committee of the Seventh National Peoples 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 August 31,
2005, the State Council promulgated the Implementing Provisions for the Law of the Peoples
Republic of China on Import and Export Commodity Inspection, which became effective on December 1,
2005 and stipulates particular requirements for the import and export commodity inspection.
Quarantine inspection
The Standing Committee of the PRC National Peoples 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.
53
C. Organizational structure
We conduct substantially all of our business through ten PRC subsidiaries and two VIEs in China.
The following diagram illustrates our subsidiaries, their country of incorporation and the
proportion of our ownership of each as of May 31, 2010.
For details of the above subsidiaries and VIEs, see History and development of the company.
54
D. Property, plants and equipment
Our principal executive offices occupy a total of approximately 7,992 square meters on the 19th to
23rd and 25th floors of Building No. 1, Capital A Partners, No. 20 Gongti East Road,
Chaoyang District, Beijing 100020, PRC (the Principal Office). In addition, we occupy a
representative office of approximately 10 square meters at 11F, KaWah Bank Centre, 232 Des Voeux
Road, Central, Hong Kong. As of May 31, 2010, we have two premises that we own and we have also
leased three premises in the following cities and municipalities to serve as technical support
centers and quarters for our technical support staff:
|
|
|
|
|
|
|
|
|
|
|
Space |
|
|
Number of |
|
Location of Leased Properties |
|
(in square meters) |
|
|
employees |
|
Guangzhou |
|
|
120.85 |
|
|
|
40 |
|
Beijing |
|
|
328.74 |
|
|
|
24 |
|
Shanghai |
|
|
139.00 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Total |
|
|
588.59 |
|
|
|
70 |
|
|
|
|
|
|
|
|
We also leased a premise with approximately 4,300 square meters in Beijing to serve as our
warehouse for our fresh delivery services for our B2C business.
We also leased a land with approximately 70,320 square meters in Beijing to serve as the farm for
self-grown goods for our B2C business.
We have not obtained the ownership certificate for the Principal Office due to an ongoing lawsuit
filed against the building developer by an un-related third party.
Further, on October 30, 2008, Ninetowns Software and the Beijing Municipal Bureau of Land Resources
Economic-Technological Development Area Branch entered into a land grant contract and a
supplemental agreement, pursuant to which Ninetowns Software acquired land use rights for 58,526.58
square meters of land located in Lu Dong District, Beijing Economic-Technological Development Area.
In May 2010, Ninetowns Software acquired the projects construction land use layout permit and
obtained the land use right certificate.
We currently support our existing users jointly with our four franchisees through three technical
support centers operated and maintained by us, and 40 technical support centers operated and
maintained by our four franchisees located in most of the major import/export cities in China.
Insurance
We do not maintain business liability insurance and to our knowledge, other software companies in
China do not maintain such insurance. We do maintain vehicle liability insurance. 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 4A. Unresolved Staff Comments
Not applicable.
55
Item 5. Operating and Financial Review and Prospects.
Overview
We are a leading provider of online solutions for international trade, with our key services in
automating import/export e-filings. 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 believe there were approximately 138,000,
140,900 and 142,300 licensees of our enterprise software registered to effect electronic
import/export processing with the PRC Inspections Administration as of December 31, 2007, 2008 and
2009, respectively.
We generated total net revenues of RMB103.0 million, RMB104.5 million and RMB93.8 million (US$13.7
million) in 2007, 2008 and 2009, respectively. The decrease in our total net revenues in 2009 was
primarily due to decreased sales from our iDeclare.CIQ software package sales and services and iQM
product series. Our net loss attributable to the Company in 2007 was RMB230.5 million, decreasing
to RMB169.6 million in 2008. Our net income attributable to the Company in 2009 was RMB 1.3 million
(US$0.2 million). The net income attributable to the Company in 2009 was mainly due to (i) the
increased revenue from our B2C business, and (ii) increased income from our investment activities.
We periodically invest our excess cash in highly liquid equity securities. In addition, from time
to time we write call and put options through listed exchange as part of our investment strategy.
Our investment committee approves the investment policy covering the investment parameters to be
followed with the primary goals being the safety of principal and maintaining the liquidity of
funds. As of December 31, 2009, we held equity securities with a total value of approximately
RMB51.2 million (US$7.5 million), which we purchased from Chinas A-Share stock exchanges. We also
made investments in the U.S. capital markets through investments in equity securities and call and
put options. As of December 31, 2009, we held equity securities with a total value of
approximately RMB120.0 million (US$17.6 million) that we purchased from the securities markets in
the United States. In 2009, we recognized approximately RMB63.2 million (US$9.3 million) from our
investment activities.
The major factors affecting our results of operations and financial condition include:
Focus on sales of enterprise software and related customer maintenance service
In 2009, we engaged in three main lines of business: (i) sales of enterprise software and related
customer maintenance services, (ii) provision of software development services, (iii) B2C e-Grocery
services. Furthermore, the provision of software development services has become a less significant
line of business over time. We intend to continue deploying our resources on sales of enterprise
software and related customer maintenance services and on our B2C e-grocery services. In addition,
we also intend to leverage our existing expertise in quality control and e-service solutions to
explore and develop other business opportunities.
Slowdown of the import/export industry in China
Our financial results have been, and we expect them to continue to be, affected by the
import/export industry in China. The growth of Chinas import/export volume experienced a slowdown
in 2008 and 2009, falling from over 20% each year for the prior six consecutive years to 17.8% and
-13.9% in 2008 and 2009, respectively. We believe that a number of factors have contributed to
this slowdown, including macroeconomic measures and monetary policies adopted by the PRC government
and the global financial crisis. However, Chinas import/export volume
for the first quarter of 2010 increased by 44.1% compared to the first quarter of 2009. We believe
Chinas import/export volume will continue to grow and create additional demand for our products
and services.
56
Change in number of potential users
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 functions of
the free software are similar to those of iDeclare.CIQ and iProcess.CIQ, the provision of such
software products free-of-charge by the PRC Inspections Administration has a material adverse
effect on our results of operations and on our future profitability.
Although the number of users of our enterprise software has increased significantly since we first
launched our iDeclare.CIQ software products in August 2000, the growth in the number of potential
users has declined significantly in recent years. The initial increase was 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. The
recent decrease was due to the PRC Inspections Administrations distribution of its free software.
We expect an increase in the number of PRC international trade enterprises as the PRC economy
continues to expand over time, but such increase may also be slowed significantly by the recent
global financial crisis. We believe the long term growth of the import/export market 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.
While the growth rate of our user base has decreased continuously, we believe that we have
continued to make sales of our iDeclare.CIQ software packages and related customer maintenance
services due to certain benefits offered to our paid customers that are not offered to users of the
free software. The PRC Inspections Administrations 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, has had 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 400 software packages of iDeclare.CIQ during the first quarter of 2010,
which is similar to the number of software packages of iDeclare.CIQ sold by our company and our
franchisees during the first quarter of 2009. Since 2008, we believe that the PRC Inspections
Administration decreased its efforts to promote its free software and we believe there is
uncertainty surrounding the PRC Inspections Administrations future promotional plans for its free
software. Additionally, the slowdown in Chinas economy caused in part by the recent global crisis
in the financial services and credit markets has also negatively impacted our sales of iDeclare.CIQ
software packages.
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, approximately 691,000 foreign-invested companies were approved to do business in China as
of April 30, 2010. 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.
57
Description of revenues, cost items and trade receivables
At December 31, 2009, we primarily operate in two business segments: (i) B2G services and (ii) B2C
services. Our B2G business segment includes sales of enterprise software and related customer
maintenance services and software development services. Currently, our total net revenues are
primarily derived from our sales of enterprise software and related customer maintenance services.
Total net revenues
Currently, we generate total net revenues primarily from our B2G segment which includes (i) sales
of enterprise software and related customer maintenance services and (ii) fees from software
development services, and our new B2C business.
Except for VAT rebates from the Chinese tax authorities as part of the PRC governments policy of
encouraging software development in the PRC, we report total net revenue net of business taxes. 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, four of our subsidiaries in China are entitled to a 14.0% VAT
rebate for certain self-developed software products. We recognize the VAT rebates at the same time
we recognize net revenues from sales of enterprise software. VAT rebates are included in our net
revenues from sales of enterprise software. In 2009, we recognized RMB 0.9 million (US$0.1 million)
in VAT rebates. We cannot predict how much our net revenues from sales of our enterprise software
and related customer maintenance services or software development services will increase in the
future, or if they will increase at all.
Enterprise software and related customer maintenance services: 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. 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.
We currently sell our enterprise software and provide related customer maintenance services through
four franchisees. Our per-unit license fee for enterprise software products charged to our
franchisees is based on our negotiated sales arrangement with the 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
Pay-Per-Transaction basis to various users. Our ability to grow our net revenues from sales of
enterprise software and related customer maintenance services will depend on (i) the rate of
increase in the number of new users of such product, (ii) the markets 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. The distribution
of free enterprise software by the PRC Inspections Administration has adversely affected our
ability to grow our net revenues from sales of enterprise software and related customer maintenance
services.
58
Notwithstanding that we 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 uncertain how many
of our users will pay for such
maintenance services. In 2009, we collected customer maintenance service fees from approximately
18,300 users, representing approximately 13% of our users due to the renewal of their maintenance
service agreements. 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 rebate is eliminated or reduced by the PRC tax
authorities.
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. 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 percentage of actual hours incurred to date for each contract to the
estimated total hours to be incurred for each contract at completion. We experienced a significant
decline in our net revenues from the provision of software development services starting in 2007
and we expect such decline to continue over time due to decreasing demand for such services and an
increase in competition for software development service contracts from other service providers.
For example, iTowNet has developed its own platform for providing software development services and
now provides software development services directly to its customers, such as the PRC Inspections
Administration, that are similar to the software development services that we provide to our
customers.
B2C services: During the first half of 2009, we launched a portal site, www.tootoo.cn, to serve as
an e-grocery platform targeting Chinese consumers primarily in Beijing and Shanghai metropolitan
areas. This platform is designed as an online grocery store, with offerings of organic products and
other fresh and natural products, as well as delivery services direct from farm to table. We
established partnerships with two local Beijing organic farms, Beijing Qingpuyuan Farm Land and
Huaixiang Organic Farm Land, to assist us with upholding and maintaining quality control standards
for product sourcing. In addition, in order to attract potential customers to this e-grocery
platform as well as to promote the tootoo.cn branding, we organized and participated in various
events such as mother and baby health seminars, organic farm field trips, and various food-related
events. Throughout the second half of 2009 and in the early part of 2010, we made significant
progress on our online grocery retail initiative. In April 2010, the online retail platform
www.tootoo.cn underwent a complete upgrade, with the addition of new features including a
convenient online payment service and a more diverse offering of organic products, fresh
vegetables, fruits, and household goods and consumer products. tootoo.cn currently carries over
3,000 products in 16 different categories. Furthermore, we established our first warehouse with
approximately 4,300 square meters, functionally divided into an ordinary temperature warehouse,
refrigerated / frozen warehouse, processing workshop, office and other functional facilities.
We believe we are the first retailer in Beijing to offer guaranteed home deliveries of fresh
produce and groceries. We believe that the market for online shopping in China is large and
growing quickly. While the e-Grocery market represents a small and nascent segment of the broader
ecommerce industry, we are very optimistic about the future prospects of this market in China and
are confident that our unique positioning, diversified offering and high quality services will
enable us to create long-term shareholder value.
Cost of revenues
Our cost of revenues consists principally of costs related to (i) sales of our enterprise software
and related customer maintenance services, (ii) our provision of software development services,
(iii) our provision of B2C e-Grocery services.
59
Enterprise software and related customer maintenance services: We distribute our software directly
to end-users to distributing them through our franchisee network via the Internet. As such, the
costs of revenues for our enterprise software is minimal because of low production costs, packaging
costs and shipment costs. Additionally the franchisees have been providing a majority of our
software maintenance services to customers for us. We therefore incurred declining direct costs to
provide software maintenance services to customers.
As a result of the above factors, cost of revenues for enterprise software and related customers
maintenance services was immaterial.
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 to be incurred
for each contract at completion. We expect our cost of revenues related to software development
services to decrease in line with a decrease in the demand for our services.
B2C services: Our costs of B2C services consist primarily of procurement costs for products sold,
and direct costs associated with food related products and services, including salaries, employee
benefits and overhead costs associated with employees providing the related services.
Gross profit margin
Our gross profit margin is primarily affected by our net revenues from sales of enterprise software
and related customer maintenance services, the cost of revenues for our software development
services and B2C services. We expect our enterprise software and related customer maintenance
services gross profit margin to remain stable. We expect our software development services gross
profit margin to decrease as we invest in more advanced technologies in new software development
projects.
Operating expenses
Our operating expenses consist of (i) selling expenses, (ii) general and administrative expenses,
(iii) research and development expenses, and (iv) (allowance for) recovery of doubtful accounts. 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. We recognize
stock-based compensation cost on a straight-line basis over the requisite service period, which is
the vesting period.
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. We expect to expand our marketing and advertising campaigns to
promote our new B2C business, specifically in the food products and services industries.
General and administrative expenses: General and administrative expenses consist primarily of
personnel expenses, office rental expenses, general office expenses, travel and entertainment
expenses and professional fees. We expense all general and administrative expenses as they are
incurred. In 2009, we incurred lower general and administrative expenses than in earlier years as a
result of the implementation of our cost reduction program which led to decreases in office
expense, entertainment, communication expense and travel expense.
60
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 generally 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
expected increase in our potential new business ventures and (iv) our investment in software
licenses for development tools to increase the productivity of our overall research and development
efforts. However, research and development expenses decreased in 2009. This decrease was mainly
attributable to the reduction in our headcount and depreciation expenses associated with disposed
fixed assets. For 2010, we expect to incur additional research and development expenses as we shift
our focus to B2C and expand our research and development initiatives to include other service
offerings. Specifically, we are exploring the potential expansion of our business by leveraging
our experience in B2G quality control and e-service solutions. We have focused our research and
development initiatives to include our B2C offerings through our e-commerce platform, tootoo.cn.
As our B2C business is under development, we may not successfully introduce it as one of our
primary businesses.
Provision for doubtful accounts: In 2007, we believe that the PRC Inspections Administration
decreased its efforts to promote its free software and we believe there is uncertainty surrounding
the PRC Inspections Administrations future promotional plans for its free software. Accordingly,
we made a provision of approximately RMB19.9 million for doubtful accounts against our receivables
specifically in relation to our building of certain electronic systems for the PRC Inspections
Administration that enable the free software to process electric declarations over the Internet. In
2008, we wrote off these trade receivables against the allowance for doubtful accounts. In
addition, in 2008 we made a further provision of RMB2.9 million based on aging analysis of trade
receivables, customers credit-worthiness, past collection history, and changes in a customers
payment terms. In 2009, a RMB26.3 million (US$3.8 million) provision for bad debts were made in
light of the significant increase of the risk of collection such receivables.
As a result of the cumulative effect of the factors described above, we expect that in the future
our total operating expenses will decrease.
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 EIT: Our PRC operating subsidiaries and VIEs are subject to PRC EIT on their taxable income.
Pursuant to PRC tax laws effective January 1, 2008, EIT is generally assessed at the rate of 25.0%
of taxable income.
Ninetowns Ports was subject to a 7.5% EIT in 2007, 25% EIT in 2008 and 15% EIT in 2009. Guangdong
Ninetowns Technology was entitled to an exemption in 2007, was subject to 7.5% EIT in 2008 and 15%
EIT in 2009. Ninetowns Network was entitled to an exemption from EIT from January 1, 2006 to
December 31, 2007 and was subject to a 25% EIT in 2008 and 2009.
61
Ninetowns Digital, Beijing New Take, Ninetowns Times, Ninetowns Ports and Ninetowns Network were
qualified as High and New technology enterprises and were granted preferential EIT rates based on
such status. Shanghai New Take was 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 High and New technology enterprise. Since the promulgation of the
new Measures for Recognition of High and New Technology Enterprise effective as of January 1, 2008,
Beijing New Take, Ninetowns Times, Ninetowns Digital and Ninetowns Network have been temporarily
subject to a 25.0% EIT.
Baichuan, Ronghe Tongshang, Ninetowns Software, Dongguan Software, Guangdong Nine Masters, Sky
Eco-agriculture, SH Meihuilong, and Tootoo Eco-agriculture were subject to a 25.0% EIT in 2009.
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 and VIEs 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 VAT of 17.0% on
sales of enterprise software products. Pursuant to PRC tax regulations, Ninetowns Network and
Ninetowns Ports are entitled to a 14.0% VAT rebate on sales of certain registered self-developed
software products. Our net revenues from sales of such enterprise software include VAT rebates in
the amount of RMB4.3 million, RMB2.9 million and RMB 0.9 million (US$0.1 million) in 2007, 2008 and
2009, respectively. After we became a general VAT taxpayer in May 2010, except for self-grown
products which are exempted from VAT, other goods are subject to VAT rates of 13% and 17%.
Upon expiration of these preferential EIT rates and VAT rebates, we will consider available
options, if any, in accordance with applicable law, that would enable us to qualify for further tax
incentives.
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
Currently, our revenue is mainly derived from the following sources: (i) sale of enterprise
software and related services; (ii) software development services, and (iii) B2C services.
Revenue from the sale of enterprise software and maintenance service is recognized when there is
evidence of an arrangement, the delivery or service has occurred, the fee is fixed or determinable,
and collectability is probable. As we do not have vendor-specific objective evidence to establish
the fair values of the undelivered elements, we recognize revenue from sales of enterprise software
and maintenance service on a straight-line basis over the service period which is typically 12
months.
For certain customers, we install the software at the customers place of business and charge the
customer a fixed fee based on actual usage of the software. Accordingly, we recognize the related
revenue when the customer uses the software. The cost to install the software has historically been
insignificant.
62
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. 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 contract at
completion.
Certain revenue from software development services also includes hardware procurement by customers
request. Since we do not have vendor-specific objective evidence to allow for separating various
components of such software development service contracts, we recognize such revenues when all
components under the contracts are delivered and the project is completed upon the receipt of a
written acceptance from the customer.
In general, B2C revenues are generally recognized upon delivery and revenues from catering services
are generally recognized when the catering services are provided.
Trade receivables
We perform ongoing credit evaluations of our customers and adjust credit limits based on payment
history and the customers current credit-worthiness, as determined by our review of their current
credit information. 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 allowances for
doubtful accounts for estimated losses resulting from the inability of its customers to make the
required payments and use the specific identification method to record such allowances. We write
off such trade receivables and specific allowances in one year if circumstances are not improved.
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. As of December 31, 2009, all of our billed receivables were from our
customers and franchisees. Since our billed 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 collectability of our billed
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 2007. 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 units 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.
In 2007, based on the impairment assessment performed by management, we recognized a total goodwill
impairment charge of RMB193.6 million related to our enterprise software and related customer
maintenance services and software development services. We also recorded in 2008 a total goodwill
impairment charge of RMB78.1 million relating to our B2B business, and this impairment charge was
included in net loss from discontinued operations. No goodwill impairment losses were recorded in
the year ended December 31, 2009.
63
Impairment of Long-lived Assets
We evaluate our long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable. When these events occur,
we measure 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, we would
adjust the carrying value of the asset based on the fair value and recognize an impairment loss.
Fair value is estimated using expected discounted future cash flows. We recorded in 2008 a total
long-lived assets impairment charge of RMB48.1 million relating to our B2B business, and this
impairment charge was included in net loss from discontinued operations. No long-lived assets
impairment losses were recorded in the year ended December 31, 2009.
Useful Life of Intangible Assets
Intangible assets include customer relationships, buyer database, completed technology, and
purchased software for internal use and land use rights. Intangible assets are amortized on a
straight-line basis over the expected useful life of five years, except land use rights which have
an expected useful life of fifty years.
Share-based Compensation
The Company recognizes share-based compensation cost on a straight-line basis over the requisite
service period, which is generally the vesting period, and measures the cost of employee services
received in exchange for share-based compensation at the grant date fair value of the awards.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves
us estimating our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and, to the extent we believe that recovery is not likely, we must establish
a valuation allowance. To the extent we establish a valuation allowance or increase this allowance
in a certain period, we must include an expense within the tax provision in the statement of
operations.
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred
tax assets. The valuation allowance is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax assets will be recoverable. In the
event that actual results differ from these estimates or we adjust these estimates in future
periods, we may need to establish an additional valuation allowance, which could materially impact
our financial position and results of operations.
Since January 1, 2007, we are also required to evaluate our tax positions to determine whether we
have any unrecognized tax benefits resulting from the differences between positions taken on our
tax returns and benefits measured and recognized in our financial statements. Significant
management adjustment is required in this process. Interests and penalties as a result of income
tax filings are classified as part of our income taxes.
64
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
|
|
December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Total net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise software and related
customer maintenance services |
|
|
75.1 |
% |
|
|
81.3 |
% |
|
|
62.3 |
% |
Software development services |
|
|
24.9 |
% |
|
|
18.6 |
% |
|
|
18.5 |
% |
Food sales and services |
|
|
|
|
|
|
0.1 |
% |
|
|
19.2 |
% |
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise software and related
customer maintenance services |
|
|
|
|
|
|
|
|
|
|
|
|
Software development services |
|
|
-17.2 |
% |
|
|
-11.9 |
% |
|
|
-12.3 |
% |
Food sales and services |
|
|
|
|
|
|
-0.1 |
% |
|
|
-18.2 |
% |
Gross profit |
|
|
82.8 |
% |
|
|
88.0 |
% |
|
|
69.5 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
|
-31.4 |
% |
|
|
-21.0 |
% |
|
|
-18.5 |
% |
General and administrative |
|
|
-71.5 |
% |
|
|
-72.3 |
% |
|
|
-67.1 |
% |
Research and development |
|
|
-24.3 |
% |
|
|
-17.8 |
% |
|
|
-18.5 |
% |
Allowance for doubtful accounts |
|
|
-21.7 |
% |
|
|
-2.8 |
% |
|
|
-28.0 |
% |
Impairment of goodwill |
|
|
-188.0 |
% |
|
|
|
|
|
|
|
|
Government subsidies |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
-253.3 |
% |
|
|
-25.7 |
% |
|
|
-62.6 |
% |
Interest income |
|
|
13.5 |
% |
|
|
6.7 |
% |
|
|
4.6 |
% |
Gain on sales of short-term investments |
|
|
42.3 |
% |
|
|
9.4 |
% |
|
|
37.8 |
% |
Change in fair value of marketable options |
|
|
|
|
|
|
|
|
|
|
29.5 |
% |
Gains from disposal of investments under
cost method |
|
|
|
|
|
|
2.1 |
% |
|
|
|
|
Other income |
|
|
|
|
|
|
0.3 |
% |
|
|
4.2 |
% |
Net (loss) income from continuing
operations before income tax and
non-controlling interests |
|
|
-197.3 |
% |
|
|
-7.1 |
% |
|
|
13.5 |
% |
Income tax expense |
|
|
-3.0 |
% |
|
|
-0.8 |
% |
|
|
-4.4 |
% |
Net (loss) income from continuing
operations |
|
|
-200.5 |
% |
|
|
-7.9 |
% |
|
|
9.1 |
% |
Net loss from discontinued operations |
|
|
-23.4 |
% |
|
|
-154.3 |
% |
|
|
-7.7 |
% |
Net (loss) income attributable to the
Company |
|
|
-223.9 |
% |
|
|
-162.2 |
% |
|
|
1.4 |
% |
2009 compared to 2008
Total net revenues
We generated total net revenues of RMB93.8 million (US$13.7 million) in 2009, an decrease of 10.3%
over our total net revenues of RMB104.5 million in 2008. This revenue decrease was principally due
to decreased sales from the iDeclare.CIQ series.
65
Enterprise software and related customer maintenance services. Net revenues from sales of our
enterprise software and related customer maintenance services decreased by 31.3% to RMB58.4 million
(US$8.6 million) in 2009 from
RMB85.0 million in 2008, primarily due to decreased sales from our iDeclare.CIQ software package
and iQM product series. In 2009, we signed customer maintenance service contracts with
approximately 18,300 users whose customer maintenance service contracts were due for renewal in
2009. We recognized net revenues of RMB7.0 million (US$1.0 million) from sales of our enterprise
software in 2009. We recognized net revenues of RMB51.4 million (US$7.5 million) from provision of
customer maintenance services in 2009, including fees collected from Pay-Per-Transaction users. Of
our net revenues from sales of enterprise software and related customer maintenance services of,
RMB5.5 million and RMB 0.6 million (US$81,733) were from sales of the iQM product series and
related software maintenance services in 2008 and 2009, respectively, representing a year-on-year
decrease of 89.1%. In addition, RMB27.0 million and RMB 28.7 million (US$4.2 million) were from
the Pay-Per Transaction filing fees in 2008 and 2009, respectively, representing a year-on-year
increase of 6.3% from 2008 to 2009. We sold approximately 1,500 software packages of iDeclare.CIQ
in 2009, which is significantly lower than the approximately 2,900 software packages of
iDeclare.CIQ sold in 2008, representing a year-on-year decrease of 48.3%.
Software development services. Net revenues from our software development services decreased by
10.8% from RMB19.5 million in 2008 to RMB17.4 million (US$2.5 million) in 2009 because the number
of hardware support and maintenance contracts entered into by Guangdong Ninetowns and the
Administration for Quality Supervision and Inspection and Quarantine of Guangdong in 2009 decreased
significantly compared to 2008.
B2C services. Net revenues from our B2C services was RMB18.0 million (US$2.6 million) in 2009
compared to nil in 2008. This is a new business.
Cost of revenues
Enterprise software and related customer maintenance services. The cost of revenues consists mainly
of direct costs associated with the delivery of customer maintenance services, including salaries,
employee benefits and overhead costs associated with employees providing related services. 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. The
franchisees provide a majority of our software maintenance services to our customers for us. Cost
of revenues from enterprise software and related customer maintenance services were insignificant
in 2008 and 2009.
Software development services. Cost of revenues from software development services decreased to
RMB11.6 million (US$1.7 million) in 2009 from RMB12.4 million in 2008. As of December 31, 2009, we
did not have any capitalized costs related to such projects.
B2C services. Cost of revenues from our B2C services was RMB17.0 million (US$2.5 million) in 2009
compared to nil in 2008. This is a new business.
Gross profit margin
Enterprise software and related customer maintenance services. Gross profit margin for sales of
enterprise software and related customer maintenance services was close to 100% in 2007, 2008 and
2009 mainly because iDeclare has been generally distributed through the Internet since 2006 and we
incurred minimal outsourcing costs to outside contractors and costs associated with packaging and
shipping of software. Additionally, the franchisees have been providing most of the software
maintenance services to customers and we incurred minimal direct costs associated with the delivery
of customer maintenance services.
Software development services. Gross profit margin for software development services decreased to
33.5% in 2009 compared to 36.2% in 2008, for the reasons stated above.
B2C services. Gross profit margin was 5.3% for our B2C services in 2009.
66
Operating expenses
Operating expenses increased to RMB123.9 million (US$18.2 million) in 2009 from RMB118.9 million in
2008, primarily due to the increase in provision for doubtful accounts.
Selling expenses
Selling expenses decreased to RMB17.4 million (US$2.5 million) in 2009 from RMB21.9 million in
2008, primarily due to the reduction in our headcount, entertainment and travel expenses
as a result of our cost reduction program implemented in 2009.
General and administrative expenses
General and administrative expenses decreased by 16.7% to RMB62.9 million (US$9.2 million) in 2009
from RMB75.5 million in 2008, primarily due to decrease in (i) legal and professional fees, (ii)
share based compensation charges, and (iii) office expenses as a result of our cost reduction
program implemented in 2009.
Research and development expenses
Research and development expenses decreased by 6.5% to RMB17.4 million (US$2.5 million) in 2009
from RMB18.6 million in 2008, primarily due to the reduction in headcount, depreciation expenses
associated with disposal of fixed assets, as well as expense declines in rental, utilities,
communication and travel expenses.
Provision for doubtful accounts
Provision for doubtful accounts increased to RMB26.3 million (US$3.8 million) in 2009 from RMB2.9
million in 2008, primarily due to the increased collection risk arising from the significant
increase in the aging of our accounts receivable balances as a result of the longer repayment
period by our customers.
Government subsidies
We did not receive any government subsidy in 2008 or 2009.
Interest income
Interest income decreased to RMB4.3 million (US$0.6 million) in 2009 from RMB7.0 million in 2008,
primarily due to a decrease in the amount of our term deposits.
Gain on sales of short-term investments
Gain on sales of short-term investments increased to RMB35.5 million (US$5.2 million) in 2009 from
RMB9.9 million in 2008 due to increased investments in marketable securities.
Change in fair value of marketable options
Change in fair value of marketable options was RMB27.7 million (US$4.1 million) in 2009 compared to
nil in 2008, which is primarily due to our new investment activities of call and put options.
Income taxes
Income tax expense in 2009 increased to RMB4.1 million (US$0.6 million) in 2009 from RMB0.8 million
in 2008 due to a provision for withholding tax on dividends paid by our Chinese subsidiaries to our
overseas holding companies.
67
Net income from continuing operations
Income from continuing operations in 2009 was RMB8.6 million (US$1.3 million), compared to loss of
RMB8.3 million in 2008, as a result of the cumulative effect of the factors described above.
Net loss from discontinued operations
Loss from discontinued operations in 2009 was RMB7.3 million (US$1.1 million), compared to loss of
RMB161.3 million in 2008. The decrease in loss from discontinued operations was primarily due to
the impairment of long-lived assets and goodwill in 2008.
Net income attributable to the Company
We recognized net income attributable to the Company of RMB1.3 million (US$0.2 million) in 2009
compared to a net loss attributable to the Company of RMB169.6 million in 2008, as a result of the
cumulative effect of the factors described above.
2008 compared to 2007
Total net revenues
We generated total net revenues of RMB104.5 million (US$15.3 million) in 2008, an increase of 1.5%
over our total net revenues of RMB103.0 million in 2007. This revenue increase was principally due
to increased sales from the iQM product series and the popularity of Pay-Per Transaction pricing
terms that helped us to retain existing clients and to attract potential new users, off-set by the
significant decline in iDeclare.CIQ software package sales in 2008.
Enterprise software and related customer maintenance services. Net revenues from sales of our
enterprise software and related customer maintenance services increased by 10.0% to RMB85.0 million
(US$12.5 million) in 2008 from RMB77.3 million in 2007, primarily due to increased sales from the
iQM product series and the popularity of Pay-Per Transaction pricing terms, off-set by the
significant decline in iDeclare.CIQ software package sales in 2008. In 2008, we signed customer
maintenance service contracts with approximately 40,500 users whose customer maintenance service
contracts were due for renewal in 2008. We recognized net revenues of RMB39.9 million (US$5.8
million) from sales of our enterprise software in 2008. We recognized net revenues of RMB45.1
million (US$6.6 million) from the provision of customer maintenance services in 2008. Of our net
revenues from sales of enterprise software and related customer maintenance services, RMB0.5
million and RMB5.5 million (US$0.8 million) were from sales of the iQM product series and related
software maintenance services in 2007 and 2008, respectively, representing a year-on-year increase
of 1,000.0%. In addition, RMB21.7 million and RMB27.0 million (US$4.0 million) were from the
Pay-Per Transaction filing fees in 2007 and 2008, respectively, representing a year-on-year
increase of 24.4%. However, we sold approximately 2,900 software packages of iDeclare.CIQ in 2008,
which is significantly lower than the approximately 8,400 software packages of iDeclare.CIQ sold in
2007, representing a year-on-year decrease of 65.5%.
Software development services. Net revenues from our software development services decreased by
23.8% from RMB25.6 million in 2007 to RMB19.5 million (US$2.9 million) in 2008. In 2008, we did
not recognize any net revenues from the provision of software development services to iTowNet and
eGrid, previously two of our largest customers for software development services. iTowNet has
developed its own platform for providing software development services and now provides software
development services directly to its customers, such as the PRC Inspections Administration, that
are similar to the software development services that we provide to our customers. As a result of
the significant decline in demand by iTowNet and eGrid for our services, and an increase in
competition for software development service contracts from other service providers, we did not
enter into as many software development contracts in 2008, as compared to 2007.
Cost of revenues
Enterprise software and related customer maintenance services. The cost of revenues consists mainly
of direct costs associated with the delivery of customer maintenance services, including salaries,
employee benefits and overhead costs associated with employees providing related services. 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. Additionally, the franchisees have been providing most of the software
maintenance services to customers since 2006. Cost of revenues from enterprise software and related
customer maintenance services were insignificant in 2006, 2007 and 2008.
68
Software development services. Cost of revenues from software development services decreased to
RMB12.4 million (US$1.8 million) in 2008 from RMB17.7 million in 2007. As of December 31, 2006,
2007 and 2008, we did not have any capitalized costs related to such projects.
Gross profit margin
Enterprise software and related customer maintenance services. Gross profit margin for sales of
enterprise software and related customer maintenance services was close to 100% in 2006, 2007 and
2008, mainly because iDeclare has been generally distributed through the Internet since 2006 and we
incurred minimal outsourcing costs to outside contractors and costs associated with packaging and
shipping of software. Additionally, the franchisees have been providing a majority of the software
maintenance services to customers since 2006 and we incurred minimal direct costs associated with
the delivery of customer maintenance services.
Software development services. Gross profit margin for software development services increased to
36.2% in 2008 compared to 30.8% in 2007, for the reasons stated above.
Operating expenses
Operating expenses decreased significantly to RMB118.9 million (US$17.4 million) in 2008 from
RMB347.0 million in 2007, primarily due to an occurrence of an impairment loss from our B2G
reporting unit in 2007 and a lower provision for doubtful accounts recognized in 2008.
Selling expenses
Selling expenses decreased significantly to RMB21.9 million (US$3.2 million) in 2008 from RMB32.4
million in 2007. This decrease was primarily due to the reduction in our (i) office and travel
expenses as a result of our cost reduction program implemented in 2008, and (ii) rental and
utility expenses as a result of our relocation to our self-owned premises.
General and administrative expenses
General and administrative expenses increased by 2.6% to RMB75.5 million (US$11.1 million) in 2008
from RMB73.6 million in 2007, primarily due to increases in (i) compensation costs incurred from
staff reduction, (ii) depreciation charges on newly acquired fixed assets and (iii) share-based
compensation charges.
Research and development expenses
Research and development expenses decreased by 25.6% to RMB18.6 million (US$2.7 million) in 2008
from RMB25.0 million in 2007, primarily due to a reduction in the number of research and
development employees and rental and utility expenses, which was a result of our relocation to our
newly acquired building.
Provision for doubtful accounts
Provision for doubtful accounts decreased significantly to RMB2.9 million (US$0.4 million) in 2008
from RMB22.4 million in 2007. In 2007, we made a provision based on the uncertainty of collection
of amounts due under certain software development contracts we entered into with the PRC
Inspections Administration, which relate to the free software. We believe that the PRC Inspections
Administration has since decreased its efforts to promote its free software.
Impairment of goodwill
The goodwill impairment was RMB193.6 million for our B2G reporting unit in 2007.
69
Government subsidies
We did not receive any government subsidy in 2008 compared to the RMB1.0 million in subsidies that
we received in 2007.
Interest income
Interest income decreased to RMB7.0 million (US$1.0 million) in 2008 from RMB13.9 million in 2007,
primarily due to a decrease in the amount of our term deposits.
Gain on sales of short-term investments
Gain on sales of short-term investments decreased significantly to RMB9.9 million (US$1.4 million)
in 2008 from RMB43.5 million in 2007 because we reduced our short-term investing activities due to
the increased volatility in the PRC securities market.
Gain from disposal of investment under cost method
In 2008, we entered into a share repurchase agreement with Global Market, under which Global Market
repurchased 309,468 Series A preferred shares from us for a cash consideration of RMB7.7 million
(US$1.1 million). We recognized a gain of RMB 2.2 million (US$0.3 million) upon the disposal of
such Series A preferred shares.
Income taxes
Income tax expense in 2008 was RMB0.8 million (US$0.1 million), compared to RMB3.1 million in 2007.
In 2008, we incurred certain deferred tax liabilities in connection with the timing differences
resulting from the accelerated depreciation of certain property and equipment.
Loss from continuing operations
Loss from continuing operations amounted to RMB8.3 million (US$1.2 million) in 2008 as compared to
RMB206.5 million in 2007. The decrease in loss was a result of the cumulative effect of the factors
described above.
Loss from discontinued operations
Loss from discontinued operations amounted to RMB161.3 million (US$23.6 million) in 2008 as
compared to RMB24.1 million in 2007. The increase in loss from discontinued operations in 2008 was
mainly due to the impairment loss of long-lived assets and goodwill of our B2B reporting unit.
Net loss attributable to the Company
We incurred a net loss attributable to the Company of RMB169.6 million (US$24.9 million) in 2008
compared to RMB230.5 million in 2007, 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, Chinas overall national
inflation rate, as represented by the change in the Consumer Price Index in China, was 4.8%, 5.9%
and -0.7% in 2007, 2008 and 2009, 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.
70
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.
Financial Reporting
We do not expect to release quarterly earnings information on a quarterly basis in the future. The
Securities and Exchange Commissions rules and regulations do not require us, as a foreign private
issuer, to report quarterly earnings information on a quarterly basis. Additionally, the Nasdaq
Marketplace Rules also do not require companies with securities listed on its exchange to report
quarterly earnings information on a quarterly basis. The Nasdaq Marketplace Rules require us, as a
foreign private issuer, to file an interim balance sheet and income statement as of and for the end
of our second quarter no later than six months following the end of our second quarter. We expect
to comply with such requirement.
B. Liquidity and capital resources
Our primary sources of liquidity is from our cash account. We had no outstanding debt as of
December 31, 2009. The following table sets forth the summary of our cash flows for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2.9 |
) |
|
|
(33.9 |
) |
|
|
(26.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing
activities |
|
|
57.2 |
|
|
|
(37.4 |
) |
|
|
(76.8 |
) |
Net cash provided by financing activities |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
(4.3 |
) |
|
|
(2.0 |
) |
|
|
0.1 |
|
Net increase/(decrease) in cash and cash
equivalents |
|
|
51.3 |
|
|
|
(73.3 |
) |
|
|
(103.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of
year |
|
|
598.6 |
|
|
|
649.9 |
|
|
|
576.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
|
649.9 |
|
|
|
576.6 |
|
|
|
473.4 |
|
|
|
|
|
|
|
|
|
|
|
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
Cash used in operating activities was RMB26.5 million (US$3.9 million) in 2009. This was primarily
attributable to increased costs in pursuing our B2C strategy in 2009. Cash used in operating
activities was RMB33.9 million in 2008. Cash used in operating activities was RMB2.9 million in
2007.
71
Cash flow from investing activities
Cash used in investing activities was RMB76.8 million (US$11.3 million) in 2009. This was
primarily attributable to purchases of marketable securities.
Cash used in investing activities was RMB37.4 million in 2008. This was primarily attributable to
purchases of property and equipment and the purchase of land use rights from Yizhuang Substation of
the PRC Country Resources Bureau for RMB30.2 million. The land use rights have a contractual
useful life of fifty years.
Cash provided by investing activities was RMB57.2 million in 2007. This was primarily attributable
to the re-classification of certain term deposits into cash and cash equivalents, but taking into
account cash used in our acquisition of Baichuan.
Cash flow from financing activities
We did not generate cash from financing activities in 2009. Financing activities generated cash of
nil and RMB1.3 million in 2008 and 2007. This was comprised primarily of proceeds from employees
exercise of their stock options.
Capital resources
To better manage our assets for long-term growth, we periodically invest our excess cash in highly
liquid equity securities. In addition, from time to time we write call and put options through
listed exchange as part of our investment strategy. Our investment committee approves the
investment policy covering the investment parameters to be followed with the primary goals being
the safety of principal and maintaining the liquidity of funds. Short-term investments are
comprised of marketable equity securities, which are classified as trading and available-for-sale.
Marketable securities that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and are reported at fair value, with realized gains
and losses recognized in earnings. Short-term investments classified as available for sale are
stated at fair values. Unrealized gains or losses on available-for-sale securities from the changes
in fair value are recorded in equity as other comprehensive income (loss). Realized gains or
losses, based upon the specific identification method, on the disposal of available-for-sale
securities are recorded in the consolidated statement of operations. Liabilities for certain call
options of RMB6.1 million (US$0.9 million) and put option of RMB5.8 million (US$0.8 million) were
included in liabilities at December 31, 2009.
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, 2009, we had
RMB473.4 million (US$69.4 million) in cash and cash equivalents. In addition, as of December 31,
2009, we had invested RMB25.0 million (US$3.7 million) in term deposits, which are payable at
varying maturities from six months to one year.
We believe that our available cash and cash equivalents 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, 2009, 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.
72
C. Research and development, patents and licenses, etc.
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.
As of December 31, 2009, we had 250 employees dedicated to research and development, 30 of whom
have masters degrees and one of whom has a Ph.D. degree. Most of our research and development
efforts are located in our principal executive offices in Beijing.
Our expenses for research and development activities totaled RMB25.0 million in 2007, RMB18.6
million in 2008 and RMB 17.4 million (US$2.5 million) in 2009.
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. In
2007, we established a research and development center in the southern region of China. We are in
the process of establishing an additional research and development center in the eastern region of
China.
Of our 250 employees dedicated to research and development, 4 employees concentrate their efforts
on the research and development of our new B2C business.
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, 2009 to December 31,
2009 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.
73
E. Off-balance sheet arrangements
We are exposed to equity price risk as a result of its investment in equity securities and equity
derivatives. Equity price risk results from changes in the level or volatility of equity prices,
which affect the value of equity securities, or instruments that derive their value from such
securities. We attempt to mitigate our exposure to such risks by not limiting our investment in any
one security or index.
F. Tabular disclosure of contractual obligations
We have entered into leasing arrangements relating to our office premises, technical support
centers and farm for self-grown goods for our B2C business. 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, 2009:
|
|
|
|
|
|
|
(in thousands) |
|
Less than one year |
|
RMB |
2,309 |
|
1-3 years |
|
|
1,680 |
|
3-5 years |
|
|
1,217 |
|
More than 5 years |
|
|
3,158 |
|
|
|
|
|
Total |
|
RMB |
8,364 |
|
|
|
|
|
As of December 31, 2009, we had unrecognized tax benefits amounting to RMB5.1 million (US$0.8
million). Since there is a high degree of uncertainty regarding the timing of future cash outflows,
we are unable to make reasonable estimates regarding the timing of settlement with the respective
tax authority.
G. Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued revised guidance on the
accounting for transfers of financial assets. The revised guidance requires more information about
transfers of financial assets, including securitization transactions, and where entities have
continuing exposure to the risks related to the transferred financial assets. It eliminates the
concept of a qualifying special-purpose entity, changes the requirements for derecognizing
financial assets, and requires additional disclosures. This guidance will be effective for the
Company on January 1, 2010 and is not expected to have any impact on the Companys consolidated
financial statements.
In June 2009, the FASB issued revised guidance on the consolidation of variable interest entities
(VIEs). The revised guidance requires an analysis to determine whether a variable interest gives
the entity a controlling financial interest in a variable interest entity. Additionally, the
revised guidance requires an ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary beneficiary. This guidance
will be effective for the Company on January 1, 2010 and is not expected to have a material impact
on the Companys consolidated financial statements.
74
In October 2009, the FASB issued new guidance on revenue recognition for arrangements with multiple
deliverables and certain revenue arrangements that include software elements. By providing another
alternative for determining the selling price of deliverables, the guidance for arrangements with
multiple deliverables will allow companies to allocate arrangement consideration in multiple
deliverable arrangements in a manner that better reflects the transactions economics and will
often result in earlier revenue recognition. The new guidance modifies the fair value requirements
of previous guidance by allowing best estimate of selling price in addition to vendor-specific
objective evidence (VSOE) and other vendor objective evidence (VOE, now referred to as TPE
standing for third-party evidence) for determining the selling price of a deliverable. A vendor is
now required to use its best estimate of the selling price when VSOE or TPE of the selling price
cannot be determined. In addition, the residual
method of allocating arrangement consideration is no longer permitted under the new guidance. The
new guidance for certain revenue arrangements that include software elements removes non-software
components of tangible products and certain software components of tangible products from the scope
of existing software revenue guidance, resulting in the recognition of revenue similar to that for
other tangible products. The new guidance is effective for fiscal years beginning on or after June
15, 2010. However, companies may be able to adopt as early as interim periods ended September 30,
2009. The guidance may be applied either prospectively from the beginning of the fiscal year for
new or materially modified arrangements or retrospectively. The Company has not early adopted the
new guidance and is currently evaluating the impact on its consolidated financial statements of
adopting this guidance.
In December 2009, the FASB issued revised guidance on Consolidations Improvements to Financial
Reporting by Enterprises Involved with VIEs, which became effective for the Company on November 15,
2009. The amendments in this guidance replace the quantitative-based risks and rewards calculation
for determining which reporting entity, if any, has a controlling financial interest in a variable
interest entity, with an approach focused on identifying which reporting entity has the power to
direct the activities of a variable interest entity, that most significantly impact the entitys
economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to
receive benefits from the entity. An approach that is expected to be primarily qualitative will be
more effective for identifying which reporting entity has a controlling financial interest in a
variable interest entity. The amendments in this guidance also require additional disclosures about
a reporting entitys involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The Company believes there will be no material impact on
its consolidated financial statements upon adoption of this standard.
In December 2007, the FASB issued new accounting guidance that defines collaborative arrangements
and establishes reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. It also establishes the
appropriate income statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures related to those
arrangements. This new accounting guidance was effective for the Company on January 1, 2009, and
its adoption did not have a significant impact on its consolidated financial statements.
In June 2009, the Financial Accounting Standards Board (FASB) approved its Accounting Standards
Codification or Codification as the single source of authoritative United States accounting and
reporting standards applicable for all nongovernmental entities, with the exception of the SEC and
its staff. The Codification, which changes the referencing of financial standards, is effective for
interim or annual financial periods ending after September 15, 2009. Therefore, beginning in the
third quarter of fiscal year 2009, all references made to US GAAP use the new Codification
numbering system prescribed by the FASB. As the Codification did change and alter existing US GAAP,
it did not have any impact on the Companys consolidated financial statements.
Effective January 1, 2009, the Company adopted an authoritative pronouncement issued by the FASB
regarding non-controlling interests in consolidated financial statements. The pronouncement
improves the relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling interests in subsidiaries in the same
way as required in the consolidated financial statements. Moreover, the pronouncement eliminates
the diversity that currently exists in accounting for transactions between an entity and
non-controlling interests by requiring they be treated as equity transaction. The pronouncement
requires consolidated net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. Furthermore, disclosure of the amounts of
consolidated net income attributable to the parent and to the non-controlling interest is required
on the face of the financial statements. The pronouncement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of the pronouncement required retroactive application of the
presentation and disclosure requirements of the standard to all periods presented. The adoption did
not impact the consolidated financial statements presented herein, except for the presentation and
disclosure requirements affecting all periods presented including:
(a) |
|
the non-controlling interest has been reclassified to equity, |
(b) |
|
consolidated net income or loss has been adjusted to include the net income or loss
attributable to the non-controlling interest, |
(c) |
|
consolidated comprehensive income or loss has been adjusted to include the comprehensive income
or loss attributable to the non-controlling interest, and |
(d) |
|
for each reporting period the Company must present a reconciliation at the beginning and end of
the period of the carrying amount of total equity and equity attributable to the Company and the
non-controlling interest. |
Accordingly, after adoption, non-controlling interests (approximately negative RMB88,655 and RMB
nil at December 31, 2009 and December 31, 2008, respectively) are classified as equity, a change
from its previous classification between liabilities and stockholders equity. Losses attributable
to non-controlling interest (approximately RMB88,655, RMB5.5 million and RMB6.1 million for 2009,
2008 and 2007, respectively) are included in net income (loss), although such losses continue to be
deducted to measure earnings (loss) per share.
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 the date of this annual report:
|
|
|
|
|
|
|
Name |
|
Age |
|
|
Position |
Shuang Wang |
|
|
47 |
|
|
Director and Chief Executive Officer |
Kin Fai Ng |
|
|
65 |
|
|
Director, Senior Vice President and Company Secretary |
Dachun Zhang |
|
|
65 |
|
|
Director |
Fushan Chen |
|
|
71 |
|
|
Director |
Mark Ming Hsun Lee |
|
|
38 |
|
|
Director |
Martin Cheung |
|
|
41 |
|
|
Director |
Xiaoguang Ren |
|
|
46 |
|
|
President |
Tommy Siu Lun Fork |
|
|
48 |
|
|
Chief Financial Officer |
Min Dong |
|
|
46 |
|
|
Senior Vice President, Legal Affairs, Administration and Human Resources |
Bolin Wu |
|
|
44 |
|
|
General Manager, Research and Development and Chief Technology Officer |
75
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
the 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. Wangs 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 directors 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 bachelors degree in science from Beijing Institute of Technology, a masters 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 bachelors degree
in language and literature from Poznan University in Poland, a masters 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 bachelors degree in ship casting from Nanjing Shipping Institute.
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 Inc., a company engaged
in the software business. Mr. Lee was the founder, chief executive officer, president and a
director of OSA Technologies, Inc., a company engaged in the software business, and 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 for Intel
Corporation. Mr. Lee holds a bachelors degree in electrical engineering and a masters degree in
electrical engineering and computer science from Massachusetts Institute of Technology. Mr. Lee
also holds a masters degree in business administration from Arizona State University.
76
Martin Cheung has served as a director since June 2008. Mr. Cheung currently works as the
Corporate Development Director of Profound Heavy Industrial Holding Limited. He also currently
serves as an independent non-executive director of China Environmental Resources Group Limited
(formerly called Benefun International Holding Limited) and Hong Long Holdings Limited, both of
which are companies with securities listed on the Hong Kong Stock Exchange. Mr. Cheung is a
member of the American Institute of Certified Public Accountants and is a Certified Public
Accountant of Australia. From 2005 to 2008, Mr. Cheung was the Corporate Finance Director at Grant
Thornton Corporate Finance Limited. From 2002 to 2005, Mr. Cheung was an Executive Vice President
at Japan Asia Securities. From 1994 to 2002, Mr. Cheung was a Vice President of Daiwa Securities.
From 1991 to 1994, Mr. Cheung was a senior auditor at Deloitte Touche Tohmatsu. Mr. Cheung
obtained a bachelors degree in Social Sciences from the University of Hong Kong in 1991, a
masters of Science degree in Accounting from Curtin University of Technology, in Perth, Australia
in 1997 and a masters of Science degree in Finance (Investment Management) from the Hong Kong
University of Science and Technology in 2001.
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 bachelors degree in mathematics from
Heilongjiang University and a masters degree in computer science from the Computing Technologies
Research Institute of the Chinese Academy of Sciences. Mr. Ren received an executive master of
business administration degree from Peking University in January 2010.
Tommy Siu Lun Fork has served as our Chief Financial Officer since September 2002. He also
currently serves as the Company Secretary of China Renji Medical Group Ltd., a company with
securities listed on the Hong Kong Stock Exchange. 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 bachelors 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 and Ninetowns Ports, and a director and the
general manager of Ninetowns Times. Ms. Dong is the spouse of Mr. Wang. Ms. Dong holds a bachelors
degree and a masters degree in law from China Politics and Law University. Ms. Dong received an
executive master of business administration degree from Peking University in July 2009.
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 bachelors
degree in application electronics from Hangzhou University of Commerce and a masters degree in
automation and computer science from Shanghai Jiaotong University.
77
The business address of each of our directors and executive officers is our principal executive
office at 22/F, Building No. 1, Capital A Partners, No. 20 Gongti East Road, Chaoyang District
Beijing 100020, The Peoples Republic of China.
B. Compensation
As of December 31, 2009, 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
2009, the aggregate amount of compensation paid by us to all of our directors and executive
officers was approximately RMB5.6 million (US$0.8 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 RMB8.2
million, RMB8.2 million and RMB5.6 million (US$0.8 million) for 2007, 2008 and 2009, 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 grantees 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 grantees
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 grantees 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$25 per
ordinary share, which we believe was the fair market value of our ordinary shares on the grant date
of such options. One-fourth of the share options granted under the 2003 Plan become exercisable on
each of May 18, 2004, November 18, 2004, November 18, 2005 and November
18, 2006. Generally, share options under the 2003 Plan are terminated if the grantees employment
is terminated by us, or terminated within 12 months from the date of the grantees retirement,
disability, change in our corporate structure, expiry of employment contract or termination of
employment at the discretion of the board.
78
Termination of 2003 Plan. Under the 2003 Plan, our board of directors may at any time terminate the
2003 Plan, except that the provisions of the 2003 Plan will remain in respect of share options
granted prior to such termination.
On August 13, 2004, Mr. Wang and Ms. Dong entered into a deed of undertaking with AIG Asian
Opportunity Fund, L.P., or AOF, and American International Assurance Company (Bermuda) Limited, or
AIA, agreeing to (i) procure Value Chain to distribute all of the cash consideration received from
the reorganization transaction to Mr. Wang and Ms. Dong, (ii) exercise all of their vested share
options under our 2003 Plan for 122,752 ordinary shares and apply the cash from the reorganization
transaction to the exercise of such options, (iii) exercise the remaining share options under our
2003 Plan for 368,260 ordinary shares as soon as such options become vested and exercisable and
(iv) refrain from transferring, assigning or creating any encumbrance over their share options
under our 2003 Plan.
The following table summarizes, as of May 31, 2010, the outstanding options granted under our 2003
Plan to our directors and executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
Underlying Options |
|
|
Exercise Price |
|
|
|
|
|
|
|
Granted |
|
|
(HK$/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 |
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.
79
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. The administrator has the authority, in its sole
discretion, to waive any restrictions or limitations under the Amended and Restated 2004 Plan.
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, 2010, the outstanding options granted under our
Amended and Restated 2004 Plan to our directors and executive
officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
Options Granted |
|
|
(US$/Share) |
|
|
Date of Grant |
|
Date of Expiration |
|
Xiaoguang Ren |
|
|
19,286 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
22,368 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
220,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
70,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Bolin Wu |
|
|
35,357 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
39,930 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
110,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
70,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Tommy Siu Lun Fork |
|
|
17,679 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
220,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
70,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Shuang Wang |
|
|
20,893 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
330,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
70,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Min Dong |
|
|
17,679 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
110,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
70,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
Options Granted |
|
|
(US$/Share) |
|
|
Date of Grant |
|
Date of Expiration |
|
Dachun Zhang |
|
|
8,036 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
3,000 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
11,250 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
30,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Fushan Chen |
|
|
8,036 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
3,000 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
11,250 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
30,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Mark Ming Hsun Lee |
|
|
17,679 |
|
|
|
8.60 |
|
|
February 23, 2005 |
|
February 22, 2015 |
|
|
|
4,500 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
15,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
30,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Kin Fai Ng |
|
|
12,000 |
|
|
|
3.03 |
|
|
February 5, 2008 |
|
February 4, 2018 |
|
|
|
90,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
30,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
Martin Cheung |
|
|
30,000 |
|
|
|
1.40 |
|
|
July 16, 2009 |
|
July 15, 2019 |
|
|
|
30,000 |
|
|
|
1.60 |
|
|
February 10, 2010 |
|
February 9, 2020 |
The following table summarizes, as of May 31, 2010, the outstanding non-vested shares granted under
our Amended and Restated 2004 Plan to our directors and executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Shares |
|
|
|
|
|
|
End of Vesting |
|
|
|
Granted |
|
|
Date of Grant |
|
Period |
Xiaoguang Ren |
|
|
60,037 |
|
|
February 5, 2008 |
|
February 5, 2012 |
|
|
|
585,771 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Bolin Wu |
|
|
41,709 |
|
|
February 5, 2008 |
|
February 5, 2012 |
Tommy Siu Lun Fork |
|
|
20,000 |
|
|
February 5, 2008 |
|
February 5, 2012 |
Shuang Wang |
|
|
30,000 |
|
|
February 5, 2008 |
|
February 5, 2012 |
Min Dong |
|
|
20,000 |
|
|
February 5, 2008 |
|
February 5, 2012 |
2006 Share Incentive Plan
Our board of directors adopted the 2006 Share Incentive 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.
81
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.
The following table summarizes, as of May 31, 2010, the outstanding non-vested shares granted under
our 2006 Plan to our directors and executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Shares |
|
|
|
|
|
|
End of Vesting |
|
|
|
Granted |
|
|
Date of Grant |
|
Period |
Xiaoguang Ren |
|
|
840,000 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Bolin Wu |
|
|
439,912 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Tommy Siu Lun Fork |
|
|
41,000 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Shuang Wang |
|
|
41,000 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Min Dong |
|
|
41,000 |
|
|
February 10, 2010 |
|
February 10, 2011 |
Kin Fai Ng |
|
|
41,000 |
|
|
February 10, 2010 |
|
February 10, 2011 |
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.
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, a nominating
committee and an investment committee.
82
Audit committee. Our audit committee currently consists of Dachun Zhang, Mark Lee and Martin
Cheung. 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. Cheung has the necessary financial sophistication under Nasdaq Marketplace Rule
4350(d)(2)(A). Our audit committee is 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 firms 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, Fushan Chen
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 is 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; |
83
|
|
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, Fushan Chen 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 is 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. |
Investment committee. Our current investment committee is responsible for managing our securities
trading account which was established in December 2008. Our investment committee consists of
Shuang Wang, Xiaoguang Ren, Kin Fai Ng and Tommy Siu Lun Fork. Our investment committee is
responsible for, among other things:
|
|
directing and managing investments in the listed securities of public companies in the
United States, Europe and Asia; and |
|
|
reporting performance and results of investments to 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, 2009, we had 336 full-time employees. Of our employees, 10 were in management,
17 were in finance, 19 were in administration and human resources, 250 were in research and
development and 40 were in sales and marketing.
84
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 RMB5.0 million, RMB4.9
million and RMB3.5 million (US$0.5 million) for 2007, 2008 and 2009, respectively. In addition, we
are required by law to contribute approximately 10% in Beijing, 12% in Shanghai and 8% in Guangzhou
of the average salaries of all employees for mandatory medical benefits and approximately 1% in
Beijing and 2% 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 RMB3.2 million, RMB3.3 million and RMB2.1 million
(US$0.3 million) for 2007, 2008 and 2009, 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, 2010, 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) |
|
|
6,518,697 |
|
|
|
18.01 |
% |
Min Dong(5) |
|
|
6,518,697 |
|
|
|
18.01 |
% |
Xiaoguang Ren(6) |
|
|
1,093,144 |
|
|
|
3.03 |
% |
Kin Fai Ng(7) |
|
|
700,725 |
|
|
|
1.95 |
% |
Bolin Wu(8) |
|
|
694,135 |
|
|
|
1.93 |
% |
Tommy Siu Lun Fork(9) |
|
|
645,853 |
|
|
|
1.79 |
% |
Mark Ming Hsun Lee(10) |
|
|
23,679 |
|
|
|
* |
% |
Dachun Zhang(11) |
|
|
12,349 |
|
|
|
* |
% |
Fushan Chen(12) |
|
|
12,349 |
|
|
|
* |
% |
Martin Cheung(13) |
|
|
7,500 |
|
|
|
* |
% |
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (10 persons) |
|
|
9,708,431 |
|
|
|
26.17 |
% |
|
|
|
|
|
|
|
|
|
5% and above shareholders |
|
|
|
|
|
|
|
|
Yong Ping Duan(14) |
|
|
7,072,327 |
|
|
|
19.76 |
% |
Technology Pioneer Corp.(15) |
|
|
3,070,028 |
|
|
|
8.58 |
% |
Value Chain International Limited(16) |
|
|
2,002,312 |
|
|
|
5.59 |
% |
|
|
|
* |
|
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. |
|
(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 35,791,834 ordinary shares outstanding as of May 31, 2010. In 2008,
800,000 of the Companys ordinary shares were converted into American Depositary
Shares to facilitate our employees cashless exercise of vested stock options and non-vested
shares. Stock options for 6,186 ordinary shares were exercised in 2008. 120,536 previously
non-vested shares became vested in 2009. |
85
|
|
|
(3) |
|
The address of our current directors and executive officers is c/o Ninetowns
Internet Technology Group Company Limited, 22/F, Building No. 1, Capital A Partners, No. 20
Gongti East Road, Chaoyang District Beijing 100020, PRC. |
|
(4) |
|
Includes (i) 4,031,465 ordinary shares held by Mr. Wang, (ii) 2,002,312 ordinary
shares held by Mr. Wang through his ownership of Value Chain, (iii) 278,307 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) 90,842 ordinary shares held by Ms.
Dong, and (v) 115,771 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) 90,842 ordinary shares held by Ms. Dong, (ii) 115,771 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) 4,031,465 ordinary shares held by Mr. Wang and
(v) 278,307 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 823,122 ordinary shares held by Mr. Ren and 270,022 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 10,250 ordinary shares held by Mr. Ng and 634,411 ordinary shares
beneficially held by Mr. Ng through his ownership of Oriental Plan Developments Limited, or
Oriental Plan, and 56,064 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 460,696 ordinary shares held by Mr. Wu and 233,439 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 350,250 ordinary shares held by Mr. Fork and 295,603 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 23,679 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. |
|
(11) |
|
Represents 12,349 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. |
|
(12) |
|
Represents 12,349 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. |
|
(13) |
|
Represents 7,500 ordinary shares underlying share options held by Mr. Cheung which
are currently exercisable or exercisable within 60 days of the date of this annual report. |
|
(14) |
|
Includes 5,072,308 ordinary shares held directly by Mr. Duan and 2,000,019
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. |
|
(15) |
|
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 Peoples Republic of China, 510655. |
|
(16) |
|
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. |
86
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.
B. Related party transactions
Overview
You should note 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 operates the data exchange platforms that interface between
international trade enterprises using our enterprise software and the PRC Inspections
Administrations 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 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.
87
Beijing iTowNet Cyber Technology Ltd.
iTowNet was established on August 23, 2001 and is currently the operator of the PRC Inspections
Administrations 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. Yadi Yangguang is 100.0% beneficially owned by Mr. Wang and Ms. Dong. 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 iTowNets charter documents.
We have historically provided, 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.
iTowNet has developed its own platform for providing software development services and now provides
software development services directly to its customers, such as the PRC Inspections
Administration, that are similar to the software development services that we provide to our
customers. As a result, iTowNet became one of our competitors in our software development services
business.
In 2007 and 2008, we did not enter into any software development contracts with iTowNet and we did
not derive any revenue from the provision of software development services to iTowNet. In 2009, we
derived RMB0.4 million revenue from the provision of software development services to iTowNet.
Mr. Wang and Ms. Dong, through Import and Export, have not and do not currently receive any income,
fee or economic benefit from iTowNet.
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 Mr. Jing Shao and Mr. 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 Mr. Jing Shao and Mr. Hongmei Tian in July 2003
for an aggregate consideration of RMB8.0 million. The transfer of such interests was completed in
February 2004.
As of September 2005, Ninetowns Enke has been 81.25% owned by Mr. Jing Shao and 18.75% owned by Mr.
Su Tianjian, one of our former employees. On June 1, 2009, we entered into a new franchise
agreement with Ninetowns Enke for iDeclare.CIQ. This agreement has a 19 month term and does not
contain any minimum sales commitment. In addition, Ninetowns Enke agreed to act as our sales agent
for our enterprise software after sales maintenance services and a sales discount of 22.23%.
We recognized net revenues of approximately RMB2.3 million (US$0.3 million) from sales of our
customer maintenance services to Ninetowns Enke in 2009.
88
Guangzhou Ninetowns Wang Li Software Co., Ltd.
Mr. Zhou Peiji, a 22.1% shareholder of Baichuan, which is one of our VIEs, owns 90% of the equity
interests of Ninetowns Wang Li.
In December 2006, we revised our franchise agreement with Ninetowns Wang Li for our new software
version under the iDeclare.CIQ series. On June 1, 2009, we entered into a new franchise agreement
with Ninetowns Wang Li for iDeclare.CIQ. This agreement has a 19 month term and does not contain
any minimum sales commitment. In addition, Ninetowns Wang Li agreed to act as our sales agent for
our enterprise software after sales maintenance services and a sales discount of 22.23% of total
maintenance revenue.
We recognized net revenues of approximately RMB9.3 million (US$1.4 million) from sales of our
software products and related customer maintenance services to Ninetowns Wang Li in 2009.
Related party trade receivables
In connection with the transactions described above, we had net trade receivables from related
parties amounting to approximately RMB5.7 million (US$0.8 million) as of December 31, 2009. These
receivables consisted primarily of proceeds from sales of enterprise software and related customer
maintenance 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.
89
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 subsidiarys 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 Global Market under the symbol NINE.
90
The following table provides the high and low trading prices for our ADSs on the Nasdaq Global
Market for (1) the years of 2005, 2006, 2007, 2008 and 2009, (2) the four quarters in 2008 and 2009
and (3) each of the months since December 2009.
|
|
|
|
|
|
|
|
|
|
|
Sales Price |
|
|
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
Annual highs and lows |
|
|
|
|
|
|
|
|
2005 |
|
US$ |
11.48 |
|
|
US$ |
4.21 |
|
2006 |
|
US$ |
6.98 |
|
|
US$ |
4.29 |
|
2007 |
|
US$ |
7.20 |
|
|
US$ |
2.64 |
|
2008 |
|
US$ |
3.30 |
|
|
US$ |
0.82 |
|
2009 |
|
US$ |
2.20 |
|
|
US$ |
0.86 |
|
|
|
|
|
|
|
|
|
|
Quarterly highs and lows |
|
|
|
|
|
|
|
|
First Quarter 2008 |
|
US$ |
3.30 |
|
|
US$ |
2.05 |
|
Second Quarter 2008 |
|
US$ |
2.73 |
|
|
US$ |
2.00 |
|
Third Quarter 2008 |
|
US$ |
2.46 |
|
|
US$ |
1.37 |
|
Fourth Quarter 2008 |
|
US$ |
1.81 |
|
|
US$ |
0.82 |
|
First Quarter 2009 |
|
US$ |
1.25 |
|
|
US$ |
0.86 |
|
Second Quarter 2009 |
|
US$ |
1.80 |
|
|
US$ |
0.95 |
|
Third Quarter 2009 |
|
US$ |
1.85 |
|
|
US$ |
1.25 |
|
Fourth Quarter 2009 |
|
US$ |
2.20 |
|
|
US$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
Monthly highs and lows |
|
|
|
|
|
|
|
|
December 2009 |
|
US$ |
1.80 |
|
|
US$ |
1.36 |
|
January 2010 |
|
US$ |
1.90 |
|
|
US$ |
1.50 |
|
February 2010 |
|
US$ |
1.69 |
|
|
US$ |
1.52 |
|
March 2010 |
|
US$ |
1.7 |
|
|
US$ |
1.46 |
|
April 2010 |
|
US$ |
1.85 |
|
|
US$ |
1.52 |
|
May 2010 |
|
US$ |
1.79 |
|
|
US$ |
1.46 |
|
June 2010 (for the period to and including June 23, 2010) |
|
US$ |
1.65 |
|
|
US$ |
1.40 |
|
B. Plan of distribution
Not applicable.
91
C. Markets
Our ADSs, each representing one of our ordinary shares, have been listed on the Nasdaq Global
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 Peoples 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.
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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:
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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 |
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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.
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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 investors particular
circumstances, or to certain types of investors subject to special treatment under U.S. federal
income tax laws, such as:
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banks or financial institutions, |
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life insurance companies, |
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tax-exempt organizations, |
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dealers in securities or foreign currencies, |
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traders in securities that elect to apply a mark-to-market method of accounting, |
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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, |
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persons subject to the alternative minimum tax provisions of the Code, |
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persons that have a functional currency other than the U.S. dollar, and |
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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:
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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; |
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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; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its
source; or |
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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.
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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. Holders 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. Holders 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.
Holders 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.
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Passive foreign investment company
It is likely that we will be classified as a PFIC for 2009. 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:
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at least 75.0% of its gross income is passive income, or |
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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.
We note that if we are considered a PFIC for any taxable year, we will continue to be treated as a
PFIC in for any subsequent taxable year with respect to any United States investors who held stock
in such PFIC year, even if we no longer meet the definitional test of a PFIC. As a result of our
substantial cash position and the decline in the value of our stock, we believe that we may have
became a PFIC during the 2006 taxable year, under a literal application of the asset test that
looks solely to market value and continued PFIC status in the 2007 and 2008 years. As a result, we
believe that we would continue to be treated as a PFIC in all taxable years thereafter for any
United States Investors, including the 2009 taxable year.
Because it is likely that we will be classified as a PFIC for 2009, a U.S. Holder of our ordinary
shares or our ADSs will likely be subject to special tax rules with respect to:
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any excess distribution that the U.S. Holder receives on our ordinary shares or our ADSs
and |
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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. |
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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. Holders holding period for our ordinary shares or our ADSs will be
treated as an excess distribution. Under these special tax rules:
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any excess distribution or gain will be allocated ratably over your holding period for our
ordinary shares or our ADSs, |
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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 |
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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. Holders 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. Holders 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. Holders income for prior taxable years. Amounts included in a U.S.
Holders 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. Holders 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.
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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. Holders 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. Holders 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. Holders 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. Holders 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:
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political and economic stability; |
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an effective judicial system; |
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a favorable tax system; |
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the absence of exchange control or currency restrictions; and |
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the availability of professional and support services. |
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However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages
include:
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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) |
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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 a majority 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:
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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 |
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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.
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F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We have previously filed with the Securities and Exchange 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, 100 F
Street NE, Washington, DC. 20549 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.
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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.
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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 Securities and Exchange Commission on
December 1, 2004.
As of May 31, 2010, we have used approximately RMB402 million (US$59 million) of the net proceeds
from our initial public offering for capital expenditure, comprising approximately RMB72 million
(US$10.5 million) for the expansion of existing facilities, approximately RMB78 million (US$11.4
million) for the purchase of real estate for new research and development centers and approximately
RMB252 million (US$37 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.
Item 15. Controls and Procedures.
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 the effectiveness of our
disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act) as of December 31, 2009. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that such disclosure controls and procedures are effective
as of December 31, 2009 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 Commissions rules
and regulations. Our Chief Executive Officer and Chief Financial Officer also concluded that our
disclosure controls and procedures are also effective as of December 31, 2009 to ensure that
information required to be discussed in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding any required disclosure.
102
Managements Annual 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
companys 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 with the participation
and under the supervision of our Chief Executive Officer and our Chief Financial Officer
assessed the effectiveness of our internal control over financial reporting as of December 31,
2009 based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Management excluded
from this assessment, the business that we acquired in 2009, because it was not possible to
conduct an assessment of the businesss internal control over financial reporting in the
period between the consummation date and the date of managements assessment. With respect to
excluding this company, we are required to (1) formally note that management is excluding this
acquired business from managements report on internal control over financial reporting;
(2) clearly identify the acquired business excluded and have indicated the significance of the
acquired business in our companys consolidated financial statements; and (3) disclose
material changes, if any, to our internal control over financial reporting due to the
acquisition of the is business. As a result of these assessments, our management has
concluded that our internal control over financial reporting was effective as of December 31,
2009 based on the criteria established in Internal Control Integrated Framework issued by
COSO. We have excluded Meihuilong, our PRC subsidiary, from our assessment of internal control over financial
reporting as of December 31, 2009 because this company was acquired on March 13, 2009 and
qualified under current SEC regulation for exclusion from our assessment of internal control
over financial reporting. Meihuilongs financial statements comprises approximately 15%,
2% and less than 1% of total revenue, loss from operations and total assets, respectively,
included in the consolidated financial statements of the Company as of December 31, 2009.
GHP Horwath, P.C. an independent registered public accounting firm, has audited the consolidated
financial statements included in this annual report on Form 20-F and, as part of the audit, has
issued an attestation report, included herein on pages F-2 and F-3, on the effectiveness of our
internal control over financial reporting.
Changes in Internal Control over Financial Reporting
We have continued to improve and upgrade our internal control over financial reporting based on our
needs and changes in the business environment. We believe that there is no change in our internal
control over financial reporting that occurred during the period covered by the annual report that
has materially affected or is 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.
103
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.
On August 27, 2009, GHP Horwath, P.C. was appointed by our board of directors as our independent
registered public accounting firm for the fiscal year ending December 31, 2009.
The following table sets forth the aggregate fees in connection with certain professional services
rendered by GHP Horwath, P.C., for the periods indicated. We did not pay any tax related or other
fees to GHP Horwath, P.C. during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31 |
|
|
|
2008 |
|
2009 |
|
2009 |
|
Audit fees(1) |
|
RMB3,957,050 |
|
RMB3,959,022 |
|
US$ |
580,000 |
|
Audit related fees(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
RMB3,957,050 |
|
RMB3,959,022 |
|
US$ |
580,000 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit fees consist of fees billed for the
annual audit of our consolidated financial
statements. Audit fees also include fees for
services that are normally provided by the
independent registered public accounting firm
in connection with statutory regulatory
filings or engagements. |
|
(2) |
|
Audit related fees consists of fees billed
for assurance and related services that are
reasonably related to the performance of the
audit or review of our financial statements. |
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 that 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.
104
Item 16F.
Change in Registrants Certifying Accountant.
(a) Resignation by Former Principal Accountant
On November 4, 2008, Deloitte Touche Tohmatsu CPA, Ltd., or Deloitte, resigned as our independent
registered public accounting firm.
The decision to change independent registered public accounting firm was recommended by our board
of directors and approved by our audit committee on November 4, 2008. We reported the change in
independent registered public accounting firm on Form 6-K furnished to the SEC on November 7, 2008.
The audit report of Deloitte on our consolidated financial statements for the fiscal year ended
December 31, 2007 (which report expresses an unqualified opinion and includes an explanatory
paragraph relating to the adoption of authoritative pronouncement
issued by the Financial Accounting
Standards Board regarding accounting for uncertainty in income taxes and an explanatory paragraph
relating to the convenience translation of Renminbi amounts into United States dollar amounts in
the financial statements) did not contain an adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal year ended December 31, 2007 and in the subsequent interim period ended November
4, 2008, we did not have any disagreement with Deloitte on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Deloitte, would have caused them to make reference to the
subject matter of the disagreement in their report on the consolidated financial statements for
such year and for such period.
During the fiscal year ended December 31, 2007 and through November 4, 2008, there were no
reportable events requiring disclosure pursuant to Item 16F(a)(1)(v) of Form 20-F, except that
the audit report of Deloitte on the effectiveness of our internal control over financial reporting
as of December 31, 2007 contained an adverse opinion because of two material weaknesses. These
material weaknesses are described in more detail in our Annual Report on Form 20-F for the fiscal
year ended December 31, 2007. As used herein, the term reportable event means any of the items
listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F. Our Audit Committee discussed the
reportable events with Deloitte and we authorized Deloitte to respond fully to inquiries of the
successor accountant concerning the reportable events pursuant to Item 16F(a)(1)(v) of Regulation
S-K.
We provided a copy of this disclosure to Deloitte and requested that Deloitte furnish a letter
addressed to the SEC stating whether it agrees with the above statements, and if not, stating the
respects in which it does not agree. A copy of the letter from Deloitte addressed to the SEC, dated
June 30, 2010, is filed as Exhibit 15.4.
(b) Engagement of New Principal Accountant
On November 4, 2008, we appointed GHP Horwath, P.C., or GHP Horwath, as our independent registered
public accounting firm. During the fiscal year ended December 31, 2007 and through November 4,
2008, neither we nor anyone on our behalf consulted GHP Horwath regarding either (i) the
application of accounting principles to a specified transaction, either completed or proposed, or
the type of audit opinion that might be rendered on our consolidated financial statements, nor has
GHP Horwath provided to us a written report or oral advice that GHP Horwath concluded was an
important factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue, or (ii) any matter that was either the subject of a disagreement with
Deloitte, as that term is defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions
to Item 16F of Form 20-F, or a reportable event, as that term is described in Item 16F(a)(1)(v)
of Form 20-F.
105
Item 16G. Corporate Governance.
We are incorporated in the Cayman Islands and our corporate governance practices are governed by
applicable Cayman Islands law. In addition, because our ADSs are listed on the Nasdaq Global
Market, we are subject to Nasdaq corporate governance requirements. Nasdaq Marketplace Rule
4350(a)(1) permits foreign private issuers like us to follow home country practice with respect
to certain corporate governance matters. We are
committed to a high standard of corporate governance. As such, we endeavor to comply with most of
the Nasdaq corporate governance practices and believe that we are currently in compliance with the
NASDAQ corporate governance practices.
106
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 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) |
107
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
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 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. |
108
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
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 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. |
109
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
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 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) |
110
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
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) |
|
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) |
111
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
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* |
|
|
Investors 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 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. |
|
4.75* |
|
|
Amendment to Share Purchase and Subscription Agreement dated December 22, 2007,
among Ixworth Enterprises Limited, Beijing Ninetowns Network and Software Co.,
Ltd., Fan Hui Yang, Zhi Sheng Limited, Ample Spring Holdings Limited, Beijing
Baichuan Tongda Science and Technology Development Co., Ltd., Zhou Peiji and
Zhou Lijun. |
|
4.76* |
|
|
Translation of Pre-sale Contract for Commodity House in Beijing Municipality
dated June 25, 2007 between Beijing Hengfu Plaza Development Co., Ltd. and
Beijing Ninetowns Ports Software and Technology Co., Ltd. |
|
4.77* |
|
|
Translation of Sale Contract for Commodity House dated September 19, 2007
between Guangzhou Hejing Real Estate Development Co., Ltd. and Guangdong
Ninetowns Technology Co., Ltd. |
|
4.78* |
|
|
Translation of Construction Land Use Right Grant Contract dated October 30,
2008 between Beijing Ninetowns Software Co., Ltd. and Beijing Land Resource
Bureau, Economic Technological Development Area Branch |
|
4.79* |
|
|
Translation of Supplemental Agreement to Construction Land Use Right Grant
Contract dated October 30, 2008 between Beijing Ninetowns Software Co., Ltd.
and Beijing Land Resource Bureau, Economic Technological Development Area
Branch |
|
4.80* |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated August 1, 2008 between Beijing
Ninetowns Network and Software Co., Ltd. and Beijing Ninetowns Zhi Fang
Software and Technology Co., Ltd. |
|
4.81* |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated August 1, 2008 between Beijing
Ninetowns Network and Software Co., Ltd. and Shenzhen Ninetowns Enke Software
Technology Co., Ltd. |
|
4.82* |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated August 1, 2008 between Beijing
Ninetowns Network and Software Co., Ltd. and Beijing Ninetowns Xin He Software
Technology Co., Ltd. |
|
4.83* |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated August 1, 2008 between Beijing
Ninetowns Network and Software Co., Ltd. and Guangzhou Ninetowns Wang Li
Software Co., Ltd. |
|
4.84* |
|
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
August 1, 2008 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Beijing Ninetowns Zhi Fang Software and Technology Co., Ltd. |
112
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
4.85 |
* |
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
August 1, 2008 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Shenzhen Ninetowns Enke Software Technology Co., Ltd. |
|
4.86 |
* |
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
August 1, 2008 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Beijing Ninetowns Xin He Software Technology Co., Ltd. |
|
4.87 |
* |
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
August 1, 2008 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Guangzhou Ninetowns Wang Li Software Co., Ltd. |
|
4.88 |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated June 1, 2009 between Beijing
Ninetowns Network and Software Co., Ltd. and Beijing Ninetowns Zhi Fang
Software and Technology Co., Ltd. |
|
4.89 |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated June 1, 2009 between Beijing
Ninetowns Network and Software Co., Ltd. and Shenzhen Ninetowns Enke Software
Technology Co., Ltd. |
|
4.90 |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated June 1, 2009 between Beijing
Ninetowns Network and Software Co., Ltd. and Beijing Ninetowns Xin He Software
Technology Co., Ltd. |
|
4.91 |
|
|
Translation of Franchise Agreement relating to Ninetowns Network Quality
Supervision Software v1.0 software dated June 1, 2009 between Beijing
Ninetowns Network and Software Co., Ltd. and Guangzhou Ninetowns Wang Li
Software Co., Ltd. |
|
4.92 |
|
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
October 1, 2009 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Beijing Ninetowns Zhi Fang Software and Technology Co., Ltd. |
|
4.93 |
|
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
October 1, 2009 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Shenzhen Ninetowns Enke Software Technology Co., Ltd. |
|
4.94 |
|
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
October 1, 2009 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Beijing Ninetowns Xin He Software Technology Co., Ltd. |
|
4.95 |
|
|
Translation of Franchise Agreement relating to iDeclare V5.0 software dated
October 1, 2009 between Beijing Ninetowns Ports Software and Technology Co.,
Ltd. and Guangzhou Ninetowns Wang Li Software Co., Ltd. |
|
4.96 |
|
|
Translation of Lease Agreement relating to warehouse lease dated January 25,
2010 between Beijing Ninetowns Sky Eco-agriculture Co., Ltd. and Beijing
Shunfeng Runlin Technology and Trade Co., Ltd. |
|
4.97 |
|
|
Translation of Sublease Agreement relating to land sublease dated June 29,
2010, between Beijing Ninetowns Sky Eco-Agriculture Co., Ltd. and Beijing
Huaixiang Xiandai Agriculture 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 GHP Horwath, P.C. |
|
15.2 |
|
|
Consent of Conyers Dill & Pearman |
|
15.3 |
|
|
Consent of Commerce & Finance Law Offices |
|
15.4 |
|
|
Consent of Deloitte Touche Tohmatsu CPA, Ltd. |
|
|
|
* |
|
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. |
113
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 30th day of June, 2010.
|
|
|
|
|
|
|
|
|
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED |
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Shuang Wang |
|
|
|
|
|
|
Name: Shuang Wang
|
|
|
|
|
|
|
Title: Chief Executive Officer |
|
|
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
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|
|
|
|
|
F - 2 |
|
|
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|
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|
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F - 5 |
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|
|
|
|
|
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F - 7 |
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|
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F - 9 |
|
|
|
|
|
|
|
|
|
F - 10 |
|
|
|
|
|
|
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|
|
F - 11 |
|
|
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|
|
|
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|
F - 13 |
|
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|
F - 45 |
|
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Ninetowns Internet Technology Group Company Limited
We have audited the accompanying consolidated balance sheets of Ninetowns Internet Technology Group
Company Limited and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, comprehensive income, changes in equity, and cash flows for
each of the years in the two-year period ended December 31, 2009, and the financial statement
schedule for the years ended December 31, 2009 and 2008. We also have audited the Companys
internal control over financial reporting as of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is responsible for these financial statements
and schedule, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the
accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these financial statements and an opinion on the Companys internal
control over financial reporting 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 and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included 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, and evaluating the overall financial
statement presentation. Our audits of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. 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 or procedures may deteriorate.
As
indicated in the accompanying Managements Annual Report on Internal Control Over Financial Reporting
appearing under Item 15 of the Companys December 31, 2009 annual report on Form 20-F, managements
assessment of and conclusion on the effectiveness of internal control over financial reporting did
not include a business acquisition during 2009 because it was not possible to conduct an assessment
of the acquired businesss internal control over financial reporting in the period between the
consummation date and the date of managements assessment. The business comprises approximately
15%, 2% and less than 1% of total revenue, loss from operations and total assets, respectively,
included in the consolidated financial statements of the Company as of December 31, 2009. Our
audit of internal control over financial reporting of the Company also did not include an
evaluation of the internal control over financial reporting of the acquired business.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for each of the years in the two-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in the United States
of America.
In our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set
forth therein.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
F - 2
As discussed in Note 2 to the consolidated financial statements, during 2009 the provisions of new
accounting standards relating to non-controlling interests were adopted.
We have also audited the adjustments to the 2007 consolidated financial statements to
retrospectively apply the change in accounting for discontinued operations, as described in Note 3,
and the change in presentation and disclosure requirements for the adoption of accounting guidance
related to non-controlling interest in 2009, as described in Note 2. Our procedures included
(1) obtaining the Companys underlying accounting analysis, comparing the discontinued operations
and non-controlling interest presented to such analysis, (2) comparing previously reported amounts
to the previously issued financial statements for such year, and (3) testing the mathematical
accuracy of the presentation. In our opinion, such retrospective adjustments are appropriate and
have been properly applied. However, we were not engaged to audit, review, or apply any procedures
to the 2007 consolidated financial statements of the Company other than with respect to the
retrospective adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2007 consolidated financial statements taken as a whole.
/s/ GHP HORWATH, P.C.
Denver, Colorado
June 30, 2010
F - 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: The Board of Directors and Shareholders of
Ninetowns Internet Technology Group Company Limited
We have audited, before the effects of the retrospective adjustments for the discontinued
operations discussed in Note 3 and the retrospective application of the authoritative pronouncement
issued by the Financial Accounting Standards Board (FASB) regarding the noncontrolling interests
discussed in Note 2 to the consolidated financial statements, the accompanying consolidated
statements of operations, comprehensive income, changes in equity, and cash flows of Ninetowns
Internet Technology Group Company Limited, its subsidiaries and variable interest entities
(collectively, the Company) for the year ended December 31, 2007 (the 2007 consolidated financial
statements before the effects of the retrospective adjustments discussed in Note 3 to the
consolidated financial statements are not presented herein), and related financial statement
schedule included in Schedule I. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audit.
We conducted our audit 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. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements, before the effects of the retrospective
adjustments for the discontinued operations discussed in Note 3 and the retrospective application
of the authoritative pronouncement issued by the FASB regarding the noncontrolling interests
discussed in Note 2 to the consolidated financial statements, present fairly, in all material
respects, the results of the Companys operations and its cash flows for the year ended December
31, 2007, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such 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.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments for
the discontinued operations discussed in Note 3 and the retrospective application of the
authoritative pronouncement issued by the FASB regarding the noncontrolling interests discussed in
Note 2 to the consolidated financial statements and, accordingly, we do not express an opinion or
any other form of assurance about whether such retrospective adjustments are appropriate and have
been properly applied. Those retrospective adjustments were audited by other auditors.
Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the Peoples Republic of China
July 10, 2008
F - 4
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
576,642 |
|
|
|
473,448 |
|
|
|
69,361 |
|
Restricted cash |
|
|
670 |
|
|
|
790 |
|
|
|
116 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
917 |
|
|
|
134 |
|
Available-for-sale securities |
|
|
10,024 |
|
|
|
170,309 |
|
|
|
24,950 |
|
Term deposits |
|
|
28,000 |
|
|
|
25,000 |
|
|
|
3,663 |
|
Trade receivables from customers: |
|
|
|
|
|
|
|
|
|
|
|
|
Billed, less allowance for doubtful
accounts of RMB5,028 in 2008 and
RMB24,806 in 2009, respectively |
|
|
27,166 |
|
|
|
11,944 |
|
|
|
1,750 |
|
Unbilled |
|
|
772 |
|
|
|
508 |
|
|
|
74 |
|
Trade receivables from related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
Billed, less allowance for doubtful
accounts RMB265 and RMB6,610 in
2008 and 2009, respectively |
|
|
6,005 |
|
|
|
5,469 |
|
|
|
801 |
|
Unbilled |
|
|
|
|
|
|
200 |
|
|
|
29 |
|
Inventories |
|
|
1,367 |
|
|
|
2,403 |
|
|
|
352 |
|
Prepaid expenses and other current
assets |
|
|
6,987 |
|
|
|
6,046 |
|
|
|
886 |
|
Deferred tax assets |
|
|
132 |
|
|
|
1,008 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
657,765 |
|
|
|
698,042 |
|
|
|
102,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
213,181 |
|
|
|
204,788 |
|
|
|
30,002 |
|
Investments under cost method |
|
|
40,293 |
|
|
|
40,237 |
|
|
|
5,895 |
|
Acquired intangible assets, net |
|
|
41,269 |
|
|
|
35,709 |
|
|
|
5,231 |
|
Other non-current assets |
|
|
817 |
|
|
|
815 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
953,325 |
|
|
|
979,591 |
|
|
|
143,511 |
|
|
|
|
|
|
|
|
|
|
|
(continued)
F - 5
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Option liabilities |
|
|
|
|
|
|
11,854 |
|
|
|
1,737 |
|
Accounts payable and accrued expenses |
|
|
13,516 |
|
|
|
11,369 |
|
|
|
1,666 |
|
Advance from customers |
|
|
8,310 |
|
|
|
10,476 |
|
|
|
1,534 |
|
Deferred revenue |
|
|
21,392 |
|
|
|
10,453 |
|
|
|
1,531 |
|
Income taxes payable |
|
|
6,190 |
|
|
|
6,577 |
|
|
|
964 |
|
Other taxes payable |
|
|
1,635 |
|
|
|
672 |
|
|
|
98 |
|
Unrecognized tax benefits |
|
|
295 |
|
|
|
375 |
|
|
|
55 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
51,338 |
|
|
|
51,776 |
|
|
|
7,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
1,807 |
|
|
|
713 |
|
|
|
105 |
|
Unrecognized tax benefits |
|
|
|
|
|
|
4,766 |
|
|
|
698 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
53,145 |
|
|
|
57,255 |
|
|
|
8,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity of the Company |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, par value
RMB0.027(HK$0.025)
per share: 8,000,000,000 shares authorized;
34,998,020 shares issued and
outstanding in 2008 and 35,118,556
shares issued and outstanding in
2009, respectively |
|
|
926 |
|
|
|
929 |
|
|
|
136 |
|
Additional paid-in capital |
|
|
880,581 |
|
|
|
885,045 |
|
|
|
129,660 |
|
Accumulated deficit |
|
|
(25,172 |
) |
|
|
(33,163 |
) |
|
|
(4,858 |
) |
Statutory reserve |
|
|
65,736 |
|
|
|
75,059 |
|
|
|
10,996 |
|
Accumulated other comprehensive loss |
|
|
(21,891 |
) |
|
|
(5,445 |
) |
|
|
(798 |
) |
|
|
|
|
|
|
|
|
|
|
Total
shareholders equity of the Company |
|
|
900,180 |
|
|
|
922,425 |
|
|
|
135,136 |
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
|
|
|
|
|
(89 |
) |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
900,180 |
|
|
|
922,336 |
|
|
|
135,123 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
|
953,325 |
|
|
|
979,591 |
|
|
|
143,511 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F - 6
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise software and related
customer maintenance services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
external customers |
|
|
67,822 |
|
|
|
70,514 |
|
|
|
46,846 |
|
|
|
6,863 |
|
related parties (Note 15) |
|
|
9,505 |
|
|
|
14,451 |
|
|
|
11,541 |
|
|
|
1,691 |
|
Software development services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
external customers |
|
|
25,642 |
|
|
|
19,458 |
|
|
|
17,013 |
|
|
|
2,493 |
|
related parties (Note 15) |
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
51 |
|
Food sales and services |
|
|
|
|
|
|
94 |
|
|
|
18,004 |
|
|
|
2,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues |
|
|
102,969 |
|
|
|
104,517 |
|
|
|
93,754 |
|
|
|
13,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise software and related
customer maintenance services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software development services
(including share-based
compensation expense of RMB126 in
2007, RMB287 in 2008 and RMB51 in
2009) |
|
|
(17,748 |
) |
|
|
(12,423 |
) |
|
|
(11,552 |
) |
|
|
(1,692 |
) |
Food sales and services |
|
|
|
|
|
|
(76 |
) |
|
|
(17,046 |
) |
|
|
(2,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(17,748 |
) |
|
|
(12,499 |
) |
|
|
(28,598 |
) |
|
|
(4,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
85,221 |
|
|
|
92,018 |
|
|
|
65,156 |
|
|
|
9,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing (including
share-based compensation expense
of RMB628 in 2007, RMB1,633 in
2008 and RMB787 in 2009) |
|
|
(32,379 |
) |
|
|
(21,942 |
) |
|
|
(17,369 |
) |
|
|
(2,546 |
) |
General and administrative
(including share-based
compensation expense of RMB1,145
in 2007, RMB3,789 in 2008 and
RMB3,297 in 2009) |
|
|
(73,636 |
) |
|
|
(75,523 |
) |
|
|
(62,877 |
) |
|
|
(9,212 |
) |
Research and development
(including share-based
compensation expense of RMB27 in
2007, RMB1,162 in 2008 and RMB332
in 2009) |
|
|
(25,026 |
) |
|
|
(18,566 |
) |
|
|
(17,373 |
) |
|
|
(2,545 |
) |
Allowance for doubtful accounts, net |
|
|
(22,395 |
) |
|
|
(2,881 |
) |
|
|
(26,259 |
) |
|
|
(3,847 |
) |
Impairment of goodwill |
|
|
(193,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
(347,006 |
) |
|
|
(118,912 |
) |
|
|
(123,878 |
) |
|
|
(18,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
F - 7
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Government subsidies |
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(260,770 |
) |
|
|
(26,894 |
) |
|
|
(58,722 |
) |
|
|
(8,605 |
) |
Interest income |
|
|
13,885 |
|
|
|
7,026 |
|
|
|
4,280 |
|
|
|
627 |
|
Gain on sales of short-term investments |
|
|
43,546 |
|
|
|
9,866 |
|
|
|
35,474 |
|
|
|
5,196 |
|
Change in fair value of marketable
options |
|
|
|
|
|
|
|
|
|
|
27,684 |
|
|
|
4,056 |
|
Gain from disposal of investment under
cost method |
|
|
|
|
|
|
2,187 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
|
|
|
|
358 |
|
|
|
3,974 |
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax and
non-controlling interests |
|
|
(203,339 |
) |
|
|
(7,457 |
) |
|
|
12,690 |
|
|
|
1,856 |
|
Income tax expense |
|
|
(3,130 |
) |
|
|
(836 |
) |
|
|
(4,100 |
) |
|
|
(601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before non-controlling
interests |
|
|
(206,469 |
) |
|
|
(8,293 |
) |
|
|
8,590 |
|
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
of tax |
|
|
(30,115 |
) |
|
|
(166,802 |
) |
|
|
(7,347 |
) |
|
|
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(236,584 |
) |
|
|
(175,095 |
) |
|
|
1,243 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to non-controlling
interest - discontinued operations |
|
|
6,053 |
|
|
|
5,483 |
|
|
|
89 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to the Company |
|
|
(230,531 |
) |
|
|
(169,612 |
) |
|
|
1,332 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(5.90 |
) |
|
|
(0.24 |
) |
|
|
0.25 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
(5.90 |
) |
|
|
(0.24 |
) |
|
|
0.25 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations per
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to the
Company per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
|
|
35,100,194 |
|
Diluted |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
|
|
35,100,194 |
|
See notes to consolidated financial statements.
F - 8
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Net (loss) income |
|
|
(236,584 |
) |
|
|
(175,095 |
) |
|
|
1,243 |
|
|
|
179 |
|
Foreign currency translation loss |
|
|
(6,977 |
) |
|
|
(4,126 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
Unrealized
gain (loss) on available-for-sale securities |
|
|
2,874 |
|
|
|
(5,999 |
) |
|
|
16,451 |
|
|
|
2,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
(240,687 |
) |
|
|
(185,220 |
) |
|
|
17,689 |
|
|
|
2,588 |
|
Less: comprehensive loss
attributable to the non-controlling interest |
|
|
6,053 |
|
|
|
5,483 |
|
|
|
89 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
attributable to the Company |
|
|
(234,634 |
) |
|
|
(179,737 |
) |
|
|
17,778 |
|
|
|
2,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F - 9
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY OF THE COMPANY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
|
|
|
|
Other |
|
|
Non- |
|
|
|
|
|
|
Ordinary Shares |
|
|
Paid-in |
|
|
Treasury Shares |
|
|
(Accumulated |
|
|
Statutory |
|
|
Comprehensive |
|
|
Controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit) |
|
|
Reserve |
|
|
(Loss) Income |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
RMB |
|
|
RMB |
|
|
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance as of January 1, 2007 |
|
|
34,991,834 |
|
|
|
926 |
|
|
|
871,642 |
|
|
|
(47,862 |
) |
|
|
(1,268 |
) |
|
|
394,056 |
|
|
|
47,287 |
|
|
|
(7,663 |
) |
|
|
|
|
|
|
1,304,980 |
|
Cumulative effect of
unrecognized tax benefit on
adoption of ASC740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(636 |
) |
Issuance of ADR shares for the
exercises of employee share
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,862 |
|
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,268 |
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,544 |
) |
|
|
17,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest upon
acquisition of VIE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,536 |
|
|
|
11,536 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(230,531 |
) |
|
|
|
|
|
|
|
|
|
|
(6,053 |
) |
|
|
(236,584 |
) |
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,977 |
) |
|
|
|
|
|
|
(6,977 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,926 |
|
Unrealized gain on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,874 |
|
|
|
|
|
|
|
2,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
34,991,834 |
|
|
|
926 |
|
|
|
873,568 |
|
|
|
|
|
|
|
|
|
|
|
145,345 |
|
|
|
64,831 |
|
|
|
(11,766 |
) |
|
|
5,483 |
|
|
|
1,078,387 |
|
Issuance of ADR shares for the
exercises of employee share
options |
|
|
6,186 |
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(905 |
) |
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169,612 |
) |
|
|
|
|
|
|
|
|
|
|
(5,483 |
) |
|
|
(175,095 |
) |
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,126 |
) |
|
|
|
|
|
|
(4,126 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
6,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,871 |
|
Unrealized loss on
available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,999 |
) |
|
|
|
|
|
|
(5,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
34,998,020 |
|
|
|
926 |
|
|
|
880,581 |
|
|
|
|
|
|
|
|
|
|
|
(25,172 |
) |
|
|
65,736 |
|
|
|
(21,891 |
) |
|
|
|
|
|
|
900,180 |
|
Issuance of ADR shares under
employee stock compensation |
|
|
120,536 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for statutory reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,323 |
) |
|
|
9,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
|
(89 |
) |
|
|
1,243 |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467 |
|
Unrealized gain on
available-for-sale securities
(net of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,451 |
|
|
|
|
|
|
|
16,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
35,118,556 |
|
|
|
929 |
|
|
|
885,045 |
|
|
|
|
|
|
|
|
|
|
|
(33,163 |
) |
|
|
75,059 |
|
|
|
(5,445 |
) |
|
|
(89 |
) |
|
|
922,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$136 |
|
|
US$129,660 |
|
|
|
|
|
|
|
|
|
|
(US$4,858 |
) |
|
US$10,996 |
|
|
(US$798 |
) |
|
(US$13 |
) |
|
US$135,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F - 10
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(236,584 |
) |
|
|
(175,095 |
) |
|
|
1,243 |
|
|
|
179 |
|
Adjustments to reconcile (loss) income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
1,544 |
|
|
|
2,406 |
|
|
|
1,291 |
|
|
|
190 |
|
Depreciation of property and equipment |
|
|
9,867 |
|
|
|
17,922 |
|
|
|
16,916 |
|
|
|
2,479 |
|
Amortization of other non-current assets |
|
|
|
|
|
|
103 |
|
|
|
116 |
|
|
|
18 |
|
Amortization of acquired intangible assets |
|
|
14,466 |
|
|
|
18,991 |
|
|
|
5,560 |
|
|
|
816 |
|
Gain from sale of trading securities |
|
|
(43,204 |
) |
|
|
(9,866 |
) |
|
|
(6,881 |
) |
|
|
(1,008 |
) |
Gain from sale of available-for-sale securities |
|
|
(342 |
) |
|
|
|
|
|
|
(14,461 |
) |
|
|
(2,118 |
) |
Gain from disposal of investment under cost method |
|
|
|
|
|
|
(2,187 |
) |
|
|
|
|
|
|
|
|
Gain from sales of property |
|
|
|
|
|
|
|
|
|
|
(633 |
) |
|
|
(93 |
) |
Allowance for doubtful accounts |
|
|
22,395 |
|
|
|
2,881 |
|
|
|
27,020 |
|
|
|
3,958 |
|
Goodwill impairment |
|
|
193,570 |
|
|
|
78,081 |
|
|
|
|
|
|
|
|
|
Property and equipment impairment |
|
|
|
|
|
|
4,339 |
|
|
|
|
|
|
|
|
|
Intangible assets impairment |
|
|
|
|
|
|
43,747 |
|
|
|
|
|
|
|
|
|
Proceeds from sales of trading securities |
|
|
94,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of trading securities |
|
|
(51,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Employee share-based compensation |
|
|
1,926 |
|
|
|
6,871 |
|
|
|
4,467 |
|
|
|
654 |
|
Gain from short sale of stock options |
|
|
|
|
|
|
|
|
|
|
(41,810 |
) |
|
|
(6,125 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables from customers |
|
|
(15,312 |
) |
|
|
277 |
|
|
|
(10,973 |
) |
|
|
(1,608 |
) |
Trade receivables from related parties |
|
|
2,577 |
|
|
|
346 |
|
|
|
535 |
|
|
|
78 |
|
Inventories |
|
|
(191 |
) |
|
|
5,644 |
|
|
|
(1,036 |
) |
|
|
(152 |
) |
Prepaid expenses and other current assets |
|
|
11,986 |
|
|
|
9,739 |
|
|
|
821 |
|
|
|
120 |
|
Accounts payable and accrued expenses |
|
|
(17,518 |
) |
|
|
(6,794 |
) |
|
|
(2,180 |
) |
|
|
(319 |
) |
Advance from customers |
|
|
4,140 |
|
|
|
(6,150 |
) |
|
|
2,166 |
|
|
|
318 |
|
Deferred revenue |
|
|
6,089 |
|
|
|
(11,080 |
) |
|
|
(10,939 |
) |
|
|
(1,603 |
) |
Income taxes payable |
|
|
315 |
|
|
|
(868 |
) |
|
|
5,232 |
|
|
|
766 |
|
Other taxes payable |
|
|
(744 |
) |
|
|
47 |
|
|
|
(963 |
) |
|
|
(141 |
) |
Deferred taxes, net |
|
|
(1,125 |
) |
|
|
(13,235 |
) |
|
|
(1,969 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(2,941 |
) |
|
|
(33,881 |
) |
|
|
(26,478 |
) |
|
|
(3,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash |
|
|
(853 |
) |
|
|
183 |
|
|
|
(120 |
) |
|
|
(18 |
) |
Decrease (increase) of term deposits |
|
|
281,209 |
|
|
|
(2,000 |
) |
|
|
3,000 |
|
|
|
439 |
|
Cash paid for investments under cost method |
|
|
(4,500 |
) |
|
|
(7,085 |
) |
|
|
|
|
|
|
|
|
Cash paid for establishment of an affiliate |
|
|
(2,450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of trading securities |
|
|
|
|
|
|
27,516 |
|
|
|
20,126 |
|
|
|
2,949 |
|
Purchase of trading securities |
|
|
|
|
|
|
(17,650 |
) |
|
|
(14,162 |
) |
|
|
(2,075 |
) |
Purchases of available-for-sale securities |
|
|
(10,076 |
) |
|
|
(5,061 |
) |
|
|
(306,648 |
) |
|
|
(44,924 |
) |
Proceeds from sale of available-for-sale securities |
|
|
2,330 |
|
|
|
|
|
|
|
177,179 |
|
|
|
25,957 |
|
Proceeds from short sale of options |
|
|
|
|
|
|
|
|
|
|
73,508 |
|
|
|
10,769 |
|
Cover short or assignment of option liabilities |
|
|
|
|
|
|
|
|
|
|
(19,835 |
) |
|
|
(2,907 |
) |
Purchase of property and equipment |
|
|
(71,782 |
) |
|
|
(13,397 |
) |
|
|
(5,976 |
) |
|
|
(875 |
) |
Proceeds from sale of property |
|
|
|
|
|
|
|
|
|
|
872 |
|
|
|
128 |
|
Purchase of intangible assets |
|
|
|
|
|
|
(30,156 |
) |
|
|
|
|
|
|
|
|
Deposits paid for acquisition of property and equipment |
|
|
(34,804 |
) |
|
|
|
|
|
|
(4,802 |
) |
|
|
(703 |
) |
Acquisition of a business, net of cash acquired of RMB 3,119 |
|
|
(101,881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of investments under cost method |
|
|
|
|
|
|
7,714 |
|
|
|
|
|
|
|
|
|
Proceeds from liquidation of an affiliate |
|
|
|
|
|
|
2,450 |
|
|
|
|
|
|
|
|
|
Return of
deposit for acquisition of property and equipment |
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
57,193 |
|
|
|
(37,366 |
) |
|
|
(76,858 |
) |
|
|
(11,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
F - 11
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of share options |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(4,305 |
) |
|
|
(1,974 |
) |
|
|
142 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
51,215 |
|
|
|
(73,221 |
) |
|
|
(103,194 |
) |
|
|
(15,118 |
) |
Cash and cash equivalents at the beginning of the year |
|
|
598,648 |
|
|
|
649,863 |
|
|
|
576,642 |
|
|
|
84,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
|
649,863 |
|
|
|
576,642 |
|
|
|
473,448 |
|
|
|
69,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account payable for purchase of property and equipment |
|
|
3,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivable for sale of property and equipment |
|
|
|
|
|
|
|
|
|
|
642 |
|
|
|
94 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes |
|
|
909 |
|
|
|
780 |
|
|
|
881 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F - 12
NINETOWNS
INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In thousands, except share and per share data)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES |
|
|
|
Ninetowns Internet Technology Group Company Limited (Ninetowns) was incorporated in the
Cayman Islands as an exempted limited liability company 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 Ninetowns business is conducted in the Peoples Republic of
China (the PRC) through its subsidiaries and variable interest entities (VIEs).
Ninetowns, its subsidiaries, and its VIEs (collectively, the Company) are principally
engaged in (i) the sale of enterprise software and provision of the related after-sales
maintenance services, (ii) software development
services, (iii) from April 2007 to March
2009, Business to Business (B2B) search engine operations and the provision of B2B search
services, and (iv) beginning in the first half of 2009, the provision of food sales and
services targeting Chinese consumers. |
|
|
|
As of December 31, 2009, a summary of the subsidiaries and VIEs of Ninetowns was as follows: |
|
|
|
|
|
|
|
|
|
|
|
Place of |
|
|
|
|
|
|
incorporation/ |
|
Effective |
|
|
|
Name of entity |
|
establishment |
|
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 |
|
|
|
|
|
|
|
|
|
Ample Spring
Holdings Limited
(Ample Spring)
|
|
BVI
|
|
|
70 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
New Take Limited
|
|
Hong Kong
|
|
|
100 |
% |
|
Investment holding |
|
|
|
|
|
|
|
|
|
Shielder Limited
|
|
Hong Kong
|
|
|
100 |
% |
|
Investment holding |
|
|
|
|
|
|
|
|
|
Nine Masters
(China) E-Catering
Services Holdings
Company Limited
(Nine Masters
E-C) (i)
|
|
BVI
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Ninetowns Organic
Agricultural
Holdings Limited
(OFD Holding)
(ii)
|
|
BVI
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Beijing New Take
Electronic Commerce
Limited (Beijing
New Take)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Beijing Ninetowns
Times Electronic
Commerce Limited
(Beijing Ninetowns
Times)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Beijing Ninetowns
Digital Technology
Limited (Beijing
Ninetowns Digital
Technology)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
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, and
provision of
software
development
services |
F - 13
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES-continued |
|
|
|
|
|
|
|
|
|
|
|
Place of |
|
|
|
|
|
|
Incorporation/ |
|
Effective |
|
|
|
Name of entity |
|
Establishment |
|
ownership interest |
|
|
Principal activities |
|
|
|
|
|
|
|
|
|
Beijing Ninetowns Network
and 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, and provision of software
development services |
|
|
|
|
|
|
|
|
|
Beijing Ninetowns Software
Co., Ltd. (Beijing
Software)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Dongguan Ninetowns
Software Co., Ltd.
(Dongguan Software)
|
|
PRC
|
|
|
100 |
% |
|
Provision of enterprise software services |
|
|
|
|
|
|
|
|
|
Guangdong Nine Masters
E-Catering Management Co.,
Ltd (Guangdong Nine
Masters) (iii)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Shanghai Nine Masters
Meihuilong Catering
Management Co., Ltd.
(Shanghai Meihuilong)
(iv)
|
|
PRC
|
|
|
100 |
% |
|
Provision of e-catering services |
|
|
|
|
|
|
|
|
|
Variable interest entities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Ronghe Tongshang
Network Technology Limited
(Ronghe Tongshang)
|
|
PRC
|
|
|
100 |
% |
|
Inactive |
|
|
|
|
|
|
|
|
|
Beijing Ninetowns Sky
Eco-agriculture Co., Ltd.
(Beijing Sky) (v)
|
|
PRC
|
|
|
100 |
% |
|
Sale of dietary products, daily
necessities, home appliances and crop
cultivation. |
|
|
|
|
|
|
|
|
|
Shanghai Tootoo
Eco-agriculture Co., Ltd.
(Shanghai Tootoo) (vi)
|
|
PRC
|
|
|
100 |
% |
|
Cultivation and sales of crops and
technical consultation and services
related to agricultural sales |
|
|
|
|
|
|
|
|
|
Beijing Baichuan Tongda
Science and Technology
Development Co., Ltd.
(Baichuan Tongda)
|
|
PRC
|
|
|
70 |
% |
|
Inactive |
|
|
|
(i) |
|
Nine Masters E-C, a wholly-owned subsidiary of the Company, was
incorporated on January 12, 2009. |
|
(ii) |
|
OFD Holding, a wholly-owned subsidiary of the Company, was incorporated
on February 6, 2009. |
|
(iii) |
|
Guangdong Nine Masters, a wholly-owned subsidiary of the Company, was
incorporated on May 5, 2009. |
|
(iv) |
|
In 2009, we acquired a 100% equity interest in Shanghai Meihuilong for a
consideration of RMB 100. The business acquisition was insignificant for financial
reporting purposes. |
|
(v) |
|
Beijing Sky, a wholly-owned subsidiary of Ronghe Tongshang, was incorporated
on February 26, 2009. |
|
(vi) |
|
Shanghai Tootoo, a wholly-owned subsidiary of Beijing Sky , was
incorporated on June 9, 2009. |
F - 14
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES-continued |
|
|
|
PRC regulations prohibit direct foreign ownership of business entities that provide internet
content, or ICP, services in the PRC, such as the business of providing online solutions 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: |
|
|
|
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; |
|
|
|
|
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 collateral for such guarantees. Through December 31, 2009, Ronghe
Tongshang has not yet entered into any business contracts that would require guarantees
from the Company; |
|
|
|
|
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; |
|
|
|
|
The equity owners may not dispose of or enter into any other agreements involving
the common shares without prior agreement by the Company. |
|
|
In 2008, the Company entered into a series of agreements with Beijing Guochuangwanwei
Information Technology Limited Company (Guochuang), under which the Company, through
Guochuang, increased the registered capital of Ronghe Tongshang through an entrusted loan of
RMB60,000 to Guochuang. The three original shareholders of Ronghe Tongshang, also entered
into agreements with Guochuang whereby Guochuang became the sole shareholder of Ronghe
Tongshang. Guochuangs interest in Ronghe Tongshang has been pledged to the Company as
collateral for the entrusted loan. |
|
|
|
In 2009, Guochuang entered into a series of agreements with two designated PRC citizens, by
which the entrusted loan of RMB60,000 was transferred from Guangchuang to these two owners
(New Owners). The New Owners became the shareholders of Ronghe Tongshang and their
interests in Ronghe Tongshang have been pledged to the Company as collateral for the
entrusted loan. The New Owners act as the nominee shareholders and have contractually agreed
not to make any decision regarding Ronghe Tongshangs operations and business without the
Companys consent. In addition, the Company is obliged to absorb the expected losses and is
entitled to receive the expected residual returns of Ronghe Tongshang. |
|
|
|
The above arrangements assigned all of the equity owners rights and obligations to the
Company, resulting in (i) the equity owners lacking the ability to make decisions that have
a significant effect on Ronghe Tongshangs operations, and (ii) the Companys ability to
extract the profits from the operations of Ronghe Tongshang, and to assume Ronghe
Tongshangs residual benefits. Because the Company is the sole variable interest holder of
Ronghe Tongshang, it is the primary beneficiary of Ronghe Tongshang. Accordingly, the
Company has consolidated the results of Ronghe Tongshang since its inception. |
F - 15
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
1. |
|
ORGANIZATION AND PRINCIPAL ACTIVITIES-continued |
|
|
|
Baichuan Tongda is a PRC company that was established on February 24, 2004 for providing
internet content services in the areas of B2B services. The founders of Baichuan Tongda were
two PRC citizens (original shareholders). In April 2007, as a part of the acquisition
transaction of Ample Spring and Baichuan Tongda, two designated PRC citizens (70%
registered shareholders) acquired 70% of the registered capital from the original
shareholders. Pursuant to a series of contractual arrangements with Baichuan Tongda and the
70% registered shareholders, the Company bears the risk of, and enjoys the
rewards from the ownership of Baichuan Tongda. A summary of the major terms of the
arrangements is as follows: |
|
|
|
The 70% registered shareholders irrevocably granted the Company the right to make
all operating and business decisions for Baichuan Tongda on behalf of the 70%
registered shareholders; |
|
|
|
|
All registered capital owned by the 70% registered shareholders is pledged to the
Company as collateral against service fees payable to the Company; |
|
|
|
|
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 the 70% registered
shareholders when such purchase becomes legally permitted; |
|
|
|
|
The 70% registered shareholders may not dispose of or enter into any other agreement
involving the shares owned by them without prior agreement by the Company; |
|
|
|
|
The Company is engaged by Baichuan Tongda as the exclusive service provider for
business and technical support services and is entitled to receive a fee for the
services provided; |
|
|
|
|
The Company has made an entrusted loan to Baichuan Tongda in the amount of RMB40,000
to finance the operations of Baichuan Tongda. |
|
|
Through the above arrangements, the Company is the primary beneficiary of Baichuan Tongda.
Accordingly, Baichuan Tongda is a variable interest entity of the Company and the financial
statements of Baichuan Tongda have been consolidated by the Company since the designated 70%
registered shareholders acquired the 70% equity interests from the original shareholders. |
|
|
|
In March, 2009, the Company discontinued its B2B business conducted through its VIEs (Note
3). Financial positions and operating results for VIEs are summarized below: |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Total assets |
|
|
70,061 |
|
|
|
57,202 |
|
Total liabilities (consisting primarily of other
current liabilities) |
|
|
(1,407 |
) |
|
|
(2,776 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Total net revenues |
|
|
274 |
|
|
|
1,100 |
|
|
|
4,136 |
|
Total net loss
|
|
|
(14,315 |
) |
|
|
(16,803 |
) |
|
|
(9,038 |
) |
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 RMB6.8259 to US$1, the approximate rate of exchange at December
31, 2009. Such translations should not be construed to be the amounts that would have been
reported under US GAAP. |
F - 16
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
Certain amounts in the 2007 and 2008 financial statements and the related notes have been
retrospectively adjusted to reflect the effect of discontinued operations as described in
Note 3. |
|
|
|
Basis of consolidation - The consolidated financial statements include the financial
statements of Ninetowns and its subsidiaries and VIEs. All significant intercompany
transactions and balances are eliminated on consolidation. |
|
|
|
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
Companys consolidated financial statements include the allowance for doubtful accounts,
estimated costs to complete in a percentage of completion arrangement, estimated useful
lives and impairment of acquired intangible assets and goodwill, valuation allowance for
deferred tax assets, fair values of derivatives and purchase price allocations relating to
businesses acquired. |
|
|
|
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. |
|
|
|
Restricted cash - The Companys restricted cash is related to deposits required by certain
customers for the software development services provided by the Company. |
|
|
|
Term deposits - Term deposits consist of deposits placed with financial institutions with
remaining maturities of greater than three months but less than one year. |
|
|
|
Short-term investments - To enable the Company to better manage its assets for long-term
growth, the Company periodically invests its excess cash in highly liquid equity securities.
In addition, from time to time the Company may write call and put options through listed
exchange as part of its investment strategy. The Companys investment committee approves the
investment policy covering the investment parameters to be followed with the primary goals
being the safety of principal and maintaining the liquidity of funds. Short-term investments
are comprised of marketable equity securities, which are classified as trading and
available-for-sale. Marketable securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities and are
reported at fair value, with realized gains and losses recognized in earnings. Short-term
investments classified as available for sale are stated at fair values. Unrealized gains or
losses on available-for-sale securities from the changes in fair value are recorded in
equity as other comprehensive income (loss). Realized gains or losses, based upon the
specific identification method, on the disposal of available-for-sale securities are
recorded in the consolidated statement of operations. |
|
|
|
The Company reviews investments in available-for-sale securities as of each balance sheet
date for other-than-temporary declines in fair value. If the Company determines that a
decline in fair value is other-than-temporary (OTTI), accumulated unrealized loss is
accounted for as realized loss and included in earnings. No other-than-temporary impairment
losses were recorded during the years ended December 31, 2007 and 2008. The Company recorded
an OTTI loss of RMB1,683 in 2009. |
|
|
|
Derivative financial instruments consisting of written call and put options (option
liabilities) are initially recorded at fair value and are re-valued at each reporting date,
with changes in fair value included in
earnings. |
F - 17
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
Inventories - Inventories are stated at the lower of cost or market price. Cost is
determined by the first in first out method. Provision for diminution in value on
inventories is made using the specific identification method. No inventory provisions were
made in 2007, 2008 and 2009. |
|
|
|
Trade receivables and allowance for doubtful accounts - Trade receivables mainly represents
amounts earned and collectible from customers. The Company provides an allowance for
doubtful accounts based on its aging analysis of trade receivables, customers
credit-worthiness, past collection history, and changes in a customers payment terms. The
Company also provides a specific allowance if there is strong evidence that indicates the
trade receivables are uncollectible, and writes off such trade receivables and specific
allowance within one year if circumstances are not improved. Trade receivables stated in the
consolidated balance sheet are net of such allowance. |
|
|
|
Changes in the allowance for doubtful accounts were as follows for the years ended December
31, 2007, 2008 and 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance at January 1, |
|
|
1,088 |
|
|
|
23,299 |
|
|
|
5,293 |
|
Provision for allowance for doubtful debts |
|
|
25,078 |
|
|
|
3,702 |
|
|
|
26,385 |
|
Recovery |
|
|
(2,683 |
) |
|
|
(821 |
) |
|
|
|
|
Write offs |
|
|
(184 |
) |
|
|
(20,887 |
) |
|
|
(262 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
|
23,299 |
|
|
|
5,293 |
|
|
|
31,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment - Property and equipment are recorded at cost less accumulated
depreciation, amortization and provision for impairment loss. 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 customer
relationships, buyer database, completed technology, purchased software for internal use and
land use right, are carried at cost, less accumulated amortization and provision for
impairment loss. |
|
|
|
Amortization is calculated on a straight-line basis over the expected useful life of the
assets of five years, except for the land use right which is amortized over fifty years.
Amortization expenses for the years ended December 31, 2007, 2008 and 2009 were RMB14,466,
RMB18,991 and RMB5,560 respectively. |
F - 18
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
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 adjust the carrying value of the
asset based on the fair value and recognize an impairment loss. Fair value is estimated
using expected discounted future cash flows. Impairment losses recognized in the years
ended December 31, 2007, 2008 and 2009 were RMB nil, RMB48,086 and RMB nil, respectively.
The impairment charge of RMB48,086 in 2008 is related to the Companys now-discontinued
B2B services segment. |
|
|
|
Impairment of 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 Company completes a two-step goodwill impairment test. The first step compares
the fair values of each reporting unit to its carrying amount, including goodwill. Fair
value is principally estimated using expected discounted future cash flows. 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 units 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. |
|
|
|
Management performed the annual goodwill impairment test as of December 31, 2007 and 2008.
In 2007 and 2008, based on the impairment assessment performed by management, the Company
recorded a goodwill impairment charge of RMB193,570 and RMB78,081, respectively. The
impairment charge in 2007 related to the Companys enterprise software and related customer
maintenance service, and software development services segments. The Companys financial
outlook from maintenance services for the free software offered by the Chinese government
was negatively impacted due to several factors. First, the Chinese governments declining
promotion of its free software resulted in a corresponding decline in the need for the
Companys maintenance services. Additionally, the Company believes there was uncertainty
surrounding the Chinese governments future promotional plans for its free software. As a
result, the Company decided to revise downward the financial performance projections and
assumptions of its enterprise software and related customer maintenance service segment,
resulting in a goodwill impairment loss of RMB187,770 for this segment in 2007. For the
software development services segment, the Company experienced a slowdown in the demand for
such services by the government and therefore also revised downward the financial
performance projections and assumptions, resulting in an impairment loss of RMB5,800 for
this segment in 2007. The impairment charge of RMB78,081 in 2008 is related to the Companys
now-discontinued B2B services segment. |
F - 19
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
The changes in the carrying amount of goodwill by reporting unit for the years ended
December 31, 2007 and 2008 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise software |
|
|
Software |
|
|
|
|
|
|
|
|
|
and related customer |
|
|
development |
|
|
|
|
|
|
|
|
|
maintenance services |
|
|
services |
|
|
B2B services |
|
|
Total |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance as of January 1, 2007 |
|
|
187,770 |
|
|
|
5,800 |
|
|
|
|
|
|
|
193,570 |
|
Goodwill acquired during the year |
|
|
|
|
|
|
|
|
|
|
78,081 |
|
|
|
78,081 |
|
Goodwill impairment during the
year |
|
|
(187,770 |
) |
|
|
(5,800 |
) |
|
|
|
|
|
|
(193,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
78,081 |
|
|
|
78,081 |
|
Goodwill impairment during the
year |
|
|
|
|
|
|
|
|
|
|
(78,081 |
) |
|
|
(78,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments under cost method - For investment in an investee over which the Company
does not have significant influence, the Company carries the investment at cost adjusted for
other-than-temporary declines in fair value, and recognizes income when receiving dividends
from distributions of the investees earnings. The Company reviews its investments 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. No impairment charge was
recorded for the years ended December 31, 2007, 2008 and 2009. |
|
|
|
Income taxes - Deferred income taxes are provided using the asset and liability method.
Under this method, deferred income taxes are recognized for tax credits and net operating
losses available for carry-forward and significant temporary differences. Deferred tax
assets and liabilities are classified as current or non-current based upon the
classification of the related asset or liability in the financial statements or the expected
timing of their reversal if they do not relate to a specific asset or liability. A valuation
allowance is provided to reduce the amount of deferred tax assets if it is considered more
likely than not that some portion of, or all of the deferred tax assets will not be
realized. Current income taxes are provided for in accordance with the laws and regulations
applicable to the Company as enacted by the relevant tax
authorities. |
|
|
|
On January 1, 2007, the Company adopted new accounting guidance related to uncertainty in
income taxes. The impact of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more likely-than-not to be sustained upon audit
by the relevant tax authority. An uncertain income tax position will not be recognized if it
has less than a 50% likelihood of being sustained. Additionally, new guidance was provided
on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The Company recognizes interest and penalties related to
uncertain tax benefits as a component of income tax expense. The Companys tax years from
2003 to 2009 are subject to examination by the tax authorities. |
|
|
|
Revenue recognition - The Companys revenue is derived from three primary sources: (i) sale
of enterprise software and related customer maintenance services; (ii) software development
services; (iii) food sales and catering services. |
|
|
|
Revenue from the sale of enterprise software and related customer maintenance service is
recognized when there is evidence of an arrangement, the delivery or service has occurred,
the fee is fixed or determinable, and collectability 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 and maintenance service on a straight-line basis over the
service period which is typically no more than 12 months. |
F - 20
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
For certain customers, the Company installs the software at the customers 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. The cost to
install the software has historically been insignificant. |
|
|
|
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, which 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. |
|
|
|
Certain revenue from software development services also includes hardware procurement under
customers request. Since the Company does not have vendor-specific objective evidence to
allow for separating various components of such software development service contracts, the
Company recognizes such revenues when all components under the contracts are delivered and
the project is completed upon the receipt of a written acceptance from the customer. |
|
|
|
Revenues from food sales are generally recognized upon delivery and revenues from catering
services are generally recognized when the catering services are provided. |
|
|
|
With the exception of rebates of value added tax on sales of software and related
maintenance services (VAT rebate) received from the Chinese tax authorities as part of the
PRC governments policy of encouraging software development in the PRC, the Company reports
revenue net of business tax. The VAT rebate was RMB4,347, RMB2,910 and RMB853 during 2007,
2008 and 2009, respectively. Pursuant to certain PRC rules relating to value-added tax,
Beijing Ninetowns Times, Beijing Ninetowns Digital Technology, Beijing Ninetowns Ports and
Beijing Ninetowns Network are entitled to a rebate of value-added tax 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. |
|
|
|
Cost of revenue - Cost of revenue includes procurement costs for products sold, and direct
costs associated with the delivery of software development and maintenance services, and food related
products and services, including salaries, employee benefits and overhead costs associated
with employees providing the related services. |
|
|
|
Research and development costs - Research and development expenses include payroll, employee
benefits and other costs associated with product development. Technological feasibility for
the Companys software products is reached shortly before the products are released for
production. Cost 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 RMB6,277, RMB8,298 and RMB1,580 during the years ended
December 31, 2007, 2008 and 2009, 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 companies that contribute significantly to local taxes. The
Company reports government subsidies
when it becomes due and receivable and the Company does not believe that it has any
obligation to repay the amounts received. |
F - 21
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
Foreign currency translation - The functional currency of the Companys subsidiaries and
VIEs established in the PRC is RMB. The functional currency of Ninetowns and its
subsidiaries established in countries other than the PRC is the US dollar. Transactions
denominated 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 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 income/loss in the
statement of shareholders equity. |
|
|
|
Comprehensive income - Comprehensive income includes net income/loss, foreign currency
translation adjustments and unrealized gain or loss on investments in available-for-sale
securities. |
|
|
|
Foreign currency risk - RMB is not a freely convertible currency. The State Administration
for Foreign Exchange, under the authority of the Peoples Bank of China, controls the
conversion of the RMB into foreign currencies. The value of the RMB is subject to changes in
PRC government policies and to international economic and political developments affecting
supply and demand in the China Foreign Exchange Trading System market. RMB balances in cash
and cash equivalents and term deposits of the Company included RMB494,615 at December 31,
2008 and RMB356,977 at December 31, 2009. |
|
|
|
Equity price risk -The Company is exposed to equity price risk as a result of its
investments in equity securities and written options. Equity price risk results from changes
in the level or volatility of equity prices, which affect the value of equity securities, or
instruments that derive their value from such securities. The Company attempts to mitigate
its exposure to such risks by not limiting its investment to any one security or index. |
|
|
|
Concentration of credit risk - Financial instruments that potentially expose the Company to
significant concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, trade receivables, and term deposits. The Company places its cash
and cash equivalents with financial institutions with high-credit ratings and quality.
Short-term investments are traded through highly rated equity security brokers. 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 measurement - Effective January 1, 2008 and 2009, the Company adopted new
accounting guidance related to fair value measurements for its financial and nonfinancial
assets and liabilities. The guidance adopted on January 1, 2009, did not have a significant
impact on the Company. Short-term investments and option liabilities are stated at fair
value. The carrying value of all other financial instruments approximates their fair value
due to the short-term nature of these instruments. |
|
|
|
The guidance defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. It also establishes a fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. |
F - 22
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
Level 1 Inputs |
|
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
|
|
|
Level 2 Inputs |
|
|
|
Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. |
|
|
|
Level 3 Inputs |
|
|
|
Level 3 inputs are unobservable inputs that shall be used to measure fair value to the
extent that observable inputs are not available for the asset or liability. |
|
|
|
Share-based compensation - The Company recognizes compensation cost on a straight-line basis
over the requisite service period, which is generally the vesting period, and measures the
cost of employee services received in exchange for stock based compensation at the grant
date fair value of the awards. |
|
|
|
Net income/loss per share - Basic net income/loss per share is computed by dividing net
income/loss attributable to ordinary shareholders by the weighted average number of ordinary
shares outstanding during the year. Diluted net income/loss 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/loss per share in periods when their effect would be
anti-dilutive. |
|
|
|
Recently issued accounting pronouncements - In June 2009, the Financial Accounting Standards
Board (FASB) issued revised guidance on the accounting for transfers of financial assets.
The revised guidance requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing exposure to the
risks related to the transferred financial assets. It eliminates the concept of a
qualifying special-purpose entity, changes the requirements for derecognizing financial
assets, and requires additional disclosures. This guidance will be effective for the Company
on January 1, 2010 and is not expected to have any impact on the Companys consolidated
financial statements. |
|
|
|
In June 2009, the FASB issued revised guidance on the consolidation of VIEs. The revised
guidance requires an analysis to determine whether a variable interest gives the entity a
controlling financial interest in a variable interest entity. Additionally, the revised
guidance requires an ongoing reassessment and eliminates the quantitative approach
previously required for determining whether an entity is the primary beneficiary. This
guidance will be effective for the Company on January 1, 2010 and is not expected to have a
material impact on the Companys consolidated financial statements. |
F - 23
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
|
In October 2009, the FASB issued new guidance on revenue recognition for arrangements with
multiple deliverables and certain revenue arrangements that include software elements. By
providing another alternative for determining the selling price of deliverables, the
guidance for arrangements with multiple deliverables will allow companies to allocate
arrangement consideration in multiple deliverable arrangements in a manner that better
reflects the transactions economics and will often result in earlier revenue recognition.
The new guidance modifies the fair value requirements of previous guidance by allowing best
estimate of selling price in addition to vendor-specific objective evidence (VSOE) and
other vendor objective evidence (VOE, now referred to as TPE standing for third-party
evidence) for determining the selling price of a deliverable. A vendor is now required to use its best
estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In
addition, the residual method of allocating arrangement consideration is no longer permitted
under the new guidance. The new guidance for certain revenue arrangements that include
software elements removes non-software components of tangible products and certain software
components of tangible products from the scope of existing software revenue guidance,
resulting in the recognition of revenue similar to that for other tangible products. The new
guidance is effective for fiscal years beginning on or after June 15, 2010. However,
companies may be able to adopt as early as interim periods ended September 30, 2009. The
guidance may be applied either prospectively from the beginning of the fiscal year for new
or materially modified arrangements or retrospectively. The Company has not early adopted
the new guidance and is currently evaluating the impact on its consolidated financial
statements of adopting this guidance. |
|
|
|
In December 2009, the FASB issued revised guidance on Consolidations Improvements to
Financial Reporting by Enterprises Involved with VIEs which is effective for the Company on
November 15, 2009. The amendments in this guidance replace the quantitative-based risks and
rewards calculation for determining which reporting entity, if any, has a controlling
financial interest in a variable interest entity, with an approach focused on identifying
which reporting entity has the power to direct the activities of a variable interest entity,
that most significantly impact the entitys economic performance and has (1) the obligation
to absorb losses of the entity or (2) the right to receive benefits from the entity. An
approach that is expected to be primarily qualitative will be more effective for identifying
which reporting entity has a controlling financial interest in a variable interest entity.
The amendments in this guidance also require additional disclosures about a reporting
entitys involvement in variable interest entities, which will enhance the information
provided to users of financial statements. The Company believes there will be no material
impact on its consolidated financial statements upon adoption of this standard. |
|
|
|
In December 2007, the FASB issued new accounting guidance that defines collaborative
arrangements and establishes reporting requirements for transactions between participants in
a collaborative arrangement and between participants in the arrangement and third parties.
It also establishes the appropriate income statement presentation and classification for
joint operating activities and payments between participants, as well as the sufficiency of
the disclosures related to those arrangements. This new accounting guidance was effective
for the Company on January 1, 2009, and its adoption did not have a significant impact on
its consolidated financial statements. |
|
|
|
In June 2009, the Financial Accounting Standards Board (FASB) approved its Accounting
Standards Codification or Codification as the single source of authoritative United States
accounting and reporting standards applicable for all nongovernmental entities, with the
exception of the SEC and its staff. The Codification, which changes the referencing of
financial standards, is effective for interim or annual financial periods ending after
September 15, 2009. Therefore, beginning in the third quarter of fiscal year 2009, all
references made to US GAAP use the new Codification numbering system prescribed by the FASB.
As the Codification did change and alter existing US GAAP, it did not have any impact
on the Companys consolidated financial statements. |
F - 24
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
2. |
|
SUMMARY OF PRINCIPAL ACCOUNTING POLICIES-continued |
|
|
Effective January 1, 2009, the Company adopted an authoritative pronouncement issued by the FASB
regarding non-controlling interests in consolidated financial statements. The pronouncement
improves the relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling interests in subsidiaries in the same
way as required in the consolidated financial statements. Moreover, the pronouncement eliminates
the diversity that currently exists in accounting for transactions between an entity and
non-controlling interests by requiring they be treated as equity transaction. The pronouncement
requires consolidated net income to be reported at amounts that include the amounts attributable to
both the parent and the non-controlling interest. Furthermore, disclosure of the amounts of
consolidated net income attributable to the parent and to the non-controlling interest is required
on the face of the financial statements. The pronouncement is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of the pronouncement required retroactive application of the
presentation and disclosure requirements of the standard to all periods presented. The adoption did
not impact the consolidated financial statements presented herein, except for the presentation and
disclosure requirements affecting all periods presented including: |
|
(a) |
|
the non-controlling interest has been reclassified to equity, |
|
|
(b) |
|
consolidated net income or loss has been adjusted to include the net income or loss
attributable to the non-controlling interest, |
|
|
(c) |
|
consolidated comprehensive income or loss has been adjusted to include the comprehensive income
or loss attributable to the non-controlling interest and |
|
|
(d) |
|
for each reporting period the Company must present a reconciliation at the beginning and end of
the period of the carrying amount of total equity and equity attributable to the Company and the
non-controlling interest. |
|
|
Accordingly, after adoption, non-controlling interests
(approximately negative RMB89 and RMB nil at
December 31, 2009 and December 31, 2008, respectively) are classified as equity, a change
from its previous classification between liabilities and stockholders equity. Losses
attributable to non-controlling interest (approximately RMB89, RMB5,483 and RMB6,053 for
2009, 2008 and 2007, respectively) are included in net income (loss), although such losses
continue to be deducted to measure earnings (loss) per share. |
|
3. |
|
DISCONTINUED OPERATIONS |
|
|
|
On March 20, 2009, the Company announced that it has undertaken a thorough review of its
overall B2B strategy for international trade and decided to discontinue its tootoo.com
business. This decision was made in light of the major changes in the global economic
environment. Tootoo.com was originally developed as a B2B search and service provider for
suppliers and buyers engaged in international trade. |
|
|
|
As a result of this decision, the Company recognized a one-time non-cash
impairment charge of approximately RMB115 million against its long-lived assets and
goodwill in 2008. |
|
|
|
Summarized operating results from discontinued operations included in the Companys
consolidated statements of operations were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Net revenues |
|
|
489 |
|
|
|
2,496 |
|
|
|
880 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(33,002 |
) |
|
|
(181,020 |
) |
|
|
(7,347 |
) |
Income tax benefit |
|
|
2,887 |
|
|
|
14,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
|
(30,115 |
) |
|
|
(166,802 |
) |
|
|
(7,347 |
) |
Non-controlling interest in discontinued operations |
|
|
6,053 |
|
|
|
5,483 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued operations attributable to the Company |
|
|
(24,062 |
) |
|
|
(161,319 |
) |
|
|
(7,258 |
) |
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations -basic |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
Loss per share from discontinued operations -diluted |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
4. |
|
SHORT-TERM INVESTMENTS |
|
|
|
Short-term investments include trading securities and available-for-sale securities. Trading
securities consist of investments in marketable equity securities with the intention of
selling them in the short term. Available-for-sale securities consist principally of equity
securities and balanced funds without a contractual expiration date issued by major financial
institutions. |
F - 25
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
4. |
|
SHORT-TERM INVESTMENTS-continued |
|
|
|
The following table provides additional information concerning the Companys trading
securities and available-for-sale securities: |
|
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 (RMB) |
|
|
December 31, 2009 (RMB) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
realized |
|
|
realized |
|
|
Fair |
|
|
|
|
|
|
realized |
|
|
realized |
|
|
Fair |
|
|
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 (RMB) |
|
|
December 31, 2009 (RMB) |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Other-than |
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
unrealized |
|
|
Fair |
|
|
|
|
|
|
unrealized |
|
|
unrealized |
|
|
-temporary |
|
|
Fair |
|
|
|
Cost |
|
|
gains |
|
|
losses |
|
|
value |
|
|
Cost |
|
|
gains |
|
|
losses |
|
|
impairment |
|
|
value |
|
Available-for-sale
securities |
|
|
13,149 |
|
|
|
|
|
|
|
(3,125 |
) |
|
|
10,024 |
|
|
|
158,674 |
|
|
|
13,488 |
|
|
|
(170 |
) |
|
|
(1,683 |
) |
|
|
170,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,149 |
|
|
|
|
|
|
|
(3,125 |
) |
|
|
10,024 |
|
|
|
158,674 |
|
|
|
13,488 |
|
|
|
(170 |
) |
|
|
(1,683 |
) |
|
|
170,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, one of the Companys available-for-sale securities had an unrealized
loss of approximately RMB1,853. This security relates to a fund that invests in natural gas
related projects and represents approximately 4% of total investments. Although the Company
had the ability to hold this security (and has the ability to hold all of its available-for-sale
securities for a long-term period), the Company sold this security in January 2010 and
realized a loss of RMB1,683. Therefore, management determined it appropriate to classify a
portion of unrealized loss as an OTTI as of December 31, 2009. The Company assesses all of
its available-for-sale securities and has determined that no other OTTIs are present at
December 31, 2009. |
|
|
|
Proceeds, gross realized gains and gross realized losses on securities classified as available
for sale for each of the years ended December 31, 2007, 2008 and 2009 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Proceeds |
|
|
2,330 |
|
|
|
|
|
|
|
177,179 |
|
Gross realized gains |
|
|
342 |
|
|
|
|
|
|
|
27,823 |
|
Gross realized losses |
|
|
|
|
|
|
|
|
|
|
(13,362 |
) |
F - 26
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
4. |
|
SHORT-TERM INVESTMENTS-continued |
The summary of trading and available-for-sale securities measured and recorded at fair value
on a recurring basis as of December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets |
|
|
Observable |
|
|
Unobservable |
|
|
|
December 31, |
|
|
for Identical |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
Assets (Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
(RMB) |
|
|
(RMB) |
|
|
(RMB) |
|
|
(RMB) |
|
Available-for-sale
securities |
|
|
170,309 |
|
|
|
170,309 |
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
917 |
|
|
|
917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
171,226 |
|
|
|
171,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Computer accessories |
|
|
1,302 |
|
|
|
1,107 |
|
Food products and related consumables |
|
|
65 |
|
|
|
1,296 |
|
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
2,403 |
|
|
|
|
|
|
|
|
6. |
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Advances to employees |
|
|
2,277 |
|
|
|
1,242 |
|
Prepaid expenses |
|
|
3,482 |
|
|
|
2,089 |
|
Deposits for office rental, utilities |
|
|
325 |
|
|
|
1,094 |
|
Interest receivable for term deposits |
|
|
571 |
|
|
|
242 |
|
Value added tax recoverable |
|
|
75 |
|
|
|
268 |
|
Other receivables |
|
|
257 |
|
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
6,987 |
|
|
|
6,046 |
|
|
|
|
|
|
|
|
F - 27
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
7. |
|
PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Buildings |
|
|
193,814 |
|
|
|
197,452 |
|
Leasehold improvements |
|
|
6,512 |
|
|
|
7,885 |
|
Furniture, fixtures and office equipment |
|
|
5,096 |
|
|
|
5,774 |
|
Computer equipment |
|
|
32,336 |
|
|
|
30,600 |
|
Motor vehicles |
|
|
7,012 |
|
|
|
7,859 |
|
|
|
|
|
|
|
|
Total |
|
|
244,770 |
|
|
|
249,570 |
|
Less: accumulated depreciation and amortization |
|
|
(31,589 |
) |
|
|
(44,782 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
213,181 |
|
|
|
204,788 |
|
|
|
|
|
|
|
|
In March 2009, the Company announced the decision to wind down the B2B services. In
conjunction with the winding down of the B2B business, the Company revised the estimate of
future cash flows used in evaluating the fair value of long-lived assets using the discounted
cash flow method. As a result, the fair value of long-lived assets was significantly reduced
and the Company recognized an impairment loss of RMB4,339 in 2008 against computer equipment
related to the now-discontinued B2B business.
Depreciation and amortization expenses for the years ended December 31, 2007, 2008 and 2009
were RMB9,867, RMB17,922, and RMB 16,916, respectively.
8. |
|
INVESTMENTS UNDER COST METHOD |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Global Market |
|
|
28,708 |
|
|
|
28,663 |
|
Tophere |
|
|
4,500 |
|
|
|
4,500 |
|
GCL |
|
|
7,085 |
|
|
|
7,074 |
|
|
|
|
|
|
|
|
|
|
|
40,293 |
|
|
|
40,237 |
|
|
|
|
|
|
|
|
In September 2006, the Company entered into a subscription agreement with Global Market
Group Limited (Global Market) to acquire 1,940,000 Series A preferred shares, which
represented 16.25% of the equity interest in Global Market on an as-converted basis for cash
consideration of RMB38,929 (US$5,000). The Companys Chief Executive Officer is a director of
Global Market. Because the Company cannot exercise significant influence over Global Market,
the investment is accounted for under the cost method.
The original subscription agreement contained put and call options. The call option gave the
Company the right to acquire a certain number of Global Markets ordinary shares at a nominal
price of US$1 in the event Global Markets earnings fell below a predetermined level, or to
receive cash if additional earnings requirements were not met. The put option gave Global
Market the right to repurchase up to 285,000 ordinary shares from the Company at a nominal
price of US$1 if Global Markets earnings were above a predetermined level.
F - 28
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
8. |
|
INVESTMENTS UNDER COST METHOD-continued |
In March 2008, Global Market issued and allotted 7,653,846 Series B Preferred Shares to
certain investors, after which the Companys equity interest in Global Market was diluted to
9.90%. The Company and Global Market both waived the put and call options set out in the
original Series A preferred shares subscription agreement.
In 2008, the Company entered into a share repurchase agreement with Global Market, under which
Global Market repurchased 309,468 Series A preferred shares from the Company for a cash
consideration of RMB 7,725 (US$1,112) and the Companys equity interest in Global Market was
further reduced to 9.03%. The Company recognized a gain of RMB 2,187 (US$321) upon the
disposal of the Series A preferred shares.
In 2009, Global Market made a stock split that each share of US$0.001 in the share capital be
subdivided into twenty-five shares of US$0.00004 each. After the split, the Companys share
remains 9.03%.
In June 2010,
Global Market paid a cash payment of special dividends to the holders of its
ordinary shares, Series A preferred shares and Series B preferred shares.
The Company received dividends of RMB6,164 (US$903).
In June 2010, the Company entered into a share purchase agreement with Global Market, under
which Global Market and Shanghai International Growth Investment Limited purchased 24,714,225
Series A preferred shares from the Company for a cash consideration of RMB26,448 (US$3,875).
The Companys equity interest in Global Market was further reduced to 3.55%.
In November 2007, the Company entered into an agreement with Hangzhou Tophere Info-Tech Inc.
(Tophere), a Chinese B2B food and beverage trade facilitator headquartered in Hangzhou, to
acquire a 19.8% equity interest for a cash consideration of RMB4,500. Because the Company
cannot exercise significant influence over Tophere, the investment is accounted for under the
cost method.
In June 2008, the Company entered into an investment agreement with Pearl Ever Group Limited
(Pearl Ever), under which the Company, through Pearl Ever, invested RMB7,085 (US$1,000) into
GCL Silicon Technology Holdings Inc. (GCL) for a 0.06% interest in GCLs equity. Because the
Company cannot exercise significant influence over GCL, the investment is accounted for under
the cost method.
In May 2010, the Company sold part of the investment in GCL, and received RMB7,626,
(US$1,117).
F - 29
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
9. |
|
ACQUIRED INTANGIBLE ASSETS, NET |
Acquired intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Customer lists and relationships |
|
|
6,131 |
|
|
|
6,131 |
|
Completed technology |
|
|
5,251 |
|
|
|
5,251 |
|
Purchased software for internal use |
|
|
17,200 |
|
|
|
17,200 |
|
Land use right |
|
|
30,156 |
|
|
|
30,156 |
|
|
|
|
|
|
|
|
Total |
|
|
58,738 |
|
|
|
58,738 |
|
Less: Accumulated amortization |
|
|
(17,469 |
) |
|
|
(23,029 |
) |
|
|
|
|
|
|
|
Acquired intangible assets, net |
|
|
41,269 |
|
|
|
35,709 |
|
|
|
|
|
|
|
|
In October 2008, the Company acquired a land use right from Yizhuang Substation of the PRC
Country Resources Bureau for RMB 30,156. The land use right has a contractual useful life
of 50 years.
In March 2009, the Company announced the decision to wind down the B2B services. In
conjunction with the winding down of the B2B business, the Company revised the estimate of
future cash flows used in evaluating the fair value of long-lived assets using the
discounted cash flow method. As a result, the fair value of long-lived assets was
significantly reduced and the Company recognized an impairment loss of RMB43,747 in 2008
against customer lists and relationships, completed technology and other acquired intangible
assets related to the now discontinued B2B business.
Amortization expenses for the years ended December 31, 2007, 2008, and 2009 were RMB14,466,
RMB18,991, and RMB5,560, respectively.
The following table represents the total estimated amortization of intangible assets for the
next five years:
|
|
|
|
|
For the Year Ending December 31 |
|
Estimated Amortization Expense |
|
|
|
RMB |
|
2010 |
|
|
4,043 |
|
2011 |
|
|
3,470 |
|
2012 |
|
|
603 |
|
2013 |
|
|
603 |
|
2014 |
|
|
603 |
|
|
|
|
|
|
|
|
9,322 |
|
|
|
|
|
The Company writes call and put options through listed exchanges. When the Company writes an
option, an amount equal to the premium received by the Company is recorded as a liability and
is subsequently adjusted to the current fair value of the option written. Premiums received
from writing options that expired are treated by the Company on the expiration date as
realized gains from investments. If a call option is exercised, the premium is added to the
proceeds from the sale of the underlying security in determining whether the Company has realized a gain or loss. If a put option is exercised, the premium is
deducted from the total purchase price in determining the cost of the underlying security. The
Company, as the option writer of an option, bears the market risk of an unfavorable change in
the price of the security underlying the written options. At December 31, 2009, option
liabilities included liabilities for call options of RMB6,054 and put options of RMB5,800.
F - 30
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
11. |
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consisted the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Salary and wages |
|
|
3,274 |
|
|
|
2,449 |
|
Professional fees |
|
|
1,117 |
|
|
|
87 |
|
Accounts payable and other payables |
|
|
3,008 |
|
|
|
5,565 |
|
Office expenses payable |
|
|
1,015 |
|
|
|
1,088 |
|
Accrued expenses |
|
|
5,102 |
|
|
|
2,180 |
|
|
|
|
|
|
|
|
|
|
|
13,516 |
|
|
|
11,369 |
|
|
|
|
|
|
|
|
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 years ended December 31,
2007, 2008 and 2009. The subsidiaries incorporated in the PRC other than Hong Kong are
governed by the Income Tax Law of the PRC Concerning Foreign Investment and Foreign
Enterprises and various local income tax laws (the Income Tax Laws).
On March 16, 2007, the National Peoples Congress adopted the 2008 PRC Enterprise Income Tax
Law (the New Income Tax Law), which went into effective on January 1, 2008. The New Income
Tax Law imposes a unified income tax rate of 25% for domestic and foreign enterprises. New and
High Technology Enterprise will enjoy a favorable tax rate of 15%. The New Income Tax Law also
provides a five-year transitional period for those entities established before March 16, 2007,
which enjoy a favorable income tax rate less than 25% under the previous income tax laws, to
gradually change their rates to 25%. In addition, the New Income Tax Law provides grandfather
treatment for enterprises which were qualified as New and High Technology Enterprises under
the previous income tax laws and were established before March 16, 2007, if they continue to
meet the criteria for New and High Technology Enterprises after January 1, 2008. The
grandfather provision allows these enterprises to continue to enjoy their unexpired tax
holiday provided by the previous income tax laws and rules.
The New and High Technology Enterprises status allows qualifying entities to be eligible for a
15% tax rate for three years. At the conclusion of the three year period, the qualifying
enterprise has the option to renew its New and High Technology Enterprises status for an
additional three years through a simplified application process if such enterprises business
operations continue to qualify for New and High
Technology Enterprises status. After the first six years, the enterprise would have to go
through a new application process in order to renew its New and High Technology Enterprises
status.
F - 31
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
12. |
|
INCOME TAXES-continued |
Under the New Income Tax Law, if the PRC subsidiaries and VIEs wish to qualify for a
preferential rate for years commencing on or after January 1, 2008, they will need to qualify
as a High and New Technology Enterprise Strongly Supported by the State under the new rules.
Until the PRC subsidiaries and VIEs receive official approval for this new status, they will
be subject to the statutory 25% tax rate. Furthermore, under the New Income Tax Law a
resident enterprise, which includes an enterprise established outside of
the PRC with management located in the PRC, will be subject to the PRC income tax. If the
PRC tax authorities subsequently determine that the Company and its subsidiaries
registered outside the PRC should be deemed a resident enterprise, the Company and its
subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of
25%.
Beijing New Take, Beijing Ninetowns Times and Beijing Ninetowns Digital Technology were
awarded the certificate of New and High Technology Enterprise and were at an income tax
rate of 15% for the year ended December 31, 2007. In 2008 and 2009, Beijing New Take,
Beijing Ninetowns Times and Beijing Ninetowns Digital Technology were subject to an
enterprise income tax rate of 25%.
Beijing Ninetowns Ports was awarded the certificate of New and High Technology Enterprise
and was at an income tax rate of 7.5% for the year ended December 31, 2007. In 2008, Beijing
Ninetowns Ports was at an income tax rate of 25% and in 2009 was at an income tax rate of
15%.
Guangdong Ninetowns was awarded the certificate of New and High Technology Enterprise and
was exempted from the enterprise income tax for the year ended December 31, 2007. In 2008,
Guangdong Ninetowns was under the grandfather treatment and enjoyed the unexpired tax
holiday with a rate of 7.5%. In 2009, Guangdong Ninetowns was subject to a preferential
enterprise income tax rate of 15%.
Beijing Ninetowns Network Software and Beijing Ronghe Tongshang were awarded the certificate
of New and High Technology Enterprise and were exempted from enterprise income tax for the
year ended December 31, 2007. In 2008 and 2009, Beijing Ninetowns Network Software and
Beijing Ronghe Tongshang were subject to an enterprise income tax rate of 25%.
Baichuan Tongda was acquired in April 2007 and was subject to an income tax rate of 33%, 25%
and 25% in 2007, 2008 and 2009, respectively.
Beijing Software and Dongguan Software were established in 2008 and were subject to an
income tax rate of 25% in 2008 and 2009.
Beijing Sky, Shanghai Meihuilong, Shanghai Tootoo, and Guangdong Nine Masters were
established in 2009 and were subject to an income tax rate of 25% in 2009.
During the years ended December 31, 2007, 2008 and 2009, if the Companys subsidiaries in
the PRC had not been awarded tax holidays or had special tax concessions, they would have
recorded an additional provision for income taxes totaling RMB23,501, RMB nil and RMB501,
respectively. Basic net income (loss) per share would have been changed to RMB(7.26),
RMB(4.85) and RMB0.02 and diluted net income (loss) per share would have been changed to
RMB(7.26), RMB(4.85) and RMB0.02, for the years ended December 31, 2007, 2008, and 2009,
respectively.
F - 32
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
12. |
|
INCOME TAXES-continued |
Income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Current tax |
|
|
1,367 |
|
|
|
(147 |
) |
|
|
6,070 |
|
Deferred tax |
|
|
1,763 |
|
|
|
983 |
|
|
|
(1,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,130 |
|
|
|
836 |
|
|
|
4,100 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2009, 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 |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Current deferred tax assets (liabilities) |
|
|
|
|
|
|
|
|
Short-term deferred revenue (B2G) |
|
|
4,811 |
|
|
|
1,463 |
|
Allowance for doubtful accounts |
|
|
|
|
|
|
6,596 |
|
Less: valuation allowances |
|
|
(4,679 |
) |
|
|
(7,051 |
) |
|
|
|
|
|
|
|
Current deferred tax assets |
|
|
132 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets |
|
|
|
|
|
|
|
|
Net operating losses carry forwards |
|
|
7,801 |
|
|
|
8,105 |
|
Less: valuation allowances |
|
|
(7,801 |
) |
|
|
(8,105 |
) |
|
|
|
|
|
|
|
Non-current deferred tax assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities |
|
|
|
|
|
|
|
|
Accelerated depreciation of property and equipment |
|
|
(1,807 |
) |
|
|
(713 |
) |
|
|
|
|
|
|
|
Non-current deferred tax liabilities |
|
|
(1,807 |
) |
|
|
(713 |
) |
|
|
|
|
|
|
|
The Company has operating loss carry forwards totaling RMB31,203 and RMB32,825 as of
December 31, 2008 and 2009 respectively, all of which were from PRC subsidiaries and will
expire on various dates between December 31, 2013 and December 31, 2014.
As of December 31, 2008 and 2009, a valuation allowance was provided against deferred tax
assets arising from net operating loss carry-forwards, and short-term deferred revenue of
certain PRC subsidiaries and VIEs due to the uncertainty of realization. Adjustment will be
made to the valuation allowance if events occur in the future that indicate changes in the
amount of deferred tax assets that may be realized.
The Company operates through multiple subsidiaries and VIEs 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 subsidiarys or VIEs earnings or deferred taxes.
If the Company were to be a non-resident for PRC tax purposes, dividends paid to it out of
profits earned after January 1, 2008 would be subject to a withholding tax. In the case of
dividends paid by PRC subsidiaries the withholding tax would be 10% and in the case of a
subsidiary 25% or more directly owned by residents in the Hong Kong Special Administrative
Region, the withholding tax would be 5%.
F - 33
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
12. |
|
INCOME TAXES-continued |
Aggregate undistributed earnings of the Companys subsidiaries and its VIEs located in
the PRC that are
available for distribution to the Company of approximately RMB541,000 and RMB550,000 at
December 31, 2008 and 2009 are considered to be indefinitely reinvested, and accordingly, no
provision has been made for the Chinese dividend withholding taxes that would be payable
upon the distribution of those amounts to the Company. The Chinese tax authorities have
clarified that distributions made out of pre-January 1, 2008 retained earnings will not be
subject to the withholding tax. Current tax expense for the year ended December 31, 2009
includes estimated withholding tax related to dividends in excess of pre-January 1, 2008
retained earnings paid by Chinese subsidiaries to overseas holding companies.
A reconciliation between income tax expense (benefit) computed by applying the PRC statutory
income tax rate of 25% to income (loss) before income taxes and the actual provision for
income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
PRC statutory income tax |
|
|
(33.0 |
%) |
|
|
(25.0 |
%) |
|
|
25.0 |
% |
Expenses not deductible for tax purposes |
|
|
6.4 |
% |
|
|
18.2 |
% |
|
|
21.9 |
% |
Provision for withholding tax on
inter-company distributions |
|
|
|
|
|
|
|
|
|
|
37.5 |
% |
Permanent differences |
|
|
11.1 |
% |
|
|
12.0 |
% |
|
|
(32.6 |
%) |
Tax exemption and tax relief granted
to PRC subsidiaries |
|
|
15.5 |
% |
|
|
(9.7 |
%) |
|
|
(4.0 |
%) |
Effect on deferred taxes due to changes
in tax rates under the new law for
certain subsidiaries |
|
|
(1.5 |
%) |
|
|
(6.7 |
%) |
|
|
(15.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
%) |
|
|
(11.2 |
%) |
|
|
32.3 |
% |
|
|
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as
follows:
|
|
|
|
|
|
|
RMB |
|
Balance at January 1, 2008 |
|
|
832 |
|
Additions based on tax positions related to the current year |
|
|
151 |
|
Reversal based on tax positions related to the current year |
|
|
(688 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
|
295 |
|
Additions based on tax positions related to the current year |
|
|
4,989 |
|
Reversal based on tax positions related to the current year |
|
|
(143 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
|
5,141 |
|
|
|
|
|
The Company does not anticipate any significant change within 12 months of this reporting
date to its uncertain tax positions. Interest and penalties recognized in the statement of
operations and current liabilities was not significant in 2007, 2008 and 2009.
F - 34
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
Individual income tax withholding |
|
|
196 |
|
|
|
144 |
|
Business tax payable |
|
|
863 |
|
|
|
1,231 |
|
Value added taxes payable (recoverable), net |
|
|
(302 |
) |
|
|
(703 |
) |
Property tax |
|
|
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,635 |
|
|
|
672 |
|
|
|
|
|
|
|
|
The Companys 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. There is
no VAT on food sales and services. The Company is also required to withhold PRC individual
income taxes on employees payroll for remittance to the tax authorities. In addition, in
October 2008, the Company purchased a land use right resulting in a property tax liability
thereon.
14. |
|
NET (LOSS) INCOME PER SHARE |
The following table sets forth the computation of basic and diluted (loss) income per share
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Numerator used in basic (loss)
income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before
non-controlling interests |
|
|
(206,469 |
) |
|
|
(8,293 |
) |
|
|
8,590 |
|
Loss from discontinued
operations attributable to the
Company |
|
|
(24,062 |
) |
|
|
(161,319 |
) |
|
|
(7,258 |
) |
(Loss) income attributable to
the Company |
|
|
(230,531 |
) |
|
|
(169,612 |
) |
|
|
1,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
outstanding |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
Plus: incremental shares from
assumed conversion of stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares
outstanding used in computing
diluted (loss) income per
ordinary share |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations per share basic |
|
|
(5.90 |
) |
|
|
(0.24 |
) |
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations per share diluted |
|
|
(5.90 |
) |
|
|
(0.24 |
) |
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations per share basic |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations per share diluted |
|
|
(0.69 |
) |
|
|
(4.61 |
) |
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to
the Company per share basic |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to
the Company per share diluted |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
F - 35
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
14. |
|
NET (LOSS) INCOME PER SHARE-continued |
American Depository Receipts held by the Company to facilitate cashless
exercises of vested employee stock options and non-vested shares for
673,278 and 793,814 ordinary shares have been excluded from shares
issued and outstanding as of December 31, 2009 and 2008,
respectively.
The Company had 924,528, 2,185,830 and 3,320,311 ordinary share equivalents outstanding,
that could potentially dilute basic income (loss) per share in the future, which were
excluded in the computation of diluted (loss) income per share in 2007, 2008 and 2009,
respectively, as their effect would have been anti-dilutive.
15. |
|
RELATED PARTY TRANSACTIONS AND BALANCES |
Sales of enterprises software and related customer maintenance service:
The Company has an agreement with Shenzhen Ninetowns Enke Software Technology Co., Ltd.
(Ninetowns Enke), a company owned by the Companys former employee, for the distribution
of the Companys enterprise software in the southern region of the PRC. During the years
ended December 31, 2007, 2008 and 2009, the Company recognized net revenues of RMB2,937,
RMB2,475 and RMB2,268, respectively, from the sales of enterprise software and related
customer maintenance service to Ninetowns Enke.
The Company signed an agreement with Guangzhou Wangli Software Co., Ltd. (Guangzhou
Wangli), a company owned by a minority shareholder of one of the Companys VIEs, for the
distribution of the Companys enterprise software in the PRC. During the years ended
December 31, 2007, 2008 and 2009, the Company recognized net revenues of
RMB6,348, RMB11,976 and RMB9,273, respectively, from the sales of enterprise
software and related customer maintenance services to Guangzhou Wangli.
The Company sold software products to Beijing iTowNet Cyber Technology Ltd. (Beijing
iTowNet) in which two members of the Companys senior management serve as director and
supervisor, directly and indirectly, amounting to RMB229 in the year ended December 31,
2007. The Company did not sell software products to Beijing iTowNet in 2008. In 2009, the
Company provided software development services to Beijing iTowNet and recognized net revenue
of RMB350.
Other:
In November 2004, the Company entered into an option agreement to acquire a 49% ownership
interest in Beijing iTowNet, exercisable at the Companys option. In the event the 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
Beijing iTowNet less any dividends or distributions the selling company received during its
ownership of Beijing iTowNet.
Related party balances:
As of December 31, 2008 and 2009, trade receivables from related parties in respect of sales
of enterprises software and related customer maintenance services and software development
services were RMB6,005 and RMB5,669, respectively. The Company adopted the same accounting
policies that were applied to trade receivables due from customers for the allowance for
doubtful accounts related to related party receivables.
At January 1, 2008, RMB1,450 was due to an affiliate, Guangzhou Yuejiu. In 2008, Guangzhou
Yuejiu was liquidated and the amount was repaid.
F - 36
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
The 2003 Plan
The Companys 2003 Plan (the 2003 Plan) allows the Company to issue options to employees
and directors to acquire 2,574,400 of the Companys ordinary shares. The 2003 Plan will
remain in effect for ten years starting from the date of adoption.
As of December 31, 2008 and 2009, options to purchase 1,338,753 and 1,276,449 ordinary
shares were outstanding, respectively, under the 2003 Plan. As of December 31, 2008 and
2009, there were 383,955 and 446,259 options, respectively, available under the 2003 Plan
for future grants.
The 2004 Plan (as amended)
Under the Amended and Restated 2004 Plan (the 2004 Plan, as amended), the Company may
grant options to its employees that are exercisable for up to 4.3 million ordinary shares at
prices to be determined by the Companys Board of Directors. The 2004 Plan, as amended, also
permits the Company to grant share appreciation rights, restricted share awards, and
performance awards. The 2004 Plan, as amended, will automatically terminate in ten years
from grant date unless the Company terminates it earlier.
On February 23, 2005, Ninetowns granted options to certain employees to purchase 890,000
ordinary shares at an exercise price of RMB71 (US$8.6) per ordinary share, which was the
closing fair market value of the Companys ordinary shares on 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.
On February 5, 2008, Ninetowns granted options to certain employees to purchase 374,769
ordinary shares at an exercise price of RMB22 (US$3.03) per ordinary share, which was the
closing fair market value of the Companys ordinary shares on 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 4, 2018.
On July 16, 2009, Ninetowns granted options to certain employees to purchase 1,369,800
ordinary shares at an exercise price of RMB10 (US$1.4) per ordinary share, which was the
average closing fair market value of the Companys ordinary shares for the month 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 July 15, 2019.
As of December 31, 2008 and 2009, options to purchase 774,396 and 2,043,862 ordinary shares
were outstanding, respectively.
The fair value of the option awards is estimated on the respective dates of grant using a
dividend adjusted Black Scholes pricing model that uses the assumptions noted in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
Options grants |
|
2005 Grant |
|
|
2008 Grant |
|
|
2009 Grant |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed average risk-free rate of interest |
|
|
5 |
% |
|
|
3.89 |
% |
|
|
2.9 |
% |
Weighted average expected option life (years) |
|
6.25 years |
|
6.25 years |
|
6.25 years |
Weighted average volatility rate |
|
|
55 |
% |
|
|
53 |
% |
|
|
61 |
% |
Weighted average dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
The risk-free rate of interest is based on the market yield of China Sovereign Bond
Denominated in USD with maturity nearest to the expected term as of the valuation date. No
dividend is expected to be paid in the future. The expected life of the option is derived
using the mid-point method, which is calculated as the
period between the grant date and the expected exercise date.
F - 37
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
16. |
|
SHARE OPTION PLANS-continued |
On February 5, 2008, Ninetowns granted 401,685 nonvested shares to certain employees. The
nonvested shares will vest over four years at 25% per year from the grant date.
On July 16, 2009, Ninetowns granted 58,698 nonvested shares to certain employees. 25% of the
nonvested shares will vest on the grant date and the remaining will vest over three years at
25% per year from the grant date. As of December 31, 2008 and 2009, 380,559 and 298,256
nonvested shares were outstanding.
As of December 31, 2008 and 2009, 3,145,045 and 1,837,346 share-based instruments were
available under the 2004 Plan, as amended, for future grants.
The 2006 Plan
In December 2005, the Companys shareholders 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 Companys 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, 2009, the Company had not granted any
options or other types of awards under the 2006 Plan.
A summary of the share options and nonvested shares activities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
Average |
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of |
|
|
Exercise |
|
|
of |
|
|
exercise |
|
|
of |
|
|
exercise |
|
Share options |
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
|
|
|
|
RMB |
|
|
|
|
|
RMB |
|
|
|
|
|
RMB |
|
Outstanding at beginning
of year |
|
|
2,500,947 |
|
|
|
40 |
|
|
|
2,030,973 |
|
|
|
40 |
|
|
|
2,113,149 |
|
|
|
36 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
374,769 |
|
|
|
22 |
|
|
|
1,369,800 |
|
|
|
22 |
|
Exercised |
|
|
(47,862 |
) |
|
|
26 |
|
|
|
(6,186 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
(422,112 |
) |
|
|
39 |
|
|
|
(286,407 |
) |
|
|
50 |
|
|
|
(162,638 |
) |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
2,030,973 |
|
|
|
40 |
|
|
|
2,113,149 |
|
|
|
36 |
|
|
|
3,320,311 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
1,872,918 |
|
|
|
37 |
|
|
|
1,711,666 |
|
|
|
36 |
|
|
|
1,790,239 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
|
|
|
|
|
|
grant-date |
|
Nonvested Shares |
|
|
Shares |
|
|
fair value |
|
|
|
|
|
|
|
|
|
|
|
RMB |
|
Nonvested at January 1, 2009 |
|
|
|
|
|
|
380,559 |
|
|
|
20.97 |
|
Granted |
|
|
|
|
|
|
58,698 |
|
|
|
10.59 |
|
Vested |
|
|
|
|
|
|
(120,536 |
) |
|
|
19.71 |
|
Forfeited |
|
|
|
|
|
|
(20,465 |
) |
|
|
20.97 |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2009 |
|
|
|
|
|
|
298,256 |
|
|
|
19.44 |
|
|
|
|
|
|
|
|
|
|
|
|
F - 38
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
16. |
|
SHARE OPTION PLANS-continued |
The total intrinsic value of options exercised during the years ended December 31, 2007,
2008, and 2009 was RMB0.6 million, RMB nil, and RMB nil, respectively. As of December 31,
2009, the aggregate intrinsic value of both options outstanding and options exercisable was
RMB nil.
The outstanding options as of December 31, 2009 have the following characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
1,276,449 |
|
|
|
3.875 |
|
|
RMB0.297 (HK$0.286) |
|
|
26 |
|
|
|
1,276,449 |
|
|
|
26 |
|
|
460,936 |
|
|
|
5.167 |
|
|
RMB40.42 (US$4.896) |
|
|
71 |
|
|
|
460,936 |
|
|
|
71 |
|
|
213,126 |
|
|
|
8.099 |
|
|
RMB11.63 (US$1.619) |
|
|
22 |
|
|
|
52,854 |
|
|
|
22 |
|
|
1,369,800 |
|
|
|
9.496 |
|
|
RMB6.49 (US$0.947) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,320,311 |
|
|
|
6.644 |
|
|
|
|
|
|
|
25 |
|
|
|
1,790,239 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the unrecognized share-based compensation cost related to
options was approximately RMB6,026 and is expected to be recognized over a weighted average
vesting period of 2.5 years. As of December 31, 2009, the unrecognized share-based
compensation cost related to nonvested share-based compensation arrangements was
approximately RMB2,028 and is expected to be recognized over a weighted-average vesting
period of 2.2 years.
The amounts of share-based compensation attributable to cost of revenues, sales and
marketing, general and administrative expenses, and research and development included in those
line items in the consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Cost of revenues |
|
|
126 |
|
|
|
287 |
|
|
|
51 |
|
Sales and marketing |
|
|
628 |
|
|
|
1,633 |
|
|
|
787 |
|
General and administrative |
|
|
1,145 |
|
|
|
3,789 |
|
|
|
3,297 |
|
Research and development |
|
|
27 |
|
|
|
1,162 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
expense |
|
|
1,926 |
|
|
|
6,871 |
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
|
In 2009, 673,278 of the Companys ordinary shares were reserved for future share
option exercises.
F - 39
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
The Company has operating lease agreements principally for its office properties in the PRC.
The leases have remaining terms ranging from 12 to 24 months and are renewable subject to
negotiation. Rental expense was RMB11,699, RMB7,955 and RMB7,056, for the years ended
December 31, 2007, 2008 and 2009, respectively.
Future minimum lease payments under non-cancellable operating lease agreements at December
31, 2008 are as follows:
|
|
|
|
|
|
|
RMB |
|
|
|
|
|
|
Year ending December 31 |
|
|
|
|
2010 |
|
|
2,309 |
|
2011 |
|
|
1,004 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,313 |
|
|
|
|
|
The Company has entered into franchise agreements to undertake marketing, distribution and
service activities. Under these agreements, the Company is obligated to provide advertising,
training and telephone support associated with its software licenses and
products. The Company did not have any significant outstanding obligation and commitment at
December 31, 2009.
Before 2007, the Company had three operating segments: enterprise software segment, software
development services segment, and 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 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. These three segments are all under the Companys business to
government (B2G) division.
In the second quarter of 2007, the Company completed the acquisition of Ample Spring and
Baichuan Tongda, a vertical search engine services provider, and formally launched the
Companys B2B search services and services platform, tootoo.com. As a result, the Company
added a new operating segment, (i.e., B2B), which provided online B2B search services by
selling keywords to improve the customers rankings in search results on the Companys
marketplaces. In March 2009, the Companys B2B segment was discontinued. Also, in 2009 the
Company launched its food sales and services business targeting Chinese consumers.
For financial reporting purposes, operating segments are defined as components of an
enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in deciding how
to allocate resources and in assessing performance. The Companys 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 the 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 the PRC value added tax refund, and (iii)
the recognition of share-based compensation expenses.
F - 40
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
18. |
|
SEGMENT INFORMATION-continued |
The Companys 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.
The following is a summary of financial information relating to each segment expressed under
PRC GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
Enterprise software |
|
|
Software |
|
|
|
|
|
|
and related customer |
|
|
development |
|
|
|
|
|
|
maintenance services |
|
|
services |
|
|
Total |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external
customers |
|
|
52,481 |
|
|
|
25,642 |
|
|
|
78,123 |
|
Net revenues from related parties |
|
|
8,241 |
|
|
|
|
|
|
|
8,241 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
60,848 |
|
|
|
7,894 |
|
|
|
68,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
Enterprise software and |
|
|
Software |
|
|
|
|
|
|
|
|
|
related customer |
|
|
development |
|
|
|
|
|
|
|
|
|
maintenance services |
|
|
services |
|
|
Other |
|
|
Total |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from
external customers |
|
|
67,315 |
|
|
|
19,458 |
|
|
|
94 |
|
|
|
86,867 |
|
Net revenues from
related parties |
|
|
14,387 |
|
|
|
|
|
|
|
|
|
|
|
14,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
82,024 |
|
|
|
7,035 |
|
|
|
18 |
|
|
|
89,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
Enterprise software and |
|
|
Software |
|
|
Food |
|
|
|
|
|
|
related customer |
|
|
development |
|
|
related |
|
|
|
|
|
|
maintenance services |
|
|
services |
|
|
business |
|
|
Total |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from
external customers |
|
|
38,472 |
|
|
|
17,013 |
|
|
|
18,004 |
|
|
|
73,489 |
|
Net revenues from
related parties |
|
|
9,482 |
|
|
|
350 |
|
|
|
|
|
|
|
9,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
48,005 |
|
|
|
5,811 |
|
|
|
958 |
|
|
|
54,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not allocate operating expenses to individual segments when making
decisions about allocating resources to the segments and assessing their performance.
F - 41
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
18. |
|
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, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from external customers under PRC GAAP |
|
|
78,123 |
|
|
|
86,867 |
|
|
|
73,489 |
|
U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Differences in the timing of revenue recognition |
|
|
11,346 |
|
|
|
353 |
|
|
|
7,763 |
|
PRC value added tax refund |
|
|
3,995 |
|
|
|
2,846 |
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues from external customers under US GAAP |
|
|
93,464 |
|
|
|
90,066 |
|
|
|
81,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from related parties under PRC GAAP |
|
|
8,241 |
|
|
|
14,387 |
|
|
|
9,832 |
|
U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Differences in the timing of revenue recognition |
|
|
912 |
|
|
|
|
|
|
|
1,817 |
|
PRC value added tax refund |
|
|
352 |
|
|
|
64 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues from related parties under US GAAP |
|
|
9,505 |
|
|
|
14,451 |
|
|
|
11,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit under PRC GAAP |
|
|
68,742 |
|
|
|
89,042 |
|
|
|
54,774 |
|
U.S. GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Differences in the timing of revenue recognition |
|
|
12,258 |
|
|
|
353 |
|
|
|
9,580 |
|
PRC value added tax refund |
|
|
4,347 |
|
|
|
2,910 |
|
|
|
853 |
|
Share-based compensation expenses |
|
|
(126 |
) |
|
|
(287 |
) |
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit under US GAAP |
|
|
85,221 |
|
|
|
92,018 |
|
|
|
65,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
(347,006 |
) |
|
|
(118,912 |
) |
|
|
(123,878 |
) |
Government subsidies |
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(260,770 |
) |
|
|
(26,894 |
) |
|
|
(58,722 |
) |
Interest income |
|
|
13,885 |
|
|
|
7,026 |
|
|
|
4,280 |
|
Gain on sales of marketable equity securities |
|
|
43,546 |
|
|
|
9,866 |
|
|
|
35,474 |
|
Gain on fair value change of stock option short sales |
|
|
|
|
|
|
|
|
|
|
27,684 |
|
Gains from disposal of investment under cost method |
|
|
|
|
|
|
2,187 |
|
|
|
|
|
Other income |
|
|
|
|
|
|
358 |
|
|
|
3,974 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense |
|
|
(203,339 |
) |
|
|
(7,457 |
) |
|
|
12,690 |
|
|
|
|
|
|
|
|
|
|
|
F - 42
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
18. |
|
SEGMENT INFORMATION-continued |
The Company does not allocate assets to individual segments when making decisions about
allocating resources to the segments and assessing their performance.
Details of customers accounting for 10% or more of net revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
Customer |
|
2007 |
|
|
2008 |
|
|
2009 |
|
A |
|
|
17 |
% |
|
|
18 |
% |
|
|
18 |
% |
B |
|
|
23 |
% |
|
|
20 |
% |
|
|
19 |
% |
20. |
|
EMPLOYEE BENEFIT PLANS |
Employees of the Company located in the PRC other than Hong Kong are covered by the
retirement plans 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% of the relevant income of the
employee with a specific ceiling. The expenses recorded by the Company related to these
defined contribution schemes were RMB5,029, RMB4,884, and RMB3,549 for the years ended
December 31, 2007, 2008, and 2009, respectively.
In addition, the Company is required by law to contribute approximately 10%, 1%, and 1.1% of
applicable salaries of certain employees for medical, 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 RMB3,219, RMB3,299, and
RMB2,075 for the years ended December 31, 2007, 2008, and 2009, respectively.
21. |
|
CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION |
As stipulated by the relevant laws and regulations in the PRC, the Companys subsidiaries
and VIEs in the PRC are required to maintain a non-distributable statutory surplus reserve.
Appropriations to the statutory surplus reserve are required to be made at not less than 10%
of profit after taxes as reported in these entities statutory financial statements prepared
under PRC GAAP. Once appropriated, these amounts are not available for future distribution
to owners or shareholders. Once the general reserve is accumulated to 50% of these entities
registered capital, these entities can choose not to provide additional reserves. The
statutory reserve may be applied against prior year losses, if any, and may be used for
general business expansion and production and an increase in the registered capital of these
entities. Amounts contributed to the statutory reserve were RMB65,736 and RMB75,059 as of
December 31, 2008 and 2009, respectively.
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.
F - 43
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009 (continued)
(In thousands, except share and per share data)
21. |
|
CHINA CONTRIBUTION PLAN AND PROFIT APPROPRIATION-continued |
RMB905 and RMB9,323 were appropriated from net income to statutory reserves by Ninetowns
subsidiaries in the PRC for the years ended December 31, 2008 and 2009 respectively.
Relevant PRC Statutory laws and regulations permit payments of dividends by Ninetowns PRC
subsidiaries and VIEs only from their retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. In addition, the general reserve requires
annual appropriations of 10% of after-tax profit to be set as aside prior to the payment of
dividends. As a result of these PRC laws and regulations, the Companys PRC subsidiary and
VIEs are restricted in their abilities to transfer funds to the Company in the form of
dividends, loans or advances. Total restricted net assets of the Companys consolidated PRC
subsidiaries and VIEs were RMB540,984 and RMB550,307 as of December 31, 2008 and 2009,
respectively.
On
February 10, 2010, the Company granted 976,500 options and 585,771 restricted shares
under the 2004 Plan, as amended, as well as 2,213,824 restricted shares under
the 2006 Plan.
F - 44
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
104,704 |
|
|
|
134,828 |
|
|
|
19,752 |
|
Investment in available-for-sale securities |
|
|
|
|
|
|
120,032 |
|
|
|
17,585 |
|
Prepaid expenses and other current assets |
|
|
818 |
|
|
|
561 |
|
|
|
82 |
|
Amounts due from subsidiaries |
|
|
525,631 |
|
|
|
427,335 |
|
|
|
62,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
631,153 |
|
|
|
682,756 |
|
|
|
100,024 |
|
Investments in subsidiaries |
|
|
281,367 |
|
|
|
251,732 |
|
|
|
36,879 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
|
912,520 |
|
|
|
934,488 |
|
|
|
136,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option liabilities |
|
|
|
|
|
|
11,854 |
|
|
|
1,737 |
|
Other payables |
|
|
4,614 |
|
|
|
111 |
|
|
|
17 |
|
Amounts due to subsidiaries |
|
|
7,726 |
|
|
|
98 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
12,340 |
|
|
|
12,063 |
|
|
|
1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, par value RMB0.027
(HK$0.025) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
8,000,000,000 shares authorized;
34,998,020 shares issued and outstanding
in 2008 and 35,118,556 shares issued and
outstanding in 2009, respectively |
|
|
926 |
|
|
|
929 |
|
|
|
136 |
|
Additional paid-in capital |
|
|
880,581 |
|
|
|
885,045 |
|
|
|
129,660 |
|
Retained earnings |
|
|
40,564 |
|
|
|
41,896 |
|
|
|
6,138 |
|
Accumulated other comprehensive loss |
|
|
(21,891 |
) |
|
|
(5,445 |
) |
|
|
(798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
900,180 |
|
|
|
922,425 |
|
|
|
135,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
912,520 |
|
|
|
934,488 |
|
|
|
136,903 |
|
|
|
|
|
|
|
|
|
|
|
F - 45
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses |
|
|
|
|
|
|
(2,654 |
) |
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(21,682 |
) |
|
|
(27,030 |
) |
|
|
(16,506 |
) |
|
|
(2,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(21,682 |
) |
|
|
(29,684 |
) |
|
|
(16,506 |
) |
|
|
(2,420 |
) |
Interest income |
|
|
2,334 |
|
|
|
364 |
|
|
|
15 |
|
|
|
2 |
|
Gain on sales of short-term
investments |
|
|
|
|
|
|
|
|
|
|
28,587 |
|
|
|
4,188 |
|
Change in fair value of marketable
options |
|
|
|
|
|
|
|
|
|
|
27,684 |
|
|
|
4,056 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
1,804 |
|
|
|
264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity in
earnings of subsidiaries |
|
|
(19,348 |
) |
|
|
(29,320 |
) |
|
|
41,584 |
|
|
|
6,090 |
|
Equity in losses of subsidiaries |
|
|
(211,183 |
) |
|
|
(140,292 |
) |
|
|
(40,252 |
) |
|
|
(5,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(230,531 |
) |
|
|
(169,612 |
) |
|
|
1,332 |
|
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
Diluted |
|
|
(6.59 |
) |
|
|
(4.85 |
) |
|
|
0.04 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
|
|
35,100,194 |
|
Diluted |
|
|
34,966,830 |
|
|
|
34,997,505 |
|
|
|
35,100,194 |
|
|
|
35,100,194 |
|
F - 46
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENT OF COMPREHENSIVE INCOME
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Net (loss) income |
|
|
(230,531 |
) |
|
|
(169,612 |
) |
|
|
1,332 |
|
|
|
192 |
|
Foreign currency translation loss |
|
|
(6,977 |
) |
|
|
(4,126 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
Unrealized gain (loss) on
available-for-sale securities |
|
|
2,874 |
|
|
|
(5,999 |
) |
|
|
16,451 |
|
|
|
2,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
(234,634 |
) |
|
|
(179,737 |
) |
|
|
17,778 |
|
|
|
2,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 47
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (CONTINUED)
STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Comprehensive |
|
|
|
|
|
|
Ordinary shares |
|
|
Paid-in |
|
|
Treasury Shares |
|
|
(Accumulated |
|
|
(loss) |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Amount |
|
|
Deficit) |
|
|
Income |
|
|
Total |
|
|
|
|
|
|
RMB |
|
|
RMB |
|
|
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
Balance as of January 1, 2007 |
|
|
34,991,834 |
|
|
|
926 |
|
|
|
871,642 |
|
|
|
(47,862 |
) |
|
|
(1,268 |
) |
|
|
441,343 |
|
|
|
(7,663 |
) |
|
|
1,304,980 |
|
Cumulative effect of
unrecognized tax benefit on
adoption of ASC740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(636 |
) |
|
|
|
|
|
|
(636 |
) |
Issuance of ADR shares for
the exercise of employee
share options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,862 |
|
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
1,268 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(230,531 |
) |
|
|
|
|
|
|
(230,531 |
) |
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,977 |
) |
|
|
(6,977 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,926 |
|
Unrealized gain on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,874 |
|
|
|
2,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2007 |
|
|
34,991,834 |
|
|
|
926 |
|
|
|
873,568 |
|
|
|
|
|
|
|
|
|
|
|
210,176 |
|
|
|
(11,766 |
) |
|
|
1,072,904 |
|
Issuance of ADR shares for
the exercise of employee
share options |
|
|
6,186 |
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169,612 |
) |
|
|
|
|
|
|
(169,612 |
) |
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,000 |
) |
|
|
(7,000 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
6,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,871 |
|
Unrealized loss on
available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,125 |
) |
|
|
(3,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2008 |
|
|
34,998,020 |
|
|
|
926 |
|
|
|
880,581 |
|
|
|
|
|
|
|
|
|
|
|
40,564 |
|
|
|
(21,891 |
) |
|
|
900,180 |
|
Issuance of ADR shares for
the exercise of employee
share options |
|
|
120,536 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,332 |
|
|
|
|
|
|
|
1,332 |
|
Foreign currency translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
Employee share options
compensation |
|
|
|
|
|
|
|
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467 |
|
Unrealized loss on
available-for-sale
securities (net of tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,451 |
|
|
|
16,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as
of December 31, 2009 |
|
|
35,118,556 |
|
|
|
929 |
|
|
|
885,045 |
|
|
|
|
|
|
|
|
|
|
|
41,896 |
|
|
|
(5,445 |
) |
|
|
922,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US$136 |
|
|
US$129,660 |
|
|
|
|
|
|
|
|
|
|
US$6,138 |
|
|
(US$798 |
) |
|
US$135,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 48
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
STATEMENTS OF CASH FLOWS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
|
RMB |
|
|
RMB |
|
|
RMB |
|
|
US$ |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(230,531 |
) |
|
|
(169,612 |
) |
|
|
1,332 |
|
|
|
192 |
|
Adjustments to reconcile net loss to net cash
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries |
|
|
211,183 |
|
|
|
140,292 |
|
|
|
40,252 |
|
|
|
5,897 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from sale of available for sale securities |
|
|
|
|
|
|
|
|
|
|
(14,461 |
) |
|
|
(2,118 |
) |
Prepaid expenses and other current assets |
|
|
2,673 |
|
|
|
6,406 |
|
|
|
256 |
|
|
|
38 |
|
Other payables |
|
|
(1,084 |
) |
|
|
1,508 |
|
|
|
(4,499 |
) |
|
|
(659 |
) |
Amounts due to subsidiaries |
|
|
104 |
|
|
|
7,628 |
|
|
|
(7,622 |
) |
|
|
(1,116 |
) |
Gain from option liabilities |
|
|
|
|
|
|
|
|
|
|
(41,810 |
) |
|
|
(6,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(17,655 |
) |
|
|
(13,778 |
) |
|
|
(26,552 |
) |
|
|
(3,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
(271,568 |
) |
|
|
(39,784 |
) |
Proceeds from sales of available-for-sale
securities |
|
|
|
|
|
|
|
|
|
|
177,179 |
|
|
|
25,957 |
|
Proceeds from short sale of options |
|
|
|
|
|
|
|
|
|
|
73,508 |
|
|
|
10,769 |
|
Cover short or assignment of option liabilities |
|
|
|
|
|
|
|
|
|
|
(19,835 |
) |
|
|
(2,907 |
) |
(Increase) decrease in amounts due from
subsidiaries |
|
|
(19,462 |
) |
|
|
88,580 |
|
|
|
97,548 |
|
|
|
14,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing
activities |
|
|
(19,462 |
) |
|
|
88,580 |
|
|
|
56,832 |
|
|
|
8,326 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of share options |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(4,386 |
) |
|
|
(3,452 |
) |
|
|
(156 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents |
|
|
(40,235 |
) |
|
|
71,350 |
|
|
|
30,124 |
|
|
|
4,413 |
|
Cash and cash equivalents at the beginning of
the year |
|
|
73,589 |
|
|
|
33,354 |
|
|
|
104,704 |
|
|
|
15,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the
year |
|
|
33,354 |
|
|
|
104,704 |
|
|
|
134,828 |
|
|
|
19,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 49
NINETOWNS INTERNET TECHNOLOGY GROUP COMPANY LIMITED
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)
Notes to Schedule I:
Basis of preparation
The parent-company condensed financial information of Ninetowns is prepared using the same
accounting policies as set out in the Companys consolidated financial statements except that
Ninetowns uses the equity method to account for its investments in subsidiaries.
Amounts due from and due to subsidiaries
Amounts due from subsidiaries represents amounts loaned to subsidiaries for their investments in
the Companys PRC subsidiaries. Amounts due from subsidiaries are non-interest bearing, unsecured
and do not have specified payment terms. Amounts due to subsidiaries are payable within one year.
* * * * * * * * *
F - 50