Item
1. Identity of Directors, Senior
Management and Advisors.
Not
applicable.
Item
2. Offer Statistics and Expected
Timetable.
Not
applicable.
A. Selected
financial information and other data
The
following table shows selected consolidated financial information and other
data
for our business. You should read the following information in conjunction
with
Item 5 of this annual report, “Operating and Financial Review and Prospects.”
The statement of operations data and cash flow data for the years ended December
31, 2004, 2005 and 2006, and the balance sheet data as of December 31, 2005
and
2006, are derived from our audited consolidated financial statements and
related
notes thereto, which are included in this annual report beginning on page
F-1.
These audited consolidated financial statements and the related notes thereto
have been prepared in accordance with accounting principles generally accepted
in the United States, or U.S. GAAP.
The
statement of operations data for 2002 and 2003, and the balance sheet data
as of
December 31, 2002 and 2003, are derived from our audited consolidated financial
statements which have not been included in this annual report.
In
thousands, except per share, per ADS and
|
|
For
the year ended December 31,
|
|
|
|
|
operating
data and percentages
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of operations data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
software
|
|
RMB 93,375
|
|
|
RMB 113,791
|
|
|
RMB
188,720
|
|
|
RMB
203,488
|
|
|
RMB
116,833
|
|
|
US$
14,971
|
|
Software
development services
|
|
|
14,400
|
|
|
|
19,045
|
|
|
|
12,723
|
|
|
|
35,700
|
|
|
|
36,017
|
|
|
|
4,615
|
|
Computer
hardware sales
|
|
|
258
|
|
|
|
72
|
|
|
|
104
|
|
|
|
678
|
|
|
|
398
|
|
|
|
51
|
|
|
|
|
108,033
|
|
|
|
132,908
|
|
|
|
201,547
|
|
|
|
239,866
|
|
|
|
153,248
|
|
|
|
19,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise
software
|
|
|
(1,115 |
) |
|
|
(1,532 |
) |
|
|
(1,528 |
) |
|
|
(495 |
) |
|
|
-
|
|
|
|
-
|
|
Software
development services
|
|
|
(3,534 |
) |
|
|
(4,939 |
) |
|
|
(2,970 |
) |
|
|
(18,192 |
) |
|
|
(16,805 |
) |
|
|
(2,153 |
) |
Computer
hardware sales
|
|
|
(216 |
) |
|
|
(48 |
) |
|
|
(9 |
) |
|
|
(482 |
) |
|
|
(134 |
) |
|
|
(17 |
) |
|
|
|
(4,865 |
) |
|
|
(6,519 |
) |
|
|
(4,507 |
) |
|
|
(19,169 |
) |
|
|
(16,939 |
) |
|
|
(2,170 |
) |
Gross
profit
|
|
|
103,168
|
|
|
|
126,389
|
|
|
|
197,040
|
|
|
|
220,697
|
|
|
|
136,309
|
|
|
|
17,467
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
(13,604 |
) |
|
|
(13,674 |
) |
|
|
(15,977 |
) |
|
|
(25,752 |
) |
|
|
(13,604 |
) |
|
|
(1,743 |
) |
General
and administrative expenses
|
|
|
(12,195 |
) |
|
|
(56,911 |
) |
|
|
(36,572 |
) |
|
|
(49,538 |
) |
|
|
(65,928 |
) |
|
|
(8,448 |
) |
Research
and development expenses
|
|
|
(4,108 |
) |
|
|
(2,691 |
) |
|
|
(4,819 |
) |
|
|
(11,249 |
) |
|
|
(29,825 |
) |
|
|
(3,822 |
) |
Total
operating expenses
|
|
|
(29,907 |
) |
|
|
(73,276 |
) |
|
|
(57,368 |
) |
|
|
(86,539 |
) |
|
|
(109,357
|
) |
|
|
(14,013
|
) |
Government
subsidies |
|
|
458 |
|
|
|
211 |
|
|
|
1,340 |
|
|
|
447 |
|
|
|
705 |
|
|
|
90 |
|
Income
from operations
|
|
|
73,719
|
|
|
|
53,324
|
|
|
|
141,012
|
|
|
|
134,605
|
|
|
|
27,657
|
|
|
|
3,544
|
|
Interest
income
|
|
|
619
|
|
|
|
1,220
|
|
|
|
3,768
|
|
|
|
17,625
|
|
|
|
19,302
|
|
|
|
2,473
|
|
In
thousands, except per share, per ADS and
|
|
For
the years ended December 31,
|
|
operating
data and percentages
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes minority interests and equity
in
earnings of an affilliate
|
|
RMB 74,338
|
|
|
RMB 54,544
|
|
|
RMB
144,780
|
|
|
RMB
152,230
|
|
|
RMB
46,959
|
|
|
US$
6,017
|
|
Provision
for income taxes
|
|
|
(2,061 |
) |
|
|
(4,116 |
) |
|
|
(1,823 |
) |
|
|
(626 |
) |
|
|
(1,031 |
) |
|
|
(132 |
) |
Income
before minority interest and equity in earnings of an
affiliate
|
|
|
72,277
|
|
|
|
50,428
|
|
|
|
142,957
|
|
|
|
151,604
|
|
|
|
45,928
|
|
|
|
5,885
|
|
Minority
interest
|
|
|
(7,299 |
) |
|
|
(9,239 |
) |
|
|
(9,006 |
) |
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
Equity
in earnings of an affiliate
|
|
|
79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
Net
income
|
|
|
65,057
|
|
|
|
41,189
|
|
|
|
133,951
|
|
|
|
151,604
|
|
|
|
45,928
|
|
|
|
5,885
|
|
Net
income per share and ADS(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.96
|
|
|
|
1.82
|
|
|
|
4.96
|
|
|
|
4.39
|
|
|
|
1.32
|
|
|
|
0.17
|
|
Diluted
|
|
|
2.96
|
|
|
|
1.82
|
|
|
|
4.74
|
|
|
|
4.25
|
|
|
|
1.30
|
|
|
|
0.17
|
|
Cash
flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
56,984
|
|
|
|
87,244
|
|
|
|
143,270
|
|
|
|
146,372
|
|
|
|
40,832 |
|
|
|
5,232 |
|
Depreciation
and amortization
|
|
|
1,126
|
|
|
|
874
|
|
|
|
2,120
|
|
|
|
5,293
|
|
|
|
9,137
|
|
|
|
1,171
|
|
Net
cash provided by (used in) investing activities
|
|
|
15,613
|
|
|
|
(39,629
|
) |
|
|
(179,405 |
) |
|
|
(110,851 |
) |
|
|
(176,483 |
) |
|
|
(22,614 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(30,531 |
) |
|
|
70,250
|
|
|
|
565,597
|
|
|
|
2,044
|
|
|
|
6,328
|
|
|
|
811
|
|
|
|
As
of December 31,
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2006(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
RMB 49,666
|
|
|
RMB167,531
|
|
|
RMB696,993
|
|
|
RMB731,474
|
|
|
RMB598,648
|
|
|
US$76,709
|
|
Trade
receivables, net of allowance for doubtful debts, from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
external
customers
|
|
|
28,179
|
|
|
|
31,096
|
|
|
|
43,913
|
|
|
|
45,996
|
|
|
|
43,142
|
|
|
|
5,528
|
|
related
parties
|
|
|
9,000
|
|
|
|
31,885
|
|
|
|
30,940
|
|
|
|
29,752
|
|
|
|
3,963
|
|
|
|
508
|
|
Term
deposits
|
|
|
24,832
|
|
|
|
65,664
|
|
|
|
150,913
|
|
|
|
207,000
|
|
|
|
307,209
|
|
|
|
39,365
|
|
Total
assets
|
|
|
133,287
|
|
|
|
323,975
|
|
|
|
1,222,182
|
|
|
|
1,345,773
|
|
|
|
1,365,289
|
|
|
|
174,945
|
|
Deferred
revenue
|
|
|
44,420
|
|
|
|
70,608
|
|
|
|
97,230
|
|
|
|
67,886
|
|
|
|
26,383
|
|
|
|
3,381
|
|
Total
liabilities
|
|
|
56,581
|
|
|
|
94,234
|
|
|
|
131,130
|
|
|
|
98,808
|
|
|
|
60,309
|
|
|
|
7,728
|
|
Mezzanine
equity
|
|
|
—
|
|
|
|
46,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
|
|
-
|
|
Total
shareholders’ equity
|
|
|
68,671
|
|
|
|
165,530
|
|
|
|
1,090,452
|
|
|
|
1,246,365
|
|
|
|
1,304,980
|
|
|
|
167,217
|
|
Number
of ordinary shares outstanding
|
|
|
—
|
|
|
|
22,780,000
|
|
|
|
34,391,834
|
|
|
|
34,991,834
|
|
|
|
34,991,834
|
|
|
|
34,991,834
|
|
|
For
the convenience of the reader, the RMB amounts are expressed in
U.S.
dollars at the rate of RMB7.8041 to US$1.00, the noon buying rate
in
effect on December 29, 2006 as quoted by the Federal Reserve Bank
of New
York.
|
(2)
|
On
November 9, 2004, our shareholders approved a 4-for-1 share split.
All
shares and per share data have been restated to give retroactive
effect to
this share split. One ADS represents one ordinary
share.
|
Exchange
rate information
Our
business is primarily conducted in China and denominated in Renminbi. This
annual report contains translations of Renminbi amounts into U.S. dollars
at a
specific rate solely for the convenience of the reader. The conversion of
Renminbi into U.S. dollars in this annual report is based on the noon buying
rate in The City of New York for cable transfers of Renminbi as certified
for
customs purposes by the Federal Reserve Bank of New York. Unless otherwise
noted, all translations from Renminbi to U.S. dollars and from U.S. dollars
to
Renminbi in this annual report were made at a rate of RMB7.8041 to US$1.00,
the
noon buying rate in effect as of December 29, 2006. We make no representation
that any Renminbi or U.S. dollar amounts could have been, or could be, converted
into U.S. dollars or Renminbi, as the case may be, at any particular rate,
the
rates stated below, or at all. In addition, such translations should not
be
construed to be the amounts that would have been reported under U.S. GAAP.
The
PRC government imposes controls over its foreign currency reserves in part
through direct regulation of the conversion of Renminbi into foreign exchange
and through restrictions on foreign trade.
The
following table sets forth information concerning exchange rates between
Renminbi and U.S. dollars for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that
we
used in this annual report or will use in the preparation of our periodic
reports or any other information to be provided to you. The source of these
rates is the Federal Reserve Bank of New York.
eGrid
and
iTowNet have been our two largest customers for software development services.
Our net revenues from the provision of software development and other services
to eGrid were RMB24.2 million and RMB16.4 million (US$2.1 million) or 10.0%
and
10.7% of our total net revenues in 2005 and 2006, respectively. We did not
recognize any net revenues from the provision of software development and
other
services to eGrid in 2004. Our net revenues from the provision of software
development services to iTowNet were RMB9.6 million, RMB4.1million and nil,
or
4.8%, 1.7% and nil of our total net revenues, in 2004, 2005 and 2006,
respectively. To our knowledge, iTowNet and eGrid are not PRC government
agencies, but iTowNet is 51.0% owned by the PRC Inspections
Administration.
In
the
event one or more of our customers discussed above discontinues their businesses
or their dealings with us, and we are unable to find an adequate replacement
for
such customer in a timely manner, we would suffer a decline in total net
revenues and in turn would need to significantly increase our sales and
marketing expenditures.
Our billed
receivables, which include trade receivables from related parties, are
significant and if customers fail to pay amounts owed, our profitability
and
financial position could decline.
As
of
December 31, 2006, our billed receivables amounted to approximately RMB21.9
million (US$2.8 million), of which our trade receivables from related parties
amounted to RMB4.0 million (US$0.5 million). Our trade receivables as of
December 31, 2006 represented approximately 2.2% of our total current assets
and
our billed receivables from related parties represented approximately 0.4%
of
our total current assets. As of December 31, 2006, we had an allowance for
doubtful debts of approximately RMB1.1 million (US$0.1 million). If any of
our
franchisees or any of our other customers fails to pay, or delays payment
on,
all or part of these receivables, we would be required to make additional
allowances for doubtful debts and our profitability and financial position
could
decline.
Our
existing major shareholders have substantial control over us and could delay
or
prevent a change in corporate control, which could in turn reduce the market
price of your ADSs.
Our
executive officers, directors and shareholders with 5.0% or more shareholding
of
our company and their affiliates beneficially own approximately 46.35% of
our
outstanding ordinary shares. Such concentration of ownership might have the
effect of delaying or preventing a change in control of our company which
could
in turn reduce the market price of our ADSs and the voting and other rights
of
our other shareholders.
Our
failure to market our customer maintenance services to our existing users
could
impair our planned revenue growth.
We
offer
one year of customer maintenance services with our iDeclare.CIQ basic package,
and charge a fee of RMB1,500 per licensee for customer maintenance services
each
year thereafter. However, until September 2003, we did not emphasize the
marketing of customer maintenance services because we were focused on building
our relationships with our users and we believed that not all of our users
and
potential users were accustomed to being charged for this type of service.
In
2006, we offered customer maintenance service contracts to approximately
29,000
users, so that approximately 23.8% of the total number of users due for a
maintenance contract renewal in 2006 paid for the renewal. In 2006,
we recognized approximately RMB41.5 million (US$5.3 million) from provision
of
customer maintenance services.
Our
success in marketing customer maintenance services to our users depends in
part
on whether users require software updates. Software updates can implement
modifications to forms, programs and information systems necessary to address
changes imposed by the PRC Inspections Administration.
Any
reduction of our preferential tax treatment as a PRC high and new technology
enterprise could materially reduce our net income.
All
of
our principal PRC operating subsidiaries enjoy or are entitled to enjoy
preferential tax treatment in the form of reduced tax rates or tax holidays
provided by the PRC government or its local agencies or bureaus. Beijing
New
Take Electronic Commerce Limited, or Beijing New Take; Beijing Ninetowns
Times
Electronic Commerce Limited, or Ninetowns Times; Ninetowns Digital Technology
Limited, or Ninetowns Digital, currently benefit from a 15.0% preferential
enterprise income tax, or EIT, rate. Beijing Ninetowns Ports Software and
Technology Co., Ltd., or Ninetowns Ports, currently benefit from a 7.5%
preferential EIT rate. Shanghai New Take Digital Technology Co., Ltd., or
Shanghai New Take, currently benefit from a 16.5% preferential EIT rate.
Beijing
Ninetowns Network and Software Co., Ltd., or Ninetowns Network, and Guangdong
Ninetowns Technology Co., Ltd., or Guangdong Ninetowns Technology, are currently
entitled to an exemption from EIT. Beijing Ronge Tongshang Network
Technology Limited, or Ronge Tongshang, which is our variable interest entity,
is currently entitled to a 15.0% preferential EIT rate. As a result of these
preferential tax treatments and the recognition of deferred tax assets for
deductible temporary differences, our effective income tax rate for 2006
was
2.2%. In addition, we also receive from the PRC government a 14.0% value
added
tax, or VAT, refund on sales of certain registered software. We cannot assure
you that we will continue to enjoy this preferential tax treatment in the
future, either due to a change in the PRC government’s tax policies or because a
subsidiary or variable interest entity fails to satisfy the financial and
operational criteria necessary to maintain its eligibility for such preferential
tax treatment. Any reduction in our preferential tax treatment could materially
reduce our net income.
On
March
16, 2007, the 2008 PRC Enterprise Income Tax Law was enacted. Under
the new law, effective on January 1, 2008, the PRC government will adopt
an
uniform EIT rate of 25.0% for all enterprises (including foreign-invested
enterprises) and revoke the current tax exemption, reduction and preferential
treatments applicable to foreign-invested enterprises. However, the
preferential EIT rate of 15.0% for “high and new technology enterprises”
was strongly supported by the State and current preferential tax treatments
for
foreign-invested high and new technology enterprises are expected to be
grandfathered for a period of five years following the effective date of
the new
law. We believe that our PRC operating subsidiaries and variable
interest entity will continue to qualify as high and new technology
enterprises entitled to the 15.0% preferential EIT rate, and therefore we
will
not be adversely affected by the new law. However, we cannot assure
you that we will continue to enjoy this preferential tax treatment in the
future, either due to a change in the PRC government’s tax policies or because a
subsidiary or variable interest entity fails to satisfy the financial and
operational criteria necessary to maintain its eligibility for such preferential
tax treatment. Any reduction in our preferential tax treatment could
materially reduce our net income. Additionally, because the PRC State
Council has not promulgated detailed rules for the 2008 PRC Tax Law, our
subsidiaries and variable interest entities may not qualify as “high and new
technology enterprises” and thus may not be entitled to a preferential EIT
rate of 15.0%. Instead, our subsidiaries and variable interest entities may
be
subject to the standard EIT rate of 25.0% after the current preferential
tax
treatment they enjoy expires. We will seek to apply for “high and new
technology enterprise” status for our subsidiaries and variable interest
entities once the detailed rules are made available to us. In
addition, under the 2008 PRC Enterprise Income Tax Law, enterprises established
under the laws of foreign countries or regions whose “de facto management
bodies” are located within the PRC are considered resident enterprises and will
generally be subject to the EIT at the rate of 25.0% on its global
income. However, the 2008 PRC Enterprise Income Tax Law does not
define the term “de facto management bodies.” Substantially all of
our management is currently located in the PRC and if they remain located
in the
PRC after the effective date of the PRC Enterprise Income Tax Law, we may
be
considered to be a resident enterprise and therefore may be subject to the
EIT
at the rate of 25.0% on our global income in the PRC.
Restricted
net assets
Relevant
PRC laws and regulations permit payments of dividends by our PRC subsidiaries
only out of their retained earnings, if any, as determined in accordance
with
PRC accounting standards and regulations. In addition, the statutory general
reserve fund, which requires annual appropriations of 10% of net after-tax
income should be set aside prior to payment of any dividends. As a result
of
these and other restrictions under PRC laws and regulations, our PRC subsidiary
and affiliate are restricted in their ability to transfer a portion of
their net
assets to us either in the form of dividends, loans or advances, restricted
portion amounted to approximately RMB522.5 million (US$67.0 million), or
40.0%
of our total consolidated net assets as of December 31, 2006.
Even
though we currently do not require any such dividends, loans or advances
from
our PRC subsidiaries, we may in the future require additional cash resources
from our PRC subsidiaries due to changes in business conditions, to fund
future
acquisitions or developments, or merely to declare and pay dividends or
distributions to our shareholders, although we currently have no intention
to do
so.
Regulation
of the import/export industry
The
State Administration for Quality Supervision and Inspection and Quarantine
of
the PRC
In
April
2001, the PRC Inspections Administration was established by combining the
former
State Import and Export Commodity Inspection Quarantine Bureau of the PRC
and
the State Quality and Technique Supervision Bureau of the PRC, which oversees
the inspection work of import and export commodities for the PRC in accordance
with the institutional reform plan of the State Council. The PRC Inspections
Administration, which is primarily an administrative and law enforcement
institution governing, among others, the health quarantine of imported
and
exported animals and plants, the inspection, appraisal, certification and
supervision of imported and exported commodities, has the following
responsibilities, among others:
•
|
executing
the inspection and quarantine, appraising and supervising of
import and
export commodities;
|
•
|
implementing
the quarantine and supervision for the import and export of animals
and
plants and the inspection, supervision and administration of
the sanitary
and food quality;
|
•
|
administering
health registrations of import and export food products and their
production units and external registration for export enterprises;
administering the import and export inspection and quarantine
marks,
import safety licenses, and export quality licenses; and implementing
the
import and export-related quality authentication and
accreditation;
|
•
|
administering
the issuance of Origin Certificates for commodities and the general
certificates of origin;
|
•
|
formulating
the development plan of technologies for commodity inspection
and
quarantine; and
|
•
|
developing
international cooperation and technology exchanges related to
commodity
inspection and quarantine and carrying out the implementation
work
relating to technological barriers to trade, as
stipulated.
|
C. Organizational
structure
We
conduct substantially all of our business through seven PRC subsidiaries
and two
variable interest entities in China. The following diagram illustrates
our
subsidiaries, their country of incorporation and the proportion of our
ownership
of each as of May 31, 2007.
For
details of the above subsidiaries and variable interest entities, see “— History
and development of the company.”
D. Property
and equipment
Our
principal executive offices occupy a total of approximately 3,170 square
meters on the 5th, 12th, 14th and 17th floors of Union Plaza, 20 Chaowai
Street
and the 20th floor of the Fan Li Building, 22 Chowai Street, Chaoyang District,
Beijing 100020 PRC. In addition, we occupy a representative office of
approximately 200 square meters at Suites 1705-6, 17/F, Two Chinachem
Exchange Square, 338 King’s
Road, North Point, Hong Kong. As
of May 31, 2007, we have
one premise which we own and we have also leased 9 premises in the
following cities and municipalities to serve as technical support centers
and
quarters for our technical support staff:
Location
|
Office
space
(in
square meters)
|
Number
of employees
|
Guangdong
Province
|
|
|
Dongguan
|
921.69
|
44
|
Guangzhou
|
120.85
|
60
|
Beijing
|
551.65
|
37
|
Shanghai
|
139.00
|
12
|
Total
|
1,733.19
|
153
|
During
2005, we transferred a number of technical support centers to our franchisees
in
an effort to reduce the number of technical support centers that we operate
on
our own. We currently support our existing users jointly with our
four franchisees through four technical support centers operated and
maintained by us and 43 technical support centers operated and maintained
by our four franchisees located in most of the major import/export cities
in
China.
Ninetowns
Ports acquired, subject to the receipt of the necessary title certificates,
four
residential units in the Sing Sun Building in Guangzhou, with aggregate space
of
approximately 355 square meters and uses such premises as employee housing
for
our employees in Guangzhou. During 2006, Ninetowns Ports acquired two
commercial units as offices with aggregate space of approximately 340.61
square
meters.
Ninetowns
Times owns two commercial units in the Qingdao Bai Sing Building in Qingdao,
with aggregate space of approximately 384 square meters and uses such commercial
units as offices. Ninetowns Times also acquired, subject to the receipt of
the
necessary title certificates, an eight-storey building in Fengtai, with
aggregate space of approximately 2,206.59 square meters and uses such
building as a call center for our technical support services and also as
a
research and development center.
Ninetowns
Ports also acquired four floors and the naming right of a building in
Beijing. See Item 7 of this annual report, “Major Shareholders and
Related Party Transactions — Related party transactions — Transaction with Mr.
Ko Jin Heng.”
Insurance
The
insurance industry in China is still at an early stage of development. We
are
not required to maintain business liability insurance, and, to our knowledge,
other software companies in China do not maintain such insurance. As a result,
we do not have business liability insurance coverage, but we do maintain
vehicle
liability insurance. Moreover, while business disruption insurance is available,
we have determined that the risks of disruption and the cost of insurance
are
such that we do not require it at this time. Any business disruption, litigation
or natural disaster might therefore result in substantial costs and diversion
of
our resources.
We
do not
maintain key-man life insurance for any member of senior management. We maintain
directors and officers insurance for our directors and members of senior
management.
how
many
of our users will pay for such maintenance services. In 2006, we collected
customer maintenance service fees from approximately 29,000 users, representing
approximately 23.8% of our users due to renew their maintenance
service. We intend to continue to increase our marketing and
collection efforts with respect to these customer maintenance service fees.
We
expect our profit margin from sales of enterprise software to decrease if
the
VAT refund is eliminated or reduced by the PRC tax authorities. We expect
net
revenues from per declaration filing fees to increase with our increased
sales
of enterprise software, but to remain stable as a percentage of our total
net
revenues.
Software
development services. Our net revenues from software development services
are derived primarily from contracts related to PRC government agency software
development projects, such as our services for the PRC Inspections
Administration and the data exchange platforms operated by iTowNet, which
is our
related party, and our services for eGrid, which is also our related party.
As
we believe is consistent with the practice of other software development
companies in China engaged in government-related work, we often commence
work on
software development projects based on oral commitments from our customer
and
sign the contract after the commencement of work. Once a contract has been
signed, we begin recognizing net revenues from these projects based on the
percentage-of-completion method, in which revenue recognition is based on
the
man-hours spent and the costs invested in the project. Billing is generally
done
periodically in accordance with predetermined milestones as established by
the
contract. We expect net revenues from software development services to increase
as we are engaged by additional PRC government agencies, such as PRC Customs,
to
perform such services, but we cannot predict how much such revenues will
grow in
the future, or if they will grow at all.
Computer
hardware sales. Although we derived significant net revenues
from computer hardware sales in the past, we expect net revenues from this
business to represent an insignificant portion of our total net revenues
in the
future.
Cost
of revenues
Our
cost
of revenues consists principally of costs related to sales of our enterprise
software and our provision of software development services.
Enterprise
software. Our enterprise software consists of standardized software, the
production of which involves minimal cost. We have production arrangements
with
several outside contractors, under which they produce the compact discs that
contain our software and charge us a fee for such services. We package such
compact discs with compact disc holders and ship the packages from our Beijing
headquarters to our branch offices, former distributors and franchisees.
As a
result, the cost of revenues for sales of enterprise software consists mainly
of
outsourcing costs to those outside contractors and costs associated with
packaging and shipping of software. Currently, we also distribute our enterprise
software products through the Internet. We expect our cost of revenues from
sales of enterprise software to increase as a percentage of our total net
revenues because we will be required to recognize additional cost of revenues
after we commercially introduce our iMonitor.CGA product series, since the
costs
associated with our iMonitor.CGA product series as a percentage of net revenues
from sales of enterprise software are higher than the costs associated with
our
iDeclare.CIQ product series.
Software
development services. Our cost of software development services is
comprised mainly of personnel expenses, office rental expenses and other
expenses directly related to our provision of software development services.
We
record cost of revenues for software development services on a
percentage-of-completion method by reference to the man-hours incurred and
estimated total project hours. We expect our cost of revenues related to
software development services to increase as a percentage of our net revenues
from software development services as a result of the requirement for more
advanced technologies in new projects. As such, we expect our overall cost
of
revenues from software development services to increase as we perform more
software development services.
General
and administrative expenses. General and administrative expenses consist
primarily of personnel expenses, office rental expenses, general office
expenses, travel and entertainment expenses, professional fees and allowance
for
doubtful debts. We expense all general and administrative expenses as they
are
incurred. In 2006, we incurred substantially higher general and administrative
expenses than in earlier years (excluding the impact of stock-based compensation
charge of RMB35.0 million in 2003) as a result of increases in (i) professional
fees incurred related to our status as a public company and our acquisition
and
investment activities, (ii) depreciation and amortization charges on fixed
assets and intangible assets, (iii) increase in stock-based compensation
expenses and (iv) increase in the number of employees due to our expansion
into
the B2B business. We expect our general and administrative expenses
to increase continuously in 2007.
Research
and development expenses. Research and development expenses consist
primarily of research and development personnel expenses and associated
rental
expenses. We expense research and development expenses as they are incurred.
In
addition, because technological feasibility for our software products ordinarily
occurs right before such products are commercially launched and because
costs
incurred between technological feasibility and commercial launch are immaterial,
such costs are expensed as incurred. We expect our research and development
expenses to increase as a result of (i) our investment in the research
and
development of new enterprise platform products, (ii) an increase in the
number
of research and development personnel, (iii) an increase in stock-based
compensation expenses, (iv) an expected increase in our potential new business
ventures and (v) our investment in software licenses for development tools
to
increase the productivity of our overall research and development
efforts.
As
a
result of the cumulative effect of the factors described above, we expect
in the
future our total operating expenses will increase.
Taxation
Under
the
current laws of the Cayman Islands our company is not subject to tax on its
income or capital gains. In addition, payment of dividends by us is not subject
to withholding tax in the Cayman Islands.
PRC
enterprise income tax. Our PRC operating subsidiaries and variable interest
entities are subject to PRC EIT on their taxable income. Pursuant to PRC
tax
laws, EIT is generally assessed at the rate of 33.0% of taxable
income.
Beijing
New Take, Ninetowns Times and Ninetowns Digital are afforded favorable tax
treatment and are only subject to a 15.0% EIT, Shanghai New Take and Ninetowns
Ports are also afforded favorable tax treatment. Shanghai New Take was exempt
from EIT from January 1, 2003 to December 31, 2004 and is subject to a 16.5% EIT
from January 1, 2005 to December 31, 2007. Ninetowns Ports was exempt from
EIT
from August 1, 2003 to December 31, 2005 and is subject to a 7.5% EIT for
the
period from January 1, 2006 to December 31, 2008. Guangdong Ninetowns
Technology is entitled to an exemption from EIT from January 1, 2006 to December
31, 2007. Ninetowns Network is entitled to an exemption from EIT from January
1,
2006 to December 31, 2008. Ronghe Tongshang is currently subject
to a 15.0% EIT.
Ninetowns Digital,
Beijing New Take, Ninetowns Times, Ninetowns Ports, Ninetowns Network and
Ronge
Tongshang have qualified as “new and high technology enterprises” and have been
granted preferential EIT rates based on such status. Shanghai New Take has
also
been granted preferential EIT rates based on its status as a software company.
Relevant PRC government authorities specify certain financial and operational
criteria for a company to comply with in order to maintain its status as
a new
and high technology enterprise.
Baichman
is currently subject to a 33.0% EIT.
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 variable interest entities generally pay a 5.0%
business tax on our net
revenues
derived from software development services and customer maintenance services
and
this business tax is deducted from our total net revenues.
Value-added
tax. Our PRC operating subsidiaries are also generally subject to a 17.0%
VAT on sales of computer hardware and accessories and our enterprise software
products. Pursuant to PRC tax regulations, Ninetowns Times, Ninetowns
Digital and Ninetowns Ports are entitled to a 14.0% VAT refund on sales of
certain registered self-developed software products. Our net revenues from
sales
of such enterprise software include VAT refunds in the amount of RMB17.4
million, RMB19.8 million and RMB10.5 million (US$1.3 million) in 2004, 2005
and
2006, respectively.
Upon
expiration of these preferential EIT rates and VAT refunds, we will consider
available options, if any, in accordance with applicable law, that would
enable
us to qualify for further tax incentives.
Trade
receivables
Our
trade
receivables from external customers and trade receivables from related parties
consist primarily of amounts due from our franchisees for enterprise software
delivered to them and amounts billed but not paid and amounts unbilled for
our
software development services. Our trade receivables balance due from related
parties was RMB4.0 million (US$0.5 million) as of December
31, 2006.
Critical
accounting policies
The
methods, estimates and judgments we use in applying our accounting policies
have
a significant impact on the results we report in our consolidated financial
statements. Some of our accounting policies require us to make difficult
and
subjective judgments, often as a result of the need to make estimates of
matters
that are inherently uncertain. We have summarized below our accounting policies
that we believe are both important to the portrayal of our financial results
and
involve the need to make estimates about the effect of matters that are
inherently uncertain.
Revenue
recognition
We
account for the sales of our enterprise software in accordance with American
Institute of Certified Public Accountants, or AICPA, Statement of Position
(SOP)
97-2, “Software Revenue Recognition.” The application of SOP 97-2 requires
judgment, including whether a software arrangement includes multiple elements,
and if so, whether vendor-specific objective evidence, or VSOE, of fair value
exists for those elements. Our customers receive certain elements of our
enterprise software over a period of time, including post-delivery repair
and
enterprise software maintenance, training, telephone support and nonspecific
enhancements of the software on a when-and-if-available basis. As no fair
value
of these elements can be assessed reliably, we recognize such revenues ratably
over the contract period of the software arrangement, which is usually 12
months. Changes to the elements in a software arrangement, the ability to
identify VSOE for those elements, and the fair value of the respective elements
could all materially impact the amount of earned and unearned revenue.
Enterprise software revenues received or receivable but not yet recognized
are
accounted for as deferred revenue on our balance sheet. Deferred revenue
is
reduced proportionately as enterprise software revenues are recognized ratably
over the 12-month period.
As
we
believe is consistent with the practice of other software development companies
in China engaged in government-related work, we often commence work on software
development projects based on oral commitments from our customer and sign
the
contract after the commencement of work. Once a contract has been signed,
we
begin recognizing revenues from these projects based on the
percentage-of-completion of the contracts, in which revenue recognition is
based
on the actual hours spent and the
estimated
costs to complete the projects. Billing is generally done periodically in
accordance with predetermined milestones as established by the contract.
The
determination of percentage-of-completion with reference to actual hours
spent
and the estimated costs to complete the projects requires significant
judgment.
Stock-based
compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS
123R,
using the modified prospective transition method. Under this method, share-based
compensation expense recognized beginning January 1, 2006 includes: (a)
compensation expense for all share-based compensation awards granted prior
to,
but not yet vested as of January 1, 2006, based on the fair market value
as of
the grant date, measured in accordance with Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” issued
by FASB and (b) compensation expense for all share-based compensation awards
granted on or subsequent to January 1, 2006, based on grant-date fair value
estimated in accordance with the provisions of SFAS 123R. We recognize
share-based compensation costs on a straight-line basis over the requisite
service period which is generally the vesting period. For share-based
compensation awards that were granted before we became a public company
and are
not yet vested, the fair value is measured using the minimum value method
and we
continue to report these options under APB 25. For options vested
prior to January 1, 2006, we accounted for share-based compensation plans
in
accordance with APB 25.
We
recorded a compensation charge of RMB10.3 million for the options granted
to our
employees under our 2004 Plan. As
we
have not granted options to our employees under the 2006 Share Incentive
Plan,
we do not have compensation charges that are associated with the 2006 Share
Incentive Plan to record.
Trade
receivables
We
perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customer’s current credit-worthiness, as
determined by our review of their current credit information. We extended
three
months of credit to our former distributors and franchisees pursuant
to
our
distribution and franchise agreements. However, it took on average five to
six
months for our former distributors and franchisees, who are also our major
customers, to settle their debts to us. Therefore, in some fiscal periods,
our
trade receivables increased, and may increase in the future, to an amount
which
is approximately equal to our total net revenues for such period. We
continuously monitor collections and payments from our customers and
maintain
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
typically write-off billed receivables that are over 360 days outstanding.
While such credit losses have historically been within our expectations and
the
provisions established, we cannot guarantee that we will continue to experience
the same credit loss rates that we have had in the past. The billed
receivables from Ninetowns Enke, iTowNet and eGrid, which are our customers
that
are related to us, were approximately 18.1% of our total billed receivables
as of December 31, 2006. The billed receivables from our customers and
franchisees, which are unrelated to us, were approximately 81.9% of our total
billed receivables as of December 31, 2006. 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 collectibility 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 2004, 2005 and 2006. The first step compares the
fair values of each reporting unit to its carrying amount, including
goodwill. If the fair value of each reporting unit exceeds its
carrying amount, goodwill is not impaired and the second step will not be
required. If the carrying amount of a reporting unit exceeds its fair
value, the second step compares the implied fair value of goodwill to the
carrying value of a reporting unit’s goodwill. The implied fair value
of goodwill is determined in a manner similar to accounting for a business
combination with the allocation of the assessed fair value determined in
the
first step to the assets and liabilities of the reporting unit. The
excess of the fair value of the reporting unit over the amounts assigned
to the
assets and liabilities is the implied fair value of goodwill. An
impairment loss is recognized for any excess in the carrying value of goodwill
over the implied fair value of goodwill. Based on the Company’s
assessment, there was no impairment of goodwill for the years ended December
31,
2004, 2005 and 2006.
A. Operating
results
The
following table sets forth the results of our operations expressed as a
percentage of our total net revenues for the periods indicated. Our historical
operating results are not necessarily indicative of the results for any future
period.
|
Year
ended
December
31,
|
|
2004
|
2005
|
2006
|
|
|
|
|
Total
net revenues:
|
|
|
|
Enterprise
software
|
93.6%
|
84.8%
|
76.2%
|
Software
development
services
|
6.3
|
14.9
|
23.5
|
Computer
hardware
sales
|
0.1
|
0.3
|
0.3
|
Cost
of revenues:
|
|
|
|
Enterprise
software
|
0.7
|
0.2
|
-
|
Software
development
services
|
1.5
|
7.6
|
11.0
|
Computer
hardware
sales
|
–
|
0.2
|
0.1
|
Gross
profit
|
97.8
|
92.0
|
88.9
|
|
Year
Ended
December
31,
|
|
2004
|
2005
|
2006
|
|
|
|
|
Operating
expenses:
|
|
|
|
Selling
expenses
|
7.9
|
10.7
|
8.9
|
General
and administrative expenses
|
18.2
|
20.6
|
43.0
|
Research
and development expenses
|
2.4
|
4.7
|
19.5
|
Total
operating expenses |
28.5
|
36
|
71.4
|
Government
subsidies
|
0.6
|
0.2
|
0.5
|
Income
from
operations
|
69.9
|
56.2
|
18.0
|
|
|
|
|
Interest
income
|
|
|
|
Income
before provision for income taxes and minority
interest
|
71.8
|
63.5
|
30.6
|
Provision
for income
taxes
|
0.9
|
0.3
|
0.6
|
Income
before minority
interests
|
70.9
|
63.2
|
30.0
|
Minority
interests
|
4.4
|
–
|
|
Net
income
|
66.5%
|
63.2%
|
30.0%
|
2006
compared to 2005
Total
net revenues
We
generated total net revenues of RMB153.2 million (US$19.6 million) in 2006,
a
decrease of 36.1% over our total net revenues of RMB239.9 million in 2005.
This
revenue decrease was principally the result of the PRC Inspections
Administration’s free distribution of products that are similar to
our iDeclare product series.
Enterprise
software. Net revenues from sales of our enterprise software decreased by
42.6% to RMB116.8 million (US$15.0 million) in 2006 from RMB203.5 million
in
2005, primarily as a result of the PRC Inspections Administration’s free
distribution of products that are similar to our iDeclare product
series. The availability of a free software product that has similar
functions as iDeclare caused our sales of our iDeclare product series to
decline
significantly. In 2006, we signed customer maintenance service
contracts with approximately 29,000 users whose customer maintenance service
contracts were due for renewal in 2006. We recognized net revenues of
RMB43.4 million (US$5.6 million) from provision of customer maintenance
services
in 2006. Of our net revenues from sales of enterprise software, RMB23.6
million
and RMB21.9 million (US$2.8 million) were from per declaration filing fees
in
2005 and 2006, respectively, representing a year-on-year decrease of 7.2%.
As of
December 31, 2006, we believe there were approximately 130,000 licensees
of our
enterprise software registered to effect electronic import/export processing
over the data exchange platforms of iTowNet, an increase of 6.6% from
approximately 122,000 of such licensees as of December 31, 2005.
Software
development services. Net revenues from our software development services
increased by 0.9% from RMB35.7 million in 2005 to RMB36.0 million
(US$4.6 million) in 2006. In 2006, we did not enter into as many
software development contracts as compared to 2005, but we completed some
project milestones and recognized revenue for software development contracts
signed in 2005.
Computer
hardware sales. Net revenues from computer hardware sales comprised less
than 0.3% of our total net revenues as we gradually exited this line of
business.
Cost
of revenues
Enterprise
software. Cost of revenues from sales of enterprise software decreased by
100% to nil in 2006 as compared to RMB495,000 in 2005. Since iDeclare is
now
generally distributed through the Internet, we
incurred
minimal outsourcing costs to outside contractors and costs associated with
packaging and shipping of software.
Software
development services. Cost of revenues from software development services
decreased to RMB16.8 million (US$2.2 million) in 2006 from RMB18.2 million
in
2005, primarily as a result of fewer number of software development service
contracts signed in 2006. As of December 31, 2006, the Company did
not have capitalized costs related to such projects which represents a
decrease
of 100% over the prior year’s balance of RMB153,000 as of December 31,
2005.
Computer
hardware sales. Cost of revenues from computer hardware sales was
insignificant in 2006.
Gross
profit margin
Enterprise
software. Gross profit margin for sales of enterprise software in 2006 was
100% compared to 99.8% in 2005 primarily because iDeclare is now generally
distributed through the Internet and we incurred minimal outsourcing costs
to
outside contractors and costs associated with packaging and shipping of
software.
Software
development services. Gross profit margin for software development services
in 2006 remained relatively stable at 53.3% compared to 49.0% in
2005.
Computer
hardware sales. Gross profit margin for computer hardware sales increased
to 66.3% in 2006 from 28.9% in 2005, primarily due to decreased sales of
lower-margin products such as desktop computers.
Operating
expenses
Operating
expenses increased by 26.4% to RMB109.4 million (US$14.0 million) in 2006
from
RMB86.5 million in 2005, primarily as a result of our efforts to expand
our
business through new business models, additional staff, increase in stock-based
compensation costs and increased research and development.
Selling
expenses
Selling
expenses decreased by 47.2% to RMB13.6 million (US$1.7 million) in 2006
from
RMB25.7 million in 2005, primarily due to our change in business model
from
direct sales to franchise sales.
General
and administrative expenses
General
and administrative expenses increased by 33.1% to RMB65.9 million (US$8.4
million) in 2006 from RMB49.5 million in 2005, primarily due to increases
in (i)
professional fees incurred in relation to our acquisition and investment
activities and compliance requirements applicable to us as a public company
in the United States, (ii) depreciation and amortization charges on
fixed assets and intangible assets, (iii) stock-based compensation costs
and
(iv) general personnel expenses, office expenses, communication expenses,
traveling expenses and insurance expenses, in each case associated with
the
increase in the scale of our operations.
Research
and development expenses
Research
and development expenses increased significantly by 165.1% to RMB29.8 million
(US$3.8 million) in 2006 from RMB11.2 million in 2005, primarily due to
an
increase in (i) stock-based compensation costs and (ii) staff costs related
to
the research and development of our new products primarily related to our
new
B2B business.
General
and administrative expenses
General
and administrative expenses increased by 35.5% to RMB49.5 million in 2005
from
RMB36.6 million in 2004, primarily due to increases in (i) professional
fees
incurred in relation to compliance requirements applicable to us as a public
company in the United States, (ii) depreciation and amortization
charges on fixed assets and intangible assets and (iii) general personnel
expenses, office expenses, communication expenses, traveling expenses and
insurance expenses, in each case associated with the increase in the scale
of
our operations.
Research
and development expenses
Research
and development expenses increased by 133.4% to RMB11.2 million in 2005
from
RMB4.8 million in 2004, primarily due to an increase in staff costs related
to
the research and development of our new products such as a PRC Customs
declaration filing system and an electronic payment system.
Government
subsidies
Government
subsidies decreased by 66.6% to RMB447,000 in
2005 from RMB1.3 million in 2004. This was attributable to our receipt of a
RMB1.0 million government subsidy for research and development work from
the
Electronic Information Industry Fund of the Ministry of Information Industry
of
the PRC in 2004. We did not receive such subsidy in
2005.
Interest
income
Interest
income increased by significantly to RMB17.6 million in 2005 from RMB3.8
million
in 2004, primarily due to interest income derived from our net proceeds
from our
initial public offering in December 2004.
Income
taxes
Income
taxes decreased by 65.7% to RMB626,000 in 2005 from RMB1.8 million in 2004,
primarily due to the increasing operations of Ninetowns Ports, which was
exempt
from enterprise income tax in 2005.
Net
income
Net
income increased by 13.2% to
RMB151.6 million in 2005 from RMB134.0 million in 2004 as a result of the
cumulative effect of the factors described above.
Inflation
Inflation
and deflation in China did not have a material impact on our results of
operations in the past three years. According to the National Bureau of
Statistics of China, China’s overall national inflation rate, as represented by
the change in the Consumer Price Index in China, was 3.9%, 1.8% and 1.5%
in
2004, 2005 and 2006, respectively.
Control
over Baichuan
In
April
2007, in connection with our acquisition through our wholly-owned subsidiary,
Ixworth, of a 70% interest in Ample Spring, we entered into a series of
contractual agreements with Baichuan, Mr. Wang and Mr. Ren, previously
shareholders of Baichuan, which provide us with effective control over
Baichuan.
Related
party trade receivables
In
connection with the transactions described above, we had trade receivables
from
related parties amounting to RMB4.0 million (US$0.5 million) or 18.1% of
our billed receivables as of December 31, 2006. These receivables consisted
primarily of proceeds from sales of enterprise software and fees from software
development services.
Board
memberships
Mr.
Wang
and Mr. Ren are two of the five directors of iTowNet. iTowNet is 51.0%
owned by
the PRC Inspections Administration and 49.0% owned by Import & Export.
Import & Export is in turn 100.0% beneficially owned by Mr. Wang and Ms.
Dong. Mr. Wu is the sole supervisor of iTowNet.
Stock
option grants
Please
refer to Item 6, “Directors, Senior Management and Employees — Compensation of
directors and executive officers.”
C. Interests
of experts and counsel
Not
applicable.
Item
8. Financial
Information.
A. Consolidated
statements and other financial information
Please
see our consolidated financial statements which are filed as part of this
annual
report.
Legal
proceedings
We
are
not currently involved in any material litigation and we are not aware
of any
pending or threatened litigation or similar proceedings which could reasonably
be expected, if such litigation or proceeding is decided adversely to us,
to
have a material adverse effect on our financial condition or results of
operations.
Dividend
policy
Since
our
inception, we have not declared or paid a dividend on our ordinary shares.
We do
not anticipate paying any cash dividend in the foreseeable future. We currently
intend to retain future earnings, if any, to finance our operations and
the
expansion of our business. Payments of dividends by our subsidiaries in
China to
us are subject to restrictions including the restriction that foreign-invested
enterprises may only buy, sell and/or remit foreign currencies at banks
authorized to conduct foreign exchange business after providing valid commercial
documents. We do not expect any of these restrictions to have a material
and
adverse effect on our ability to receive payments of dividends from our
subsidiaries in China. There are no such similar foreign exchange restrictions
in the Hong Kong, the Cayman Islands or the British Virgin Islands.
Item
16A. Audit Committee
Financial Expert.
See
Item
6 of this annual report, "Directors, Senior Management and Employees — Board
practices."
Our
board
of directors has adopted a code of ethics for our chief executive officer
and
senior financial officers and a code of business conduct and ethics, which
is
applicable to all of our directors, officers and employees. Our code of ethics
and code of business conduct and ethics are publicly available on our website
at
http://www.ninetowns.com/english, and such codes are filed as exhibits
to this annual report.
Item
16C. Principal Accountant Fees and
Services.
The
following table sets forth the aggregate fees in connection with certain
professional services rendered by Deloitte Touche Tohmatsu, an independent
registered public accounting firm, for the periods indicated. We did not
pay any
tax related or other fees to our principal accountants during the periods
indicated.
|
For
the year ended December 31
|
|
2005
|
2006
|
2006
|
Audit
fees(1)
|
RMB2,463,000
|
RMB3,789,000
|
US$486,000
|
Audit
related
fees
|
372,000
|
526,000
|
67,000
|
Total
|
RMB2,835,000
|
RMB4,315,000
|
US$553,000
|
(1)
|
Audit
fees are the aggregate fees billed for each of the fiscal years
for
professional services rendered by our principal accountants for
their
audit and review of our annual financial statements and interim
financial
statements in connection with the statutory requirement and our
initial
public offering in 2004.
|
Audit
Committee Pre-Approval Policy and Procedures
Our
audit
committee will pre-approve all audit and non-audit services provided by our
independent registered public accounting firm. These services may include
audit
services, audit-related services, tax services and other services, as described
above. On an annual basis, our audit committee will review and approve the
audit
services to be rendered by our independent registered public accounting firm
prior to the engagement of the service. Audit services not covered by the
annual
engagement letter, audit-related services and tax services are estimated
to
result in an amount of more than US$10,000 require the express approval of
our
audit committee prior to engagement. Our audit committee may delegate
pre-approval authority to one or more members of our audit committee. The
decisions of any audit committee member to whom authority is delegated to
pre-approve a service shall be presented to the full audit committee at its
next
scheduled meeting. Our Chief Financial Officer, Tommy Siu Lun Fork is required
to report to our audit committee on a quarterly basis regarding the extent
of
services actually provided and the fees for the services performed.
Item
16D. Exemptions from the Listing
Standards for Audit Committee.