UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549







FORM 20-F


(Mark One)





o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORx
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2010ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the

transition period from ________________ to ________________ORo
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company report ________________





Commission file number: 001-33134





Yucheng Technologies Limited


(Exact name of Registrant as specified in its charter)





Not Applicable


(Translation of Registrant’s name into English)





British Virgin Islands


(Jurisdiction of incorporation or organization)





Beijing Global Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng District, Beijing


100013, P.R. China


(Address of principal executive offices)





Weidong Hong, Chief Executive Officer, Tel: +86 10 5913 7700, Fax: +86 10 5913 7800


Beijing Global Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng District, Beijing


100013, P.R. 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:





Title of each class
Name of each exchange on which registeredOrdinary shares
The NASDAQ Stock Market LLC





Securities registered or to be registered pursuant to Section 12(g) of the Act:


None





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:


None





Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.


18,560,014 ordinary shares





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.





o  Yes     x  No





If this report is an annual or transaction 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     x  No





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.


x  Yes      o  No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 c) 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):


o  Large Accelerated Filer     x  Accelerated Filer      o    Non-Accelerated Filer





Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.





x  U.S. GAAP      o  International Financial Reporting Standards as issued by the International Accounting Standards Board      o  Other





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      o  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      x  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 Section 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








YUCHENG TECHNOLOGIES LIMITED





TABLE OF CONTENTS







PageITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

5ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE

5ITEM 3.
KEY INFORMATION

5ITEM 4.
INFORMATION ON THE COMPANY

27ITEM 4A.
UNRESOLVED STAFF COMMENTS

49ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

49ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

68ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

77ITEM 8.
FINANCIAL INFORMATION

78ITEM 9.
THE OFFER AND LISTING

80ITEM 10.
ADDITIONAL INFORMATION

83ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

93ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

93ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

93ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

93ITEM 15.
CONTROLS AND PROCEDURES

94ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT

96ITEM 16B.
CODE OF ETHICS

96ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

96ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

96ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

96ITEM 17.
FINANCIAL STATEMENTS

97ITEM 18.
FINANCIAL STATEMENTS

97ITEM 19.
EXHIBITS

97


i





Introduction





Unless otherwise indicated, references in this annual report to:





·
“China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Hong Kong SAR, Macau SAR and Taiwan.





·
“NASDAQ” refers to the NASDAQ Global Market.





·
“Renminbi” or “RMB” refers to the legal currency of China.





·
“SEC” refers to the United States Securities and Exchange Commission.





·
“Securities Act” refers to the Securities Act of 1933, as amended.





·
“Shares” or “ordinary shares” refers to our ordinary shares, of no par value.  “USD”, “U.S. dollars”, “dollar” and “US$” refer to the legal currency of the United States.





In addition, unless otherwise indicated, references in this annual report to:





·
“Yucheng” or “Yuxinyicheng” refers to the Yucheng Technologies Limited, as a whole or any portion thereof, unless expressly stated otherwise.





·
“Beijing Sihitech” refers to Beijing Sihitech Technology Co., Ltd. and, unless the context otherwise requires, its subsidiaries.





·
“China Unistone” refers to China Unistone Acquisition Corporation.





·
“Easycon” refers to Beijing Easycon Electronics Limited.





·
“e-Channels” refers to Beijing e-Channels Century Technology Co., Ltd.





·
“e-Channels BVI” refers to Port Wing Development Co., Ltd.





·
“Fujie” refers to Shanghai Fujie Business Consulting Limited.





·
“Fuyi” refers to Shanghai Fuyi Business Consulting Limited.





·
“Recency” refers to Chengdu Recency Technologies Limited.





·
“Sihitech BVI” refers to Ahead Billion Venture Ltd.





·
“Sunrisk” or “Yuxinhengsheng” refers to Beijing Yuxinhengsheng Information Technology Limited.


1





·
“Yuxin Data” refers to Yuxin Data Technologies Co., Limited (Tianjin)





·
“Yuxinyicheng Information” refers to Beijing Yuxinyicheng Information Co., Ltd.





·
“Elegon” refers to Chengdu Elegon Infotech Ltd.





·
“Beijing Huazhi” refers to Beijing Sihitech Huazhi Consulting Service Co.,Ltd.





·
“Hainan Baodaotong” refers to Hainan Baodaotong Technology Limited.






“Tianjin Yuxinyicheng” refers to Tianjin Yuxinyicheng Technologies Limited.






“Chengdu Yuxinyicheng” refers to Chengdu Yuxinyicheng Technologies Limited.






“Xiamen Yucheng” refers to Xiamen Yucheng Technologies Ltd.






“Yuxinyicheng Software” refers to Beijing Yuxinyicheng Software Technologies Limited






“Guangzhou Yuxinyicheng” refers to Guangzhou Yuxinyicheng Information Technologies Limited






“Shanghai Sihitech” refers to Shanghai Sihitech Technology Co., Ltd.






“Shanghai Software” refers to Shanghai Sihitech Software Co., Ltd.





“Yucheng Internet” refers to Yucheng Internet Technologies Co., Ltd





·
“we,” “us,” “our company,” “our,” “the Company” and “Yucheng” refer to Yucheng Technologies Limited and, unless the context otherwise requires, its subsidiaries and predecessors.





·
“Tier I banks” or “Top Four banks” refers to the four largest state-controlled banks in China, namely the Industrial and Commercial Bank of China, the Bank of China, China Construction Bank and the Agricultural Bank of China; “Tier II banks” or “Joint-Stock banks” refers to the other 13 national commercial banks and policy banks in China; and “Tier III banks” or “SMBs” refers to small and mid-sized banks in China.





This annual report contains statistical data relating to the banking industry in China that we obtained from various publications.  These publications generally indicate that they have obtained their information from sources believed to be reliable, but we do not guarantee the accuracy and completeness of their information.  Although we believe that these publications are reliable, we have not independently verified their statistical data.  The statistical data may not be comparable to similar statistics collected for the industry in the United States or other countries.





Forward-Looking Information





This annual report contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry.  All statements other than statements of historical fact in this annual report are forward-looking statements.  These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “estimate,” “plan,” “believe,” “is /are likely to” or other similar expressions.  The forward-looking statements included in this annual report relate to, among other things:





·
our goals and strategies, including how we effect our goals and strategies;


2




·
our expectations for our future business development, business prospects, results of operations and financial condition;





·
expected changes in our revenue composition, margins and certain costs or expenditures;





·
our future contracting and pricing strategies or policies;





·
our plans to expand our business operations and product offerings;





·
competition from other providers of IT services and products;





·
the time to develop and market new services and products;





·
PRC governmental policies relating to the business development, banking regulation and regulation of the financial services sector; and





·
Other “forward-looking” information.





We believe it is important to communicate our expectations to our stockholders.  However, there may be events in the future that we are not able to predict accurately or over which we have no control.  The risk factors and cautionary language discussed in this annual report provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations in these forward-looking statements, including, among other things:





·
changing interpretations of generally accepted accounting principles;





·
outcomes of government reviews, inquiries, investigations and related litigation;





·
continued compliance with government regulations;





·
legislation or regulatory environments, requirements or changes adversely affecting the businesses in which we and our PRC operating companies are engaged;





·
geopolitical events and regulatory changes; and





·
the effect of world recession and declines in global and specific country GDP on the world financial sector and the Chinese economy.





These forward-looking statements involve various risks, assumptions and uncertainties.  Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot give assurance that our expectations will turn out to be correct.  Our actual results could be materially different from and worse than our expectations.  Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key Information — D. Risk factors” and elsewhere in this annual report.


3


The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report.  You should not place undue reliance on these forward-looking statements, and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information — D. Risk factors” in this annual report.





All forward-looking statements included herein attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  Except to the extent required by applicable laws and regulations, we undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events.


4





PART I





ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS





Not applicable.





ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE





Not applicable.





ITEM 3.          KEY INFORMATION





A.    Selected financial data.





SELECTED CONSOLIDATED FINANCIAL DATA





The following summary consolidated financial data for the three years ended December 31, 2010 are derived from our audited consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or US GAAP, and have been audited by BDO Limited, an independent registered public accounting firm.  The report of BDO Limited on those consolidated financial statements is included elsewhere in this annual report.  This information is only a summary and should be read together with the consolidated financial statements, the related notes and other financial information included in this annual report.  Our selected consolidated statement of operations data for the two years ended December 31, 2006 and 2007 and our selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 have been derived from our audited consolidated financial statements, which are not included in this annual report, and have been retrospectively adjusted for the adoption of the new accounting standards related to the presentation and disclosure requirements for non-controlling interests and for the discontinued operations.




Yucheng Technologies Limited, or Yucheng, was incorporated on November 17, 2005 as a subsidiary of China Unistone.  After completion of a redomestication merger of China Unistone with and into Yucheng and the acquisition by Yucheng of Sihitech BVI and e-Channels BVI on November 24, 2006, Yucheng became the holding company of our business.  Sihitech BVI was our predecessor from an accounting perspective, and the purchase method of accounting was used in consolidating e-Channels BVI and China Unistone into Sihitech BVI.


In 2010, Yucheng sold100% of the shares in its POS company to an unrelated party and the management team of the POS business to permit the company to focus on our core business of IT solutions for banks in China.




The POS business has been reclassified to discontinued operations for the year ended December 31, 2010, and the comparative figures for the years ended December 31, 2008 and 2009 have been retrospectively reclassified to discontinued operations according to US GAAP accounting requirements.




Yucheng's income statements data do not include the results of POS business, which has been reclassified to discontinued operations.





Revenues represented in this section are net of business tax.





The following table sets forth our selected consolidated statement of operations data.


5


2006


2007


2008


2009


2010RMB


RMB


RMB


RMB


RMB


USD(in thousands, except percentages)Revenues


289,650



431,875



662,197



354,470



403,644



60,949Income(Loss) from operations


45,256



79,541



89,988



(9,025
)


37,239



5,623Income(Loss) from continuing operations


40,731



75,946



91,331



(625
)


31,436



4,747Earnings per share (basic) from continuing operations


5.02



5.64



5.21



0.14



1.84



0.28Earnings per share (fully diluted) from continuing operations


3.96



4.82



4.89



0.14



1.80



0.27





The following table sets forth our selected consolidated balance sheet data.





As of December 31,2006


2007


2008


2009


2010RMB


RMB


RMB


RMB


RMB


USDCash


98,358



222,494



239,751



246,577



162,536



24,542Trade accounts receivable


116,606



203,451



280,654



147,979



196,243



29,632Total current assets


305,848



572,304



647,311



561,216



590,184



89,115Goodwill


37,274



169,362



187,816



189,010



189,010



28,540Total assets


389,141



821,747



943,887



868,118



869,964



131,361Total current liabilities


141,218



315,727



367,352



265,699



260,304



39,305Total liabilities


146,511



323,450



373,328



266,931



262,087



39,574Stockholders' equity


242,629



493,098



558,536



593,318



602,743



91,012Total liabilities and stockholders' equity


389,141



821,747



943,887



868,118



869,964



131,361





EXCHANGE RATE INFORMATION





The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated.  These rates are provided solely for investors’ reference and are not necessarily the exchange rates that are used in this annual report or will be used in the preparation of our other periodic reports or any other information to be provided by the company.


6





Period

End


Average(1)


High


Low(Renminbi per USD1.00)2004


8.2765



8.2768



8.2774



8.27642005


8.0702



8.1936



8.2765



8.07022006


7.8041



7.9723



8.0702



7.80412007


7.2949



7.6058



7.8127



7.29462008


6.8225



6.9477



7.2946



6.78002009


6.8282



6.8314



6.8380



6.82502010


6.6227



6.7668



6.8284



6.6227November


6.6762



6.6558



6.6925



6.6239December


6.6227



6.6515



6.6786



6.62272011January


6.5891



6.6027



6.6349



6.5876February


6.5752



6.5833



6.5985



6.5705March


6.5564



6.5662



6.5750



6.5564April


6.4990



6.5316



6.5564



6.4990May


6.4845



6.4989



6.5108



6.4845





(1)
Averages for a period are calculated by using the average of the exchange rates on the end of each month during the period.  Monthly averages are calculated by using the average of the daily rates during the relevant period.


Source: Federal Reserve Bank of New York and the Bank of China





This annual report contains translations of certain Renminbi amounts into U.S. dollar amounts at specified rates.  Translations from Renminbi to U.S. dollars at certain specified date refers to the noon buying rate on that particular date in The City of New York for cable transfers of Renminbi as certified for customs purpose by the Federal Reserve Bank of New York.  Unless otherwise stated, the translations of Renminbi into U.S. dollars have been made based on the noon buying rate on December 31, 2010, which was RMB6.6227 to USD1.00.  We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.  See “Item 3. Key Information — Risk factors — Risks related to doing business in China — Any fluctuations in exchange rates could result in foreign currency exchange losses” and “— Restrictions on currency exchange may limit our ability to receive and use our revenues or financing effectively” for discussions on the effects of fluctuating exchange rates and currency control on the value of our ordinary shares.  On June 28, 2011, the noon buying rate was RMB6.4723 to USD1.00.





The People’s Bank of China, or the PBOC, issued a public notice on July 21, 2005 increasing the exchange rate of the Renminbi against the U.S. dollar by approximately 2.0% to RMB8.11 per USD1.00.  Further to this notice, the PRC government has reformed its exchange rate regime by adopting a managed floating exchange rate regime based on market supply and demand with reference to a portfolio of currencies.  Under this new regime, the Renminbi is no longer pegged to the U.S. dollar.  This change in policy has resulted in an approximate 20.2% appreciation of the Renminbi against the U.S. dollar between July 21, 2005 and June 28, 2011.  The PRC government may decide to adopt an even more flexible currency policy in the future, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar,or adopt a more conservative currency policy which could effectively peg the RMB to the U.S. dollar.


7





B.    Capitalization and indebtedness.





Not applicable.





C.    Reasons for the offer and use of proceeds.





Not applicable.





D.    Risk factors.





RISKS RELATING TO OUR BUSINESS





We have a limited operating history as a combined company, which makes evaluating our business and prospects difficult.





Our current business was formed upon the consummation of a three-party acquisition on November 24, 2006 among Yucheng, Sihitech BVI, parent of Beijing Sihitech, a company established in June 1999 that focused on providing system integration and other IT solutions and services, and e-Channels BVI, parent of e-Channels, a company established in February 2001 that focused on providing multi-channel software solutions and IT consulting services.   In addition, we acquired five companies in 2007.  See “Item 4. Information on the Company - A. History and development of the Company.”  Our combined company has a limited operating history, which makes it difficult to evaluate our historical financial results and business prospects.  Our future success depends on a successful integration of all these companies and the capturing of opportunities presented by these acquisitions.  If we experience difficulties in the integration process or are not able to take advantage of the perceived synergies between us and these companies, we may not be able to expand our operations and revenues as expected.





In addition, our management team has worked together for a relatively short period of time and it may be difficult to evaluate their effectiveness, on an individual or collective basis, as well as their ability to respond to future challenges to our business, including their ability to:





·
respond to increasing competitions in the industry;





·
adapt to changing technologies;





·
retain and expand our client base;





·
expand our solution and service offerings;





·
manage our business expansions, including integration of past and future acquisitions;





·
manage risks associated with intellectual property;





·
maintain effective control of our costs and expenses; and





·
attract, retain and motivate qualified personnel.





If we are unsuccessful in addressing these challenges, our results of operations and business prospects may be materially and adversely affected.


8




We may not be able to sustain our rate of revenue growth.





Our revenues fluctuated in recent years.   Our revenue decreased 46.5% from RMB662.2 million in 2008 to RMB354.5 million in 2009, and increased by 13.9% from the 2009 revenue to RMB403.6 million(USD60.9million) in 2010.  Our revenue growth, in particular the growth from 2006 to 2007, was primarily enhanced by our merger with e-Channels BVI on November 24, 2006 and our acquisitions of five companies in 2007.  In addition to revenues generated by these acquired companies, we were also able to achieve synergies among our existing business and the acquired businesses.   Without the impact of these acquisitions, our growth rate during this period would have been much lower.  In 2008, 2009 and 2010, we did not make any acquisition and we may not be able to make acquisitions with a similar scale, or at all, in future periods, or give assurance that our future acquisitions, if any, will be able to provide the same level of synergy as our past acquisitions.  In addition, our past growth reflected our success in achieving market acceptance of our IT solutions and software and establishing market leadership in certain segments of China’s financial IT services industry.  As we become a larger and more mature company, we may not be able to sustain our recent rate of revenue growth in future periods. Additionally, the changing economic environment as a result of the recent world recession and PRC government economic policy decisions may have an effect on our overall growth.





We have been relying on, and are expected to continue to rely on, a limited number of clients, in particular the various separate development centers and provincial branches of China Construction Bank, for a significant proportion of our revenues.  Any loss of these clients could significantly impact our future revenues, and materially and adversely affect our operational results and our financial condition.





China Construction Bank is one of the largest banks in China and our largest user of our services, accounting in the aggregate for 48.7%, 34.0% and 22.7% of our revenues in 2008, 2009 and 2010, respectively.  We provide solutions and services to different provincial branch offices of China Construction Bank and to its head office.  Although the engagements with the branches and the head office are under separate and independent contracts, certain individual accounts still historically account for a significant amount of revenue.  For example, our largest account within China Construction Bank was with its head office, which accounted for 37.7%, 21.5% and 14.3% of our revenues in 2008, 2009 and 2010, respectively.  Notwithstanding the separate legal treatment of the engagements, a substantial failure to provide the contracted solutions and services under one of our agreements may result in a disruption to our overall relationship with China Construction Bank.  Also, if China Construction Bank’s general IT spending pattern and budget changes or decreases, it could adversely affect our ability to offer services and win contracts from different entities within the bank.  We have no long-term contracts with China Construction Bank or any of our major clients.  There are no assurances that we will be able to continue to retain these clients, and that we will maintain or increase our current level of business with them in the future.  If we lose any of these significant clients, or if any of them significantly reduces their use of our solutions and services, we may not be able to find replacement revenue sources, thus materially and adversely impacting our operating results and financial condition.  In addition, our current clients are primarily large national commercial banks that possess significant negotiating and pricing power, and if they exert pricing pressure on us, we cannot guarantee that we will be able to resist this pressure or find other replacement clients.  If we have to lower prices to maintain our business with these clients, our profitability may be materially and adversely affected.





Fluctuations in our clients’ annual IT budgets and spending cycles and other factors can cause our revenues and results of operations to vary significantly from quarter to quarter and from year to year.





Our revenues and results of operations will vary significantly from quarter to quarter and from year to year due to numerous factors, many of which are outside of our control.  As substantially all of our revenues are derived from providing services on IT projects outsourced from our banking clients in China, the amount of our revenues for any period is affected by the timing of our clients’ IT projects, which in turn depends on their internal budgeting and planning process, over which we have no control.  Historically, our banking clients have been awarding more projects in the third and fourth quarters as compared to the first and second quarters, as a result, we generally record stronger revenues in the third and fourth quarters of each year.  In addition, our revenues are generally the lowest in the first quarter of each year due to the Chinese New Year holiday.  Furthermore, the project mix of any given period also significantly affects our gross margin and results of operations.  For example, if we record a higher percentage of low margin hardware pass-through revenue as compared to higher margin software development revenue in a given quarter, our gross margin will be negatively affected.  We may not be able to control the timing and types of projects we undertake and the revenue we can record in a given quarter.


9





Due to the annual budget cycles of most of our clients, we also may be unable to accurately estimate the demand for our Software & Solutions, which could adversely affect our business planning.  Moreover, our results will vary depending on our clients’ business needs from year to year.





Other factors that may cause fluctuation of our quarterly and annual results include:





·
our ability to successfully develop, introduce and sell new or enhanced solutions in a timely manner;





·
the announcement or introduction of new or enhanced solutions by us or our competitors;





·
any delays in the completion of our projects; and





·
the results of our acquisitions of, or investments in, other businesses or assets.





Due to these and other factors, including factors discussed elsewhere in this “Risk factors” section, our results of operations may fluctuate significantly from quarter to quarter and from year to year, and our results of operations for any period may not be indicative of our performance in any future period.





In addition, we base our planned operating expenses, including research and development expenses, general and administrative expenses, and hiring of additional personnel in part on our expectations of future revenue.  If our revenues for a particular quarter are lower than we expect, we may be unable to proportionately reduce our operating expenses for that quarter, which would harm our results of operations for that quarter.  If our results of operations in future quarters fall below the expectations of securities analysts or investors, the market price of our shares will likely decline significantly.





Our business depends on the banking industry in China, and changes within that industry could reduce demand for our solutions and services.  The recent growth of China’s banking industry and IT spending by China’s banks may not continue, which would have a material adverse effect on our results of operations and business prospects.





Substantially all of our revenues have been derived, and are expected to continue to be derived from, solutions and services which we provide to banks in China.  Our revenue growth in recent years has been driven in part by the growth in China’s banking industry, which is a result of China’s rapid economic development and recent industry-wide reforms.  These combined changes have greatly increased IT spending by China’s banks.  This growth may not continue at the same rate or at all.  Unfavorable economic conditions, such as a slow-down in the global economic development led by the recent economic downturn, potential instability in the global banking system and changing monetary policies in China, have and could continue to adversely impact China’s economy and the growth of banks operating in China, which may in turn impact their IT expenditures.  Any decreases in, or reallocation of, capital expenditures by our current and potential clients could have a material and adverse effect on our business, financial conditions and results of operations.  In addition, to encourage potential growth in the Chinese economy, the PBOC has adopted, and may continue to adopt, various macroeconomic measures that may encourage banks to lend more and to riskier clients than in the recent past.  This could cause an increase in the non-performing loan rate, which would materially impact bank profitability.  Finally, the PBOC may also impose monetary policies or interest rates that may reduce the profitability of China’s banks.  Any reduction in profitability of China’s banks may reduce their spending on IT, which may materially and adversely affect our business, financial condition and results of operations.





10




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





Many factors, including those listed below, could affect our clients’ decisions relating to their IT outsourcing and our business relationship with our clients:





·
Our clients may change the way they make IT spending decisions.We derive a substantial majority of our revenues from providing IT solutions, software and services to China’s banks on a project-by-project basis, and client relationships play an important role in our ability to win projects from our clients.  We strive to build long-term relationships with our clients to increase our competitive advantage over other IT vendors.  We have recently observed a shift in the decision-making process for IT spending in China’s banks.  More decisions are being made at banks’ head offices, instead of provincial level branches, primarily due to centralization of customer data at the bank head offices.  Such a shift, or any other change of the decision maker in our clients, may result in the loss of business opportunities to competitors who have closer relationships than us with the new decision-making body within the bank.





·
Consolidation of our clients.  There is a continuing trend for financial institutions in China to consolidate.  Our clients may be acquired by other financial institutions and adopt the acquirer’s IT systems.  Also, as these institutions grow in size through consolidation, they may exert pricing pressure on vendors.  In addition, as restrictions against foreign ownership in the financial and insurance industries ease, more foreign investors may acquire stakes in or form strategic alliances with financial institutions in China, and may direct or influence management to use IT vendors recommended or favored by the investor, leading to the loss or reduction of our business with these existing clients.





·
Our clients may decide to develop their IT solutions in-house.  Our clients may find it more cost-effective to invest in and develop their own in-house IT capacity rather than relying on third-party vendors, thereby reducing their purchases of our solutions and services.  For example, a banking client for which we designed the initial online banking platform decided to later conduct further online banking development in-house, and as a result, we were not able to renew our contract with such client.





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





The occurrence of any of these events may materially and adversely affect our business, financial condition and results of operations.





We are facing increasing competition in the market for IT services in China’s banking industry, and if we fail to compete successfully, we may lose clients and our revenues and profits may decline.





There is intense competition in the market for IT services in China’s banking industry, and the industry is characterized by frequent technological changes, evolving industry standards and changing client demands.  We face competition from both China’s domestic IT service providers, and global IT vendors.  See “Item 4. Information on the Company — B. Business overview — Competition”.  Some of our competitors have longer operating histories, larger clientele, more diverse service offerings, more extensive personnel and financial resources than we do.  While new IT service providers may also enter the industry, we also compete with the IT departments of our existing and potential clients, which may be capable of creating in-house solutions, thereby reducing the need for outside service providers.  We expect competition to increase and we cannot guarantee that we will successfully compete against our competitors.  Our current or future competitors may develop or offer solutions or services that are comparable or superior to ours at a lower price.  In addition, only some of our solutions and services are protected by intellectual property rights, and therefore, our competitors may copy some of our technologies without incurring the associated research and development expenses, and sell their competing products with lower cost, which could result in the loss of sales of our solutions and services.  If we fail to successfully compete against our current and future competitors, our business, financial condition and results of operations may be materially and adversely affected.


11





We undertake many of our projects on a fixed-price basis.  If we underestimate our costs, or fail to control our costs in the implementation of the projects, our gross margins and profitability may be materially and adversely affected.





We typically undertake our client projects on a fixed-price basis where we charge a fixed price to the client based on our evaluation of the estimated resources required to implement the project.  If we overestimate costs required for the project, our bid may become uncompetitive and we may lose business as a result.  Conversely, if we underestimate the project costs, complexity or scope of work to be done for the projects that we win, due to miscommunication with our clients or underestimation of technical difficulties, or if we incur additional costs due to unforeseen conditions, such as appreciation of personnel cost or the existence of software bugs, we will not be able to change the contract value or pass such additional costs to our clients.  As a result, we may have a reduced gross margin from such projects or even suffer a loss, which would negatively affect our overall gross margin and profitability.





We may be forced to reduce the prices of our solutions and services due to increased competition, which could lead to reduced revenues and profitability.





We may be forced to reduce the prices of our solutions and services in response to price-cutting strategies of our competitors, in particular in the areas of labor intensive contracts with low requirements for proprietary solutions or know-how.  Many smaller financial IT service companies depend on offering low prices to win these contracts.  We may not be able to respond to such competition by controlling our costs, shifting to other service areas with higher margins or providing additional solutions and services or enhancements to enable us to charge premium prices, and we may lose clients in these particular segments of our business if we do not reduce our prices.  Any such reduction in prices may materially and adversely affect our business, financial condition and results of operations.





Cancellelation of projects by customers and the risk of recognizing the cost incurred for such circumstance could adversely affect our revenues and profitability.





From time to time, projects on which we start work are cancelled. This may be because of change in client management, client budgetary constraints, client strategy shifts, and other similar factors. We may not be able to, or for client relations reasons, want to seek reimbursement for all of our costs incurred for projects cancelled by customers.





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





The markets for our Software & Solutions change rapidly due to technological innovation, product introductions, declining prices and evolving industry standards, among other factors.  New solutions and technology often render existing solutions and services obsolete, excessively costly or otherwise unmarketable.  As a result, our success depends on our ability to keep up with the latest technological progress and anticipate technological advances and to develop or acquire and integrate new technologies into our Software & Solutions portfolio.  We cannot give assurances that we will be able to keep our solutions and services competitive in the evolving market.  In addition, rapid advances in technology also require us to commit substantial resources to researching, developing or acquiring new technologies and deploying them into our operations, as well as to continuously train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies.  Such research, development and training place significant burden to our financial resources.  If we are not able to devote adequate resources to keep our technologies competitive, our ability to effectively compete in the market may suffer as a result, which may materially and adversely affect our business, financial condition and results of operations.


12





Our failure to retain existing clients or changes in their continued use of our solutions and services will adversely affect our results of operations.





We strive to establish strong, long-term client relationships, so that our clients will come back to us project after project.  For many projects that we undertake with our clients, there are often subsequent phases as the client’s business develops and their IT needs evolve, and we are typically engaged for the follow-on work.  Revenue from such follow-on projects is a source of our repeating revenues.  Historically, such repeating revenues accounted for a significant portion of our total revenues.  Whether our clients will come back to us for such follow-on projects depends on a number of factors, including the quality of our work, the ease of use, reliability and price, clients’ IT strategy,as well as the cost of switching to another service provider.  Our existing clients may decide not to engage us for follow-on projects due to quality, our competitors’ aggressive pricing or the obsolescence of our solutions or other concerns.  In addition, our clients may decide to delay system expansions, upgrades and improvements due to a change in their own growth, spending patterns or IT budget.  Any material reduction in our repeat revenues may materially and adversely affect our business, financial condition and results of operations.





Furthermore, we rely in part on our ability to cross-sell new solutions and services to our existing clients to our share of wallet with each client.  For our new clients, we typically provide one initial service component, such as a custom application development or the integration of a new application with legacy IT systems.  Then we seek to use such initial client engagement as a foothold to understand the clients’ IT needs and quickly build client relationships that will provide us with opportunities to demonstrate our capabilities and value so that they may engage us for additional projects.  If we fail to satisfy our clients in one product line, it may negatively impact our sales of other solutions and services to that client, which may materially and adversely affect our future revenue growth.





We are expanding into other business areas through joint ventures, such as Yuxin Data. If we fail to manage the complexity of a joint venture, the business of the joint venture may suffer and our financial condition and results of operations may be materially and adversely affected.





We have established Yuxin Data with a third party partner to expand into different new areas of business. Managing the additional complexity of a joint venture can be very challenging. We cannot guarantee that we will be successful in our management of these joint venture.  Many factors, some of them are beyond our control, could materially and adversely affect our ability to turn this business into a profitable business, We will assess regularly any joint venture endeavors and from time to time we may choose to exit from them when they no longer fit our business strategy. Upon exit, we may not recover our investment.





We are expanding into other sectors of the diversified financial services, and seek to establish a presence in IT services for insurance and securities companies, with which we have limited experience.





We believe that we will be able to become an IT service provider for a broad range of diversified financial service companies as the market characteristics and underlying IT capabilities are similar to the banking industry.





In the past our clients have been predominately banks in China.  As we expand into the insurance market, we may not be able to successfully localize the software or understand the requirements of insurance companies. Although the market for IT solutions for insurance companies is nascent and highly fragmented, there are already competitors in the space.  We may not be able to compete in a cost effective manner or gain successful reference sites that will enhance our reputation in this field.  Our IT solutions may also be outdated, before they are even brought to market, or we may not be able to develop appropriate solutions.  In addition, we do not have significant experience with insurance solutions and will be facing additional risks and uncertainties.  If we fail to manage and grow our service capabilities, in this or other business we undertake, our business, financial condition and results of operations may be materially and adversely affected.


13





We are expanding our client base to include an increasing number of SMBs, which subjects us to additional risks, such as uncertainties of future businesses and credit risks.





As part of our effort to diversify our business and reduce our dependence on a limited number of banking clients, we have expanded our client base to include SMBs.  However, we have limited experience doing business with these banks and we cannot ensure that our sales strategies will be successful in obtaining repeat business, such as later phase improvement or expansion of the initial projects we undertake, from these clients as we are typically able to do with our larger clients, such as Top Four bank and Joint-Stock bank clients.  In addition, as compared to Top Four banks and Joint-Stock banks, we have less understanding of SMBs’ budgeting process and their project awarding practices due to much larger number of banks and diversified characteristics among them, which makes it more difficult for us to predict future projects in order to allocate and plan our resources.  Furthermore, SMBs may not be as reliable as Top Four banks and Joint-Stock banks in making timely payments, which would subject us to additional credit risks.  If we cannot successfully manage these risks, our business, financial condition and results of operations may be materially and adversely affected.





We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our competitive position and adversely affect our business and prospects.





We rely on a combination of patent, copyright and trademark laws, licensing agreements, confidentiality agreements, internal confidentiality policies and other contractual provisions, as well as technical measures to protect our intellectual property rights.  We cannot give assurance that PRC laws and our measures will be adequate to protect our intellectual property.  PRC laws are still developing in this area and the enforcement of such rights at the judicial level is highly uncertain and may not be as effective as in the United States or other countries.  We may not be able to deter competitors from copying our technology, reverse-engineering our solutions, or otherwise infringing on our intellectual property rights.  To protect our trade secrets and other proprietary information, our employees, consultants, advisors and collaborators are required to enter into confidentiality agreements.  There can be no assurance that these agreements will provide meaningful protection in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information.  We hold registered rights covering certain aspects of our technology, in particular software solutions, but it is uncertain how much protection such registrations provide us.  We have 2 patents and 162 copyrights in China; however the protection is limited and may not sufficiently protect our intellectual property rights.  In addition, because we currently do not have patents, we are unable to rely on patent law to protect our intellectual property.  If we fail to protect our intellectual property and technology, or if our competitors independently develop technologies that are substantially equivalent or superior to our technology, our competitiveness may be adversely affected, which may materially and adversely affect our business and prospects.





Furthermore, if we believe third parties have infringed our intellectual property and other proprietary rights, we may have to resort to litigation to enforce our intellectual property and proprietary rights.  Intellectual property litigation is expensive and time-consuming.  Litigation may also cause significant diversion of company resources and management attention, cause disruptions in our daily operations, prove to be unsuccessful, and result in our intellectual property rights being held invalid or unenforceable, all of which could materially and adversely affect our business, financial conditions and results of operations.





If we infringe on third-parties’ intellectual property rights, we could be required to cease offering the infringing solutions, redesign those solutions or enter into license agreements and pay royalties, any of which could have an material adverse impact on our business, financial condition and results of operations.





There can be no assurances that a third party will not assert that our solutions and services violate their intellectual property rights.  Intellectual property laws are not fully developed in China, and there may be significant uncertainties in the scope and enforceability of intellectual property rights a company holds.  As the number of solutions offered by Yucheng and our competitors increase and the functionality of these solutions further overlaps, intellectual property related litigation in our industry may increase.  Our competitors may claim that our solutions and services infringe their intellectual property rights and initiate litigation against us.





Any such claims, whether with or without merit, could be expensive and time consuming to defend, cause significant diversion of our management’s time and our resources, disrupt our daily operations and damage our reputation.  If we are found by a competent court to have infringed third parties’ intellectual property rights, we may be required to:


14




·
pay damages to the owner of the technology that we are found to infringe, which could be substantial;





·
cease making, selling or using solutions that incorporate the infringed intellectual property;





·
redesign our solutions around the infringed intellectual property, which may not be feasible; and





·
enter into licensing agreements and pay royalties in order to obtain the right to use necessary technologies.





Any such litigation and the judgment of any of these remedies may materially and adversely affect our business, financial condition and results of operations.





We may be subject to intellectual property infringement claims from our clients, which may force us to incur substantial legal expenses and, if the claim is upheld against us, may materially and adversely affect our business, financial condition and results of operations.





The majority of our contracts involving custom-designed software solutions provide that our clients own the intellectual property rights to software solutions developed under these contracts, and we are not permitted to use such intellectual property.  We only retain our proprietary rights to the methodologies, algorithms or patents that we use in the development of the custom-designed software solutions.  In addition, most of these contracts are silent as to whether we can make improvements on such custom-designed solutions and commercialize such improvements.





As a result of these contract provisions, we may be subject to intellectual property infringement claims by our clients.  It may be difficult to distinguish which part of the software that we developed for our clients represents our proprietary rights, and it is also not clear whether we have rights to make improvements on the software or part of the software that we developed for our clients.  If our clients initiate intellectual property claims against us, we may have to incur substantial legal expenses, which may also divert significant management attention and company resources, damage our client relationships and disrupt our normal business operations.  In addition, we may not be successful in defending against such litigation.  If we are found to have violated our clients’ intellectual property rights, we could be forced to pay licensing fees or be enjoined from using the related intellectual property and forced to develop and utilize alternatives.  Such a finding could also result in substantial monetary liabilities, harm our reputation, cause a decline in our sales and negatively affect our client relationships, all of which may materially and adversely affect our business, financial condition and results of operations.  One successful claim may also bring a cascade of other similar claims, which may further exacerbate the material adverse effect of such litigation on our business, financial condition and results of operations.





Our intellectual property indemnification practices may materially and adversely impact our business.





We have agreed to defend many of our clients at our own cost for any third-party intellectual property claims filed against them arising from the solutions and services we furnished them, and indemnify them for any damages of intellectual property infringement.  This practice may subject us to significant litigation costs and indemnification claims by our clients.  We cannot assure that third-parties will not pursue such claims, which may materially and adversely affect our business, financial condition and results of operations.


15





We rely on selected third-party technologies and third-party suppliers for hardware equipment and software applications for our Platform & Maintenance Services.  If we are not able to obtain the needed items, our business could be materially and adversely affected.





We depend on the availability of the necessary hardware equipment and software applications from third-parties for our Platform & Maintenance Services. We have established business relationships with selected suppliers. We cannot assure that these vendors/distributors will continue to offer needed hardware or software solutions, continue their relationships with us or provide us their products at reasonable prices. In such an event, we may not be able to secure alternative suppliers or procure hardware equipment and software applications at a reasonable cost. In addition, even if we are able to obtain replacement third-party products in a timely manner, our solutions may not properly interface or interoperate with their hardware or software solutions, which may result in delays and client dissatisfaction, or even result in contractual breaches with our clients. We may be unable to develop an alternative solution on a timely basis or at a reasonable cost to circumvent the lack of products from third parties. Our failure or inability to acquire alternative third-party products or develop alternative solutions on a timely basis or at a reasonable cost may subject us to contract liability and our relationship with our clients may be negatively affected, which may materially and adversely affect our business, financial condition and results of operations.





We may be unsuccessful in identifying and acquiring suitable acquisition candidates or fail to complete acquisitions, which could adversely affect our growth.





We have grown in the past partly through selective acquisitions.  Through these acquisitions we expanded our revenue sources, added new solutions or services, acquired new clients and obtained qualified personnel, all of which complemented our organic growth.  We plan to continue to pursue selective acquisitions of high-quality financial IT services companies to further our future growth.  However, we may not be able to identify suitable future acquisition candidates or complete such acquisitions on terms commercially acceptable to us, which may impair our ability to effectively or efficiently implement our growth strategies.  In addition, identifying acquisition targets, due diligence and negotiations all require significant management attention and diversion of our resources.  If we fail to successfully complete acquisitions after spending significant management time and company resources, our business, financial condition and results of operations could be materially and adversely affected.





We face risks in connection with the acquisition of businesses.  If we fail to manage these risks, our financial condition and results of operations may be adversely affected.





We face risks in connection with the acquisition of businesses.  These risks include:





·
difficulties integrating acquired businesses and retaining necessary personnel to run such businesses;





·
entry into unfamiliar markets;





·
unforeseen or hidden liabilities;





·
need for financial resources beyond our planned levels;





·
inability to generate sufficient revenues and profits to offset acquisition costs;





·
failures in realizing anticipated synergies; and





·
potential loss of or harm to relationships with employees and clients resulting from our integration of the acquired businesses.





Any of these risks may derail the success of our acquisitions.  As a result, we may not realize the benefit we anticipated while incurring significant costs, and our business, financial condition and results of operations may be materially and adversely affected.


16





If we are not able to retain our senior management team and critical staff members, and recruit quality personnel as we expand, our business and prospects will be adversely affected.





We depend on our ability to retain and recruit qualified personnel, including senior management and other key staff members.  The available talent pool, especially the more senior and experienced pool, in China is limited and competition is intense.  We depend on our senior management team for their industry knowledge and experience as well as their relationships with existing clients.  If we lose the service of any member of our senior management team, we may not be able to find a suitable replacement in a timely manner or at all.  Even if we are able to find a replacement, it will take time for the new person to be integrated into our business.  Furthermore, the ability to successfully complete client engagements depends on a trained, knowledgeable and stable staff, such as skilled engineers and project managers.  As we continue to grow, we need additional qualified staff to carry out our additional business projects, as well as other aspects of our business, such as sales and marketing, research and development and accounting. If we are not able to retain our senior management team, recruit quality personnel as we expand, or provide appropriate training, career opportunities and otherwise motivate and retain our qualified employees, our business, financial condition and results of operations may be materially and adversely affected.  In addition, although we have non-competition provisions in our employment agreements with our management and key personnel, we cannot be certain that these provisions will not be breached and that they will be enforceable in a PRC court.  If our management and key personnel join our competitors or form competing businesses, our competitive position and business prospects may be materially and adversely affected.





Increases in wages for IT professionals will increase our costs and our gross margins and profit margins may be adversely affected.





Historically, wages for comparably skilled technical personnel in China’s IT services industry have been lower than in developed regions, such as in the U.S. or Europe. However, in recent years, due to rapid economic development, and intense competition for qualified IT professionals and general inflation, wages in China’s IT services industry have increased. Wages may continue to increase at even faster rates considering the recent government initiatives to increase the incomes of laborers to narrow the income gaps between rich and poor. In addition, we may be required to implement wage increases by the relevant labor bureaus’ guidelines, such as our average 6.8% wage increase in early April 2010. Our personnel cost accounted for 58.9%, 60.4% and 62.3% of our cost of revenues for Software & Solutions and Maintenance Services in 2008, 2009 and 2010, respectively. Although we were able to increase productivity to counter the increase in our IT personnel costs, we cannot assure you that we will be able to achieve these or comparable cost savings in the future. If we experience significant increases in wages for IT professionals, our cost of revenues will increase significantly, which could materially and adversely affect our gross margin and results of operations.




We provide warranties on third-party hardware and software that we procure for our clients.  We may incur substantial costs, if our clients file a significant number of warranty claims against us for such third-party hardware and software, and if those claims either exceed the scope of the warranties that the manufacturers or their agents have contracted to provide to us, or if such manufacturers or their agents do not honor their contract warranties.





Through our Platform & Maintenance Services, we assist clients with the procurement and installation of third-party hardware and software which best meets their system requirements.  For the individual components, we typically provide warranties similar in scope to the warrants covered by the manufacturers.  However, we are generally responsible for the maintenance and service of the entire system, and will act on behalf of our clients to obtain manufacturer warranted services.  Most of our contracts do not have disclaimers or limitations on liability for special, consequential and incidental damages, nor do we limit the amount recoverable for damages.  If our clients file a significant number of warranty claims against us for such third-party hardware or software, we cannot be certain that the original manufacturers’ warranties will be fulfilled and that the costs incurred will be sufficiently cover.  The warranties obtained from such manufacturers may not cover the entire warranty claims, or the manufacturers may refuse to honor their contract warranties.  As a result, we may be liable for damages, which could materially and adversely affect our financial condition and results of operations.


17





Many of our contracts with clients permit termination by our clients as their IT requirements change, or if our performance is not consistent with the quality and other standards specified in those contracts.  Any termination of contracts may materially and adversely affect our business, results of operations and financial condition.





Many of our client contracts can be terminated by our clients as their IT requirements change, and without penalty. There are a number of factors relating to our clients that are outside of our control which might lead them to terminate a contract or project with us, including a change in financial condition, mergers and acquisitions or significant corporate restructurings. The ability of our clients to terminate contracts creates an uncertain revenue stream. Furthermore, many of our contracts provide that our client may terminate the contract if we fail to meet a specified timetable or fail to achieve certain quality or other standard. If our contracts are terminated due to this reason, in addition to the lost revenue and incurrence of penalties, our industry reputation may suffer. Any significant contract termination, especially if unanticipated, could have a negative impact on our business, financial condition and results of operations.





We may be subject to significant contract liabilities, if we fail to complete client projects on time, or if we fail to provide required level of services under our maintenance contracts.





Many of our client contracts require us to complete the projects in a certain timeframe and some also impose interim milestones. We cannot make assurances that we will always be able to complete our client projects on time or meet all the interim milestones. A number of reasons may result in delay of our client projects, such as unforeseen bugs, technical difficulties or lack of sufficient software engineers. Some of these factors are beyond our control. If we fail to meet the deadlines or milestones specified in the timetable, we may be subject to contractual penalties, such as significant late fees, and the client may have the right to terminate the contract and require us to compensate them for any loss they incurred due to our delay. If this happens, our reputation, client relationships as well as our business, financial condition and results of operations may be materially and adversely affected.





In addition, some of our client contracts require us to keep the client’s system in operation and are subject to contractual liabilities if the client’s system breaks down for more than a specified period of time.  If we fail to properly maintain the client system, or fail to fix system disruptions in a timely manner, we may breach such contracts and be subject to contractual liabilities, which could also materially and adversely affect our client relationships as well as our business, financial condition and results of operations.





Our solutions use internally developed technology and third-party products, any of which may contain errors and bugs, which may require us to spend additional time and incur additional expenses to correct.  These errors and bugs may also cause breaches in our service agreements and require us to pay damages to our clients.





Our solutions may contain undetected errors, defects or bugs that may or may not be correctable.  Our solutions also involve integration with products and systems developed by third-parties.  Complex third-party software programs may contain undetected errors or bugs when they are first introduced or as new versions are released. Because we cannot test our existing or future solutions or third-party products upon which our solutions are dependent for all possible scenarios, our solutions may contain errors which are not discovered until after they have been installed and we may not be able to correct these problems on a timely manner. We may be required to devote resources and incur significant expenses to detect and correct such errors and bugs, and we cannot guarantee that all of these errors or bugs can be corrected. These errors and bugs may also result in delays in project completion, loss of our solutions market share, injury to our reputation and damage our relationship with our clients. Furthermore, these errors or bugs may significantly impair their intended use and subject us to liabilities, which may require us to pay damages, which may adversely affect our client relationships as well as our business, financial condition and results of operations.





We may experience system failures, which could hurt our business reputation, and subject us to contract liability to our clients for the interruption in service. Our computer networks may be vulnerable to security risks that could materially and adversely affect our results of operations and subject us to liability.





Our operations depend on our ability to protect our systems from interruptions caused by damage from fire, earthquake, power loss, telecommunications failure, unauthorized access, computer hackers, computer viruses, software malfunction or other events beyond our control. We currently back-up data only relating to certain systems, such as financial, human resource and emails, and do not have sufficient backup facilities to provide full system services, if the primary facility is not functioning. We currently do not have an offsite disaster recovery system. In the event of major disasters, both primary and backup locations could be adversely impacted. We could also experience system interruptions due to the failure of our systems to function as intended, such as the failure of the systems relied upon to deliver online banking services or the failure of the interaction of our systems with other systems and networks of our clients or other third parties. Loss of all or part of the systems for a period of time could have a material adverse effect on our business reputation, financial condition and results of operations.


18





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





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





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





The PRC government has provided various incentives to domestic companies in the software industry in China in order to encourage developmentand growth of the industry. Many of our PRC subsidiaries have historically received technology subsidies, business tax exemptions, value-added tax, or VAT, refunds and preferential income tax treatments. For example, many of our PRC subsidiaries enjoyed reduced enterprise income tax at the applicable rate of 15% on taxable profits in China, as compared to the statutory rate (33% prior to 2008 and 25% thereafter) and/or tax holidays due to their status as a foreign-invested enterprises, software enterprises or high-tech enterprises located in certain locations. Our tax savings from these preferential income tax treatments amounted to RMB31.2 million, RMB5.6 million and RMB9.3 million (USD1.4 million) in 2008, 2009 and 2010, respectively. See “Item 5. Operating and Financial Review and Prospects — A. Operating results — Income taxes.” In addition, due to our status as Software Enterprise in the high-tech industry, we received technology subsidies, VAT refunds, business tax refunds and other benefits in the amount of RMB6.2million, RMB4.4 million and RMB5.4 million (USD0.8 million) respectively, in 2008, 2009 and 2010. See “Item 5. Operating and Financial Review and Prospects — A. Operating results — Operating expenses — General and administrative expenses.” The PRC government may reduce or eliminate these incentives at any time in the future. Additionally, in order to continue to qualify for some of these incentives, we are required to meet stringent requirements on research and development activities and on our gross revenues.





On March 16, 2007, the PRC National People’s Congress passed the PRC Enterprise Income Tax Law, or the New EIT Law, and in December 2007 the PRC State Council issued implementation rules under the New EIT Law, both of which became effective on January 1, 2008. Under the New EIT Law and its implementation rules, a unified enterprise income tax rate of 25% and unified tax deduction standards will be applied equally to both domestic-invested enterprises and foreign-invested enterprises, but it repealed most of the existing preferential tax treatments, including the preferential tax rates and the tax holidays. The New EIT Law provides a five-year transition period that allows enterprises that enjoyed certain preferential tax treatment under the old enterprise income tax regime to gradually transition to the 25% statutory rate in a prescribed fashion. According to a notice issued by the PRC State Council, for enterprises that enjoyed preferential income tax rate of 15% pursuant to certain prior tax rules or regulations specified in the notice, the applicable enterprise income tax rate will increase to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012 and thereafter. For tax holidays specified in the notice, enterprises already enjoying such holidays prior to January 1, 2008 can generally continue to enjoy such tax holidays until their expiration, upon which time the 25% tax rate will apply. All other preferential tax treatments have generally terminated on December 31, 2007. Due to the application of the New EIT Law and its implementation rules, certain of our subsidiaries may no longer be able to enjoy any preferential income tax treatment, and certain others may need to pay higher transitional income tax rates starting January 1, 2008. As a result, we expect our effective income tax rate to gradually increase from our 2009 level, which may materially and adversely affect our financial condition and results of operations.


19





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





Insurance companies in China offer limited business insurance products and we currently do not have insurance against business interruptions. Should any natural catastrophes, such as earthquakes, floods, typhoons, fire or any acts of terrorism occur in China that affect our operations, we might suffer not only significant property damages, but also the loss of revenue due to interruptions to our business operations, which could have a material adverse effect on our business, financial condition or results of operations. In addition, we do not have any key personnel insurance to cover any losses we may suffer due to any loss of our senior management and other key personnel. In any such event, we may incur additional costs, which could materially and adversely affect our financial condition and our results of operations.





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





Our business could be materially and adversely affected by the outbreak of a health epidemic or pandemic. Any prolonged occurrence of a health crisis, such as severe acute respiratory syndrome, influenza or other adverse public health developments in China could require the temporary closure of our offices or prevent our staff from traveling to our clients’ offices to provide on-site services. Such closures could severely disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.




RISKS RELATED TO DOING BUSINESS IN CHINA





Adverse changes in China’s political and economic policies, including its policy of reforming its economic system, could have a material adverse effect on the growth of private businesses in China, such as ours.





All of our operations are conducted in China and all of our sales are made in China. Accordingly, our business, financial condition and results of operations are significantly affected by economic, political and legal developments in China. Since the late 1970s, China has been reforming its economic system and changing from a planned economy based on governmental dictates and priorities to one that uses market forces to influence deployment of economic resources, labor and capital and to determine business endeavors. It is impossible to predict whether or not the government will continue to encourage economic liberalization and further release its control over the economy and encourage private enterprise. We also cannot predict the timing or extent of future economic reforms that may be proposed. Any re-imposition of planned economy regulation or similar kinds of restrictions could reduce the freedom of private businesses to operate in a profitable manner, restrict inflows of capital or stifle investor willingness to participate in China’s economy. Any adverse change in the economic conditions or government policies in China could have a material adverse effect on overall economic growth, which in turn could lead to a reduction in demand for our solutions and services and consequently have a material adverse effect on our business. Moreover, to the extent we need additional capital; any restrictions on foreign ownership, foreign investment and repatriation of profits will hamper our ability to find capital outside of China.


20





The economy of China has been experienced rapid growth after the global economic recession, leading to increased inflation, Monetary policies adopted by the PRC government to combat inflation may result in a decrease in China’s economic development and profitability of China’s banks, which could adversely affect our business.





The rapid growth of China’s economy after the global economic recession has resulted in higher levels of inflation. China’s consumer price index increased 3.3% in the full year of 2010, and the government has initiated a number of monetary policies to control the potential overheating of the economy and high inflation, As part of such measure, the People’s Bank of China, or PBOC, China’s central bank, has increased statutory deposit reserve ration 6 times in 2010 and another 5 times in the first five months in 2011, increasing the statutory reserve ratio from 15.5% at the end of 2009 to its current level of 21.0%, which greatly reduced the amount of funds available for China’s banks to extend loans. In addition, PBOC increased interest rates 2 times in 2010 and another 2 times in the first five months in 2011, which could result in slowdown of capital investment, consumption and overall economic activity. All these and other measures could lead to reduced profit for China’s banks and reduce their desire to upgrade or expand their IT systems. Any reduced IT spending in China’s banking industry will materially and adversely affect our sales, which could materially and adversely affect our business, financial condition and results of operations, In addition, higher inflation may increase our costs, and there can be no assurance that we would be able to increase our prices to the extent necessary to offset the increase in our expenses, and our gross margin and net margin could be materially and adversely affected.





PRC laws and other conditions may limit our ability to make dividend payments to our shareholders.





We are a holding company in the British Virgin Islands, or the BVI. We rely on our PRC subsidiaries to provide us with cash flow and to meet our other obligations, including paying dividends to our shareholders. Relevant PRC laws and regulations permit payment of dividends by a PRC subsidiary only from accumulated distributable profits, if any, determined in accordance with PRC accounting standards and regulations, and only after setting aside at least 10% of its current year profits (up to an aggregate amount equal to half of its registered capital). See “Item 8. Financial Information — A. Consolidated statements and other financial information — Dividend policy.” The PRC tax authorities may initiate changes in determining income of our PRC subsidiaries that would further limit their ability to pay dividends and make other distributions to us. It is therefore possible that our PRC subsidiaries will not have any distributable profit to pay us, even if they are profitable under US GAAP.





In addition, although PRC law currently allows enterprises owned by foreign investors to remit their profits, dividends and bonuses earned in China to other countries, and the remittance does not require prior approval by the State Administration of Foreign Exchange, or SAFE, we cannot assure you such policy will not change. SAFE regulations require extensive documentation and reporting, some of which is burdensome and slows payments. If there is a return to payment restrictions and reporting, it may also adversely affect the ability of our PRC subsidiaries to distribute their profits to us. Furthermore, if any of our PRC subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may also restrict their ability to pay dividends or make other payments to us. Any limitation on our subsidiaries’ ability to distribute dividends to us may adversely affect our ability to pay dividends to our shareholders.





Any fluctuations in exchange rates could result in foreign currency exchange losses.





Our operating subsidiaries are all located in China and our functional currency is Renminbi, and we are subject to fluctuations of the exchange rate between the Renminbi and the U.S. dollar. PBOC sets and publishes daily a base exchange rate between the Renminbi and the U.S. dollar. Beginning on July 21, 2005, PBOC has set this rate with reference primarily to the supply and demand of Renminbi against a basket of currencies in the market during the prior day, taking into account other factors such as the general conditions existing in the international foreign exchange markets, as compared to an exchange rate pegged to the U.S. dollar before such date. As a result, from July 21, 2005 to June 28, 2011, the Renminbi appreciated approximately 20.2% against the U.S. dollar. There is increasing international pressure for the PRC government to further loosen its control of the foreign exchange rate to allow a faster appreciation of the Renminbi.


21


Because our earnings and cash from operations are denominated in Renminbi, fluctuations in exchange rates between the U.S. dollar and the Renminbi will affect our balance sheet and earnings per share in U.S. dollars. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Furthermore, fluctuations in the exchange rate could affect the relative value of any dividend we issue, which will be exchanged into U.S. dollars, as well as the value of any U.S. dollar denominated investments we make in the future and any earnings on such investments. The value in Renminbi in terms of our financing activities denominated in U.S. dollars will also be adversely affected if Renminbi continues to appreciate against the U.S. dollar.





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





Foreign exchange transactions under capital accounts continue to be subject to significant foreign exchange controls and require the approval of PRC governmental authorities, including SAFE. If our PRC subsidiaries borrow foreign currency loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance our PRC subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities including the Ministry of Commerce or its local branches. These limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange through debt or equity financing.





Recent PRC regulations relating to offshore investment activities by PRC residents may increase the administrative burden we face and create regulatory uncertainties that could restrict our overseas and cross-border investment activity, and a failure by our shareholders, who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.





SAFE promulgated regulations that require registration with local SAFE offices in connection with direct or indirect offshore investment and cross-border investment through the special purpose vehicles by PRC residents, including PRC individual residents and PRC corporate entities. These regulations apply to our shareholders who are PRC residents and also apply to our prior and future offshore acquisitions. In particular, the SAFE regulations require PRC residents to file with competent SAFE offices information about offshore companies in which they have directly or indirectly invested or through which the cross-border investment is conducted and to make follow-up filings in connection with certain material transactions involving such offshore companies, such as increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, external guarantees or other material events that do not involve return investment.





The SAFE regulations retroactively require registration by March 31, 2006 of direct or indirect investments in offshore companies or cross-border investments previously made by PRC residents in offshore companies. If a PRC resident with a direct or indirect stake in an offshore parent company or any cross-border investment fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries. Further, failure to comply with various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion.





To date, our major shareholders who are PRC residents, or whose shares are beneficially owned by PRC residents, have completed the required foreign exchange registration with the local foreign exchange bureau according to these SAFE regulations. They are still required to file with competent SAFE offices when there are material transactions involving us. We are committed to complying and to ensuring that our shareholders who are subject to these regulations to continue comply with the relevant rules. However, due to the newness of the regulations and uncertainty concerning the reconciliation of the new regulations with other approval requirements, it remains unclear how the regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities, and we cannot make assurances that all of our shareholders who are PRC residents will comply with our requests to make or obtain any applicable registrations or approvals required by the regulations or other related legislation. The failure or inability of our PRC resident shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries from making distributions or paying dividends or affect our ownership structure, as a result of which our business operations and our ability to distribute dividends to you could be materially and adversely affected.


22





We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and we may therefore be subject to PRC income tax for any dividends we receive from our subsidiaries, which may materially and adversely affect the amount of dividends we must pay to our shareholders.





Under the New EIT Law and its implementation rules, enterprises established under the law of non-PRC jurisdictions, but whose “de facto management body” is located in China, are treated as resident enterprises for PRC tax purposes. Although the implementation rules stipulate that the “de facto management body” refers to the organization which substantially manages and controls the operation, staff, finance, properties and other aspects of the enterprises, it is currently unclear in which specific situations a non-PRC enterprise’s “de facto management body” is located in China. All of our management is currently based in China. If we are treated as a resident enterprise for PRC tax purposes, we will be subject to PRC tax on our worldwide income at the 25% uniform tax rate, which will include any dividend income we receive from our subsidiaries. In addition, the New EIT Law provides that the qualified dividend income between resident enterprises is exempted income, and the implementation rules stipulates that the “the qualified dividend income between resident enterprises” refers to the direct investment between resident enterprises, it is not clear what is considered a qualified resident enterprise under the New EIT Law. If we are required under the New EIT Law to pay income tax for any dividends we receive from our subsidiaries, it will materially and adversely affect the amount of dividends we may pay to our shareholders.





Dividends payable by us to our non-PRC shareholders, and gains on the sales of our ordinary shares, may be subject to withholding taxes under PRC tax laws, which may materially reduce the value of the investment.





The New EIT Law and its implementation rules provide that an income tax rate of 10% will normally be applicable to dividends payable to non-PRC investors which are derived from sources within China. This provision may apply to our non-PRC shareholders, if we are deemed as a resident enterprise for tax purposes. According to a notice issued by the PRC State Council, this 10% income tax starts to apply to dividends declared from profits generated after January 1, 2008. In addition, under the New EIT Law and its implementation rules, if we are deemed as a resident enterprise, any gains realized on the transfer of shares by such investors are also subject to 10% tax, if such gains are regarded as income derived from sources within China. We are a BVI holding company and substantially all of our income may come from dividends we receive from our subsidiaries, primarily those located in China. If we declare dividends from such income to our shareholders, it is unclear whether such dividends, or the gain our non-PRC shareholders may realize from the transfer of our ordinary shares, would be treated as PRC-sourced income and be subject to PRC tax. If we are required under the New EIT Law to withhold PRC income tax on our dividends payable to our non-PRC shareholders, or if non-PRC shareholders are required to pay PRC income tax on the transfer of their ordinary shares, the value of the investment may be materially and adversely affected.





Uncertainties with respect to the PRC legal system could limit the protection available to investors and the company.





The PRC legal system is a civil law system based on written statutes. Unlike in the common law system, prior court decisions may be cited for reference, but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. We conduct all of our business through our consolidated entities established in China. These entities are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises. However, since many laws, rules and regulations are relatively new, and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protection available to us. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of Chinese administrative and court proceedings as well as assess the level of legal protection we enjoy in China versus in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, clients and suppliers. In general, these uncertainties, including the inability to enforce our contracts, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the PRC’s legal system, particularly with regard to China’s IT industry and banking industry, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.


23





There may be difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States judgments against us, our subsidiaries, our officers and directors and experts named in this annual report.





We are incorporated in the British Virgin Islands and our operating subsidiaries are formed under PRC law. Substantially all of our assets are located in China. In addition, our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. It may not be possible to effect service of process within the United States or elsewhere outside China upon our directors, executive officers or experts named in this annual report, including effecting service of process with respect to matters arising under United States federal securities laws or applicable state securities laws. China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States and many other countries. As a result, recognition and enforcement in China of judgments of a court in the United States and many other jurisdictions in relation to any matter, including securities laws, may be difficult or impossible. Furthermore, an original action may be brought in China against our assets and our subsidiaries, our directors and executive officers and experts named in this annual report only if the actions are required to be arbitrated by PRC law and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages.





RISKS RELATING TO OUR SHARES





Future sales of shares, or the perceived sale of additional shares, may lead to a decline in the market price of our shares.





We issued 5,328,320 ordinary shares as part of the initial purchase price for the acquisitions of Sihitech BVI and e-Channels BVI. As of March 31, 2009, all of such shares are tradable subject to restrictions under Rule 144 and insider trading rules.





As a significant portion of our shares are held by a small number of shareholders, historically trading volume of our shares has been relatively low. We cannot predict the effect, if any, market sales of securities held by our significant shareholders or any other shareholders or the availability of these securities for future sale will have on the market price of our ordinary shares.





Furthermore, we may need to do additional financing in the future in the form of our ordinary shares or securities convertible into, or exchangeable for, our ordinary shares, which will further dilute the shareholding of shareholders and may result in decline of our share price.





If certain financial or financing objectives are achieved, selling shareholders in the three-party acquisition will be entitled to receive shares of our stock which would result in dilution and might have an adverse effect on the market price of our ordinary shares.





Selling shareholders in the three-party acquisition have the right to earn up to 952,832 shares per year from 2007 to 2010 based on net profit targets. See “Item 4. Information on the Company — A. History and development of the Company — Corporate history”. We are required to issue 952,832 shares to these selling shareholders in the three-party acquisition based on our fiscal results, which were met in 2007 and 2008.  The Company failed to meet the pre-determined financial objectives in 2009 and 2010,  as a result, no shares are to be issued to selling shareholders for 2009 and 2010. There is no obligation to register these shares after issuance. However, after being held for the appropriate periods, these shares will be eligible for resale under Rule 144 of the Securities Act. If the additional shares are earned, they will significantly increase the number of our shares outstanding, and result in dilution to our existing shareholders. The issuance of these additional shares may cause a decrease in the trading price of our shares in the public market.





24





A large portion or our shares are owned by two of our directors and executive officers. These shareholders will have a significant influence over our corporate transactions and other matters that require shareholder approval.





Our executive officers and directors, including Messrs. Weidong Hong, Chairman and Chief Executive Officer and director and Shuo Zeng, Chief Operating Officer and director, in aggregate control the vote of about 21.66% of our issued and outstanding ordinary shares, assuming they do not sell any of their shares and our total number of issued and outstanding shares does not change. These two major shareholders maintain a significant influence over the outcome of corporate transactions or other matters submitted to our shareholders for approval, including the election of directors and the approval of other business transactions.





The interest of these shareholders may not be the same as the interest of our other shareholders. This concentration of ownership could have the effect of delaying or preventing a change in our control or discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market price of our shares or prevent shareholders from realizing a premium over the market price for their shares. In addition, if our major shareholders chose to dispose of a material portion of the ordinary shares they hold, the prevailing market price of our shares may decline.





Certain provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.





Our Memorandum and Articles of Association include provisions that could limit the ability of others to acquire control of us. Under those provisions, our board has the power to issue preferred shares with such rights attaching to them as they decide and that this power could be used in a manner that would delay, defer or prevent a change of control of our company. These provisions could have the effect of depriving shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to acquire control of us in a tender offer or similar transactions.





The market price for our shares may be volatile.





Our share price has been highly volatile and is expected to remain highly volatile in the future. Many factors affect the market price for our shares, including the following:





·
actual or anticipated fluctuations in our quarterly results of operations;





·
changes in financial estimates by securities research analysts;





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





·
the addition or departure of key personnel;





·
the addition or loss of key clients;





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


25




·
intellectual property litigation;





·
the release from or expiration of lock-up or other transfer restrictions on our outstanding ordinary shares or sales of additional shares; and





·
general economic or political conditions in China and the United States.





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





Although publicly traded, the trading market in our ordinary shares has been substantially less liquid than the average trading market for a stock quoted on NASDAQ and this low average trading market in our ordinary shares may adversely affect the price of our ordinary shares.





Although our ordinary shares are traded on NASDAQ under the symbol “YTEC”, the trading market in our ordinary shares has been substantially less liquid than the average trading market for companies quoted on NASDAQ. Reported average daily trading volume in our ordinary shares for the three-month period ended March 31, 2011 was approximately 67,320 shares. Limited trading volume will subject our shares to greater price volatility and may make it difficult to sell our shares at an attractive price.





As a foreign private issuer with ordinary shares listed on NASDAQ, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.





As a foreign private issuer whose ordinary shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain NASDAQ requirements. A foreign private issuer that elects to follow its home country practice must submit to NASDAQ a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each NASDAQ requirement with which it does not comply followed by a description of its applicable home country practice. As a company incorporated in the British Virgin Islands and listed on the NASDAQ Global Market, we expect to follow our home country practice with respect to, among other things, the composition of our board, director nomination procedures, the compensation of officers, annual meetings, the distribution of annual reports to shareholders and quorum requirements at shareholders’ meetings. In addition, we expect to follow BVI law instead of NASDAQ requirements that mandate that we obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control, certain transactions other than a public offering involving issuances of 20% or greater interests in the Company and certain acquisitions of the stock or assets of another company.





In addition, we are obligated to file an annual report on Form 20-F with audited financial statements and a report on Form 6-K at such times as we release information to the public either voluntarily or pursuant to the BVI laws. Therefore, our frequency of filing financial and other information may be less than that of a domestic United States registered company under the rules and regulations of the SEC. Investors may not receive information on a timely basis, therefore increasing their risk of investment.


26





We are a BVI company and, because judicial precedent regarding the rights of shareholders is more limited under BVI law, shareholders may have less protection for their shareholder rights than they would under U.S. law.





Our corporate affairs are governed by our Memorandum and Articles of Association, the BVI Business Companies Act, 2004 and the common law of the BVI. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under BVI law are to a large extent governed by the common law of the BVI. The common law of the BVI is derived in part from comparatively limited judicial precedent in the BVI as well as from English common law, the decisions of whose courts are of persuasive authority, but are not binding on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under BVI law are not necessarily as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the BVI has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, BVI companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of our board or controlling shareholders than they would as public shareholders of a company incorporated in a U.S. jurisdiction.





ITEM 4.          INFORMATION ON THE COMPANY





A.   History and development of the Company.





CORPORATE INFORMATION





Our legal name is Yucheng Technologies Limited, which was incorporated in the BVI on November 17, 2005. Our principal executive office is located at Beijing Global Trade Center, Tower D , Floor 9, 36 North Third Ring Road East, Dongcheng District, Beijing 100013, P.R. China, and our telephone number is +86 10 5913 7998. Our registered office in the BVI is at P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola. We maintain an Internet website at www.yuchengtech.com. Our agent for service of process in the United States is National Corporate Research at 10 E. 40th Street, 10th Floor, New York, New York 10016.





CORPORATE HISTORY





Yucheng Technologies was founded on November 24, 2006 via a three-party acquisition among China Unistone, Sihitech BVI and e-Channels BVI. Pursuant to the acquisition agreement and its amendment, in addition to the initial purchase considerations, the selling shareholders of Sihitech BVI and e-Channels BVI are entitled to additional cash and equity purchase consideration upon satisfaction of certain conditions. With respect to additional cash consideration, they are entitled to:





(1)
USD4,960,000, if we receive an aggregate of USD34,250,000 in gross proceeds from an additional financing, including, but not limited to, (a) exercise of our warrants, (b) our successful completion of a secondary offering, or (c) the private investment into us by a strategic investor;





(2)
USD1,000,000, if the average closing price of our stock in any 60 consecutive trading days of the year, or the Average Share Price, is above USD10.00 in 2006;





(3)
USD2,000,000, if the Average Share Price is above USD12.00 in any 60 consecutive trading days of 2007; and





(4)
USD3,000,000, if the Average Share Price is above USD14.4 in any 60 consecutive trading days of 2008;





provided, however, that in the event that all of the above events occur, the maximum aggregate amount to be paid by us to the selling shareholders will be no more than USD10,000,000. As of March 31, 2009, the hurdle criteria for conditions (1), (3) and (4) have been met. We paid USD4,960,000 to the selling shareholders in 2007, with respect to condition (1). With respect to condition (3), we have paid USD2,000,000 to the selling shareholders. With respect to condition (4) we have paid USD3,000,000 to the selling shareholders.





With respect to additional equity consideration, the selling shareholders are entitled to receive 952,832 shares each year for four years starting from 2008, if we achieve a net profit of the following amounts according to the financial statements audited in accordance with US GAAP, where net profit shall be determined for this purpose only, as net profit (determined on the basis of US GAAP) before the amortization expenses related to the acquisition of e-Channels:


27




Year Ending December 31,

Net Profit2007

USD8.5 million2008

USD11.9 million2009

USD16.7 million2010

USD23.3 million





As of March 31, 2009, the net profit target for the years ended December 31, 2007 and December 31, 2008 were met. Accordingly, we were required to issue and we had issued 952,832 shares to the selling shareholders for each year.The Company failed to meet the pre-determined financial objectives in 2009 and as a result, no shares were issued to selling shareholders for 2009 and 2010.





In 2007, we made four acquisitions which became wholly-owned subsidiaries: Sunrisk, Recency, Fuyi and Fujie. All acquisition related payments for Sunrisk and Recency have been paid. For Fuyi and Fujie of the total possible RMB20.7 million consideration, RMB17.1 million has been paid and RMB3.5 million has been accrued, with the variance due to operating results. Subsequently, we sold a 49% interest in Sunrisk. The minority shareholders are Gu’an Qihang, a private Chinese company, and 3 individual investors.





In May 2007, we acquired a 75% interest of Easycon, a provider of IT solutions and service to SMBs in China. In January 2008, we acquired the remaining 25% interest and Easycon is now a wholly-owned subsidiary. All payments have been made in relation to the 2007 consideration. An aggregate consideration of RMB7.2 million was negotiated with the minority shareholders of Easycon. RMB6.0 million was paid on February 2, 2008, RMB1.2 million was paid on April 1, 2008.





In August 2008, we established a joint venture Elegon Infotech, a joint venture with 3i Infotech of India. In 2008, we made cash advances to Elegon approximately RMB1.8 million, and collected from Elegon approximately RMB1.8 million. In June, 2009 we transferred our interests of 49% in Chengdu Elegon Infotech Limited (“Elegon”) to 3i Infotech Limited for a cash consideration of RMB8.4 million.





In March, 2009, we established a joint-venture, Hainan Baodaotong Technologies Limited (“Baodaotong”) in Haikou city. Total registered capital is RMB50 million. Haikou Gas Holding Company, Yucheng and Guangzhou Tech holds 45%, 35% and 20% of Baodaotong’s equity interests, respectively. In December, 2009, Yucheng transferred 20% of Baodaotong’s equity interest to a third party for cash consideration of RMB2.5 million. In May, 2010, Yucheng transferred the remaining 15% of Baodaotong’s equity interest to a third party for a total consideration of RMB7.2 million.





In April 2009 we established a joint venture Sihitech Huazhi Consulting Service, a joint venture with SmartSoft. Total registered capital is RMB1.0 million .We hold a 40% interest in the company.





In March, 2010, we established a joint-venture, Yuxin Data Technologies Co., Ltd (“Yuxin Data”) in Tianjin with NTT Data Group. Total registered capital is RMB60.0 million .We hold 49% of equity interests in the company.




In December, 2010, Yucheng transferred its interests of 100% in Beijing Yuxinyicheng Information Technology Limited (“Yuxinyicheng Information”) to other investors, for a consideration of RMB21.5 million, in order to focus on our core business.




In January, 2011, we established a joint-venture, Yucheng Internet Technologies Co., Ltd (“Yucheng Internet”) in Beijing. Total registered capital is RMB 17.5 million. We hold 30% of equity interests in the company.


B.   Business overview.





OVERVIEW OF OUR BUSINESS





We are a leading provider of information technology, or IT, software, solutions and services to China’s banking sector. Our Software & Solutions business enables our clients to establish and maintain IT platforms to better manage their operations and serve their customers’ needs. We develop and deliver an extensive suite of technology via our Software & Solutions business, which we believe are best in class in the Chinese market, and are tailored toward specific functional needs of our clients. Software & Solutions provides critical functionality required in China’s banking industry, including Channel Solutions, Management Solutions and Business Solutions. For a more detailed description, see “Item 4. INFORMATION ON THE COMPANY – B. Business overview. – Our solutions and services – Software & Solutions.”


28





We generally provide our Software & Solutions to our clients on a project-by-project basis, whereby our clients agree to enter into one or several fixed-price, all-inclusive contracts, as opposed to purchasing separate individual service components from us on a time-and-materials or per-segment basis.





In addition to Software & Solutions, we also provide Platform & Maintenance Services to our clients, which involves selecting, procuring and reselling third-party hardware equipment and software applications to our clients. This also involves monitoring and assisting in the installation of such equipment and software at clients’ sites, as well as assisting in the integration of the installed equipment with clients’ existing IT systems. We typically only provide Platform & Maintenance Services as part of a larger client engagement that includes Software & Solutions, or if we anticipate that the Platform & Maintenance Services component will lead to future Software & Solutions revenue from the same client.





Since becoming a public company in November 2006, we have grown both organically and through acquisition of other IT solutions and service providers in China’s banking industry. In total, we have acquired five companies:





·
a 100% interest of Sunrisk, a provider of risk management solutions and services to China’s banks; subsequently in April 2008, we sold a 49% interest in Sunrisk to third-parties.





·
a 100% interest of Easycon, a provider of IT solutions and service to SMBs in China;





·
a 100% interest of Recency, a provider of business intelligence solutions and consulting services to China’s banks; and





·
a 100% interest of both Fujie and Fuyi, two related companies focused on ERP management consulting and project implementation.


These acquisitions have enabled us to offer a broader range of solutions and services, provided us with access to a broader client base, and helped us to strengthen our management team and employee base.





In January 2007, we established Yuxinyicheng Information and Yuxinyicheng Software, through which we conduct our POS Merchant Acquiring Services. Yucheng maintained an 80% controlling interest in Yuxinyicheng Information and an individual investor controlled a 20% non-controlling interest. As of January 2009, we acquired the non-controlling interest in Yuxinyicheng Information. In December, 2010, we sold our entire equity interest in Yuxinyicheng Information to third parties.





In 2008, we started to provide E-Banking ASP services to small banks in China to capitalize the opportunities presented by those banks who wish to jointly operate their E-Banking services with a third party partner.





In August 2008, we invested in Elegon Infotech, Ltd., a joint venture with 3i Infotech of India, to localize 3i Infotech’s relevant products into the insurance sector in China. We hold a 49% interest in the company until June 2009 when we sold all of our equity stake in Elegon Infotech, Ltd .to 3i Infotech,Ltd..





In March 2009, we established a joint-venture, Hainan Baodaotong Technologies Limited (“Baodaotong”) in Haikou city with a third party.  Baodaotong is focused on card issuance business for public transportation in Hainan Province.  As of December 31, 2009, we held 15% of equity interests in the company. In May, 2010, Yucheng sold the remaining 15% of Baodaotong’s equity interest to a third party.


29





In April 2009 we established a joint venture Sihitech Huazhi Consulting Service, a joint venture with SmartSoft, to provide high end IT consulting services for banks in China. We hold a 40% interest in the company.





In March, 2010, we established a joint-venture, Yuxin Data Technologies Limited (“Yuxin Data”) in Tianjin with NTT Data Group, to run our E-Banking ASP businesses. We hold 49% of equity interests in the company.





In January 2011, we established a joint-venture, Yucheng Internet Technologies Limited (“Yucheng Internet”) in Beijing with, to provide internet finance services. We hold 30% of equity interests in the company.





We conduct our business through various subsidiaries in the PRC. Together with our head offices in Beijing, we have subsidiaries or branch offices in 7 other cities. As of December 31, 2010, we had 2,271 employees.





OUR INDUSTRY





According to IDC, the market for banking industry IT solution spending in China is expected to grow from RMB8.1 billion (USD1.2billion) in 2010 to RMB16.48billion (USD2.5 billion) in 2014, representing a CAGR of 19.4%. This rapid growth in IT solution spending is driven primarily by the development in China’s economy and the ongoing regulatory reform catalyzed by China’s accession into the WTO, and the resulting increase in competition in China’s banking industry. To meet increasingly complex customer demands and to stay competitive in the market place, China’s banks are increasingly relying on IT systems for the management of their operations, such as processing transactions, analyzing operational data and managing risks, thereby creating growth opportunities for IT service providers such as us.





The following table sets forth China’s banking industry IT solution spending by solution type from 2006 to 2014.











Source: IDC, July 2010





China’s banking and financial institutions and their IT needs





China’s banking industry continues to be the primary provider of capital to China’s economy and bank deposits remain the primary choice for domestic savings. According to IDC, there are currently less than 4,000 banking institutions operating in China as of July 2010. This number is expected to continue to decline as the Chinese Banking Regulatory Commission (CBRC), continues to emphasis industry consolidation to increase the efficiency of banks and the integrity of the Chinese banking system. Most of banking institutions in China are either wholly state-owned or state-controlled, directly or through state-owned enterprises. In recent years, there have been a growing number of privately-owned as well as foreign-owned banks, although they are still relatively small in number to date. In addition, to promote competition the CBRC lessened regional restrictions, thereby allowing more banks, especially joint-stock and SMBs, to expand nationally.




30





China’s banking industry can be classified into four groups, including:





·
Tier 1 - State-controlled commercial banks. Commonly known as the “Big Four,” this group is comprised of the Industrial and Commercial Bank of China, Bank of China, China Construction Bank and the Agricultural Bank of China. These four banks are the largest among China’s domestic banks in terms of assets, deposit base, loan portfolio and nationwide branch network. According to CBRC 2010 Annual Report, the Big Four together account for 49.2% of bank assets in China. In recent years, the Big Four have completed an initial public offering and listing of their shares on the Hong Kong Stock Exchange or Shanghai Stock Exchange. Although the Big Four have substantial in-house IT capabilities, we believe that, given their status as overseas listed companies on foreign exchanges and their needs to achieve global best practices; they will continually need to use third-party IT solution and service providers to various degrees.





·
Tier 2 – National commercial banks. More commonly referred to as “Joint-Stock” banks, this group comprises of 13 other national commercial banks, which are owned by a combination of government entities, state-owned enterprises and other investors. Many members of this group, such as Bank of Communications, China Merchants Bank, China Minsheng Banking Corporation, Huaxia Bank, Shanghai Pudong Development Bank and Shenzhen Development Bank, are listed domestically and/or in Hong Kong. Joint-Stock banks generally have the financial resources necessary to maintain sufficient in-house IT capabilities to meet their needs. However, we believe that they are in substantial need of third-party expertise to enable them to sustain the growth rates that they have achieved in recent years.








·
Central bank and policy banks.The People’s Bank of China, or PBOC, is PRC’s central bank, which formulates China’s monetary policies and implements, such policies through a number of means, such as setting deposit reserves, interest rates and foreign exchange rates. In addition, there are three policy banks in China: the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China. These policy banks were established in the mid-1990s as a result of banking reforms to assume the government driven policy lending functions from the Big Four. China Development Bank is in the process of transforming from a policy bank to a national commercial bank.





·
Tier 3 – Small and Medium-sized Banks (SMBs).According to IDC, in 2010 this group comprised 143 city commercial banks, 37 foreign banks, and over 3,306 cooperatives (including rural commercial banks and rural cooperative banks). We believe that most of the SMBs lack both the financial resources and in-house IT expertise needed to either scale up operations or to meet increasingly stringent regulatory requirements. As such, we believe they are most likely to allocate a majority of their IT spending to third-party providers such as us. Although foreign banks possess the financial resources, they are not familiar with local market practices and the regulatory requirements and often require the assistance of China’s domestic IT service providers.





In addition to banks, there are numerous non-banking financial institutions in China, including insurance companies, securities brokerages, investment companies, asset management companies, trust companies, finance companies and investment banks. This industry segment is still in the early stages of development in China. As this industry segment matures, we expect it to undergo significant consolidation. The IT systems and applications used in these non-banking financial institutions have similarities to those used in banking institutions. We believe as these financial institutions become larger, they will need more complex and sophisticated IT solutions to manage their business and service their customers. Non-banking financial institutions present potential business opportunities for IT service providers, such as Yucheng. As we are a leader to provide IT services for banks and our systems, such as call centers and e-transactions software, are readily adaptable to new applications.


31




Furthermore, we believe that in order to continue to access new channels for growth, banks may use their strong government support and access to capital to expand into new financial services adjacent to the banking sector, such as insurance, asset management, securities brokerage and investment banking, if such diversification becomes allowed under PRC laws and regulations. We believe such expansion and the need to integrate these new businesses with their existing banking businesses will require banks to place an even greater emphasis on IT capabilities in order to increase efficiency. As their IT needs become increasingly complex, their use of third-party IT services will continue to increase, in particular from those providers with experience in both the banking industry and the non-banking financial services industry.





Driving forces of IT spending at China’s banking institutions





China’s growing economy and the ongoing regulatory reforms are two major driving forces of change for China’s banking industry. China has experienced rapid economic growth over the past three decades, largely as a result of the PRC government’s extensive economic reforms. China’s gross domestic product, or GDP, as measured by the National Bureau of Statistics of China, has grown in nominal terms at a CAGR of 16.5% from 2006 to 2010. China’s economic growth, combined with increasing fixed capital formation, high household savings rates, and a closed capital account, have driven the growth of China’s banks in the past decade. Such a rapidly developing economy places heavy demands on the efficiency and integrity of the country’s banking system. In recent years, China’s banking system has undergone significant changes and evolved to become an increasingly market-driven system.





In addition, China’s entry into the WTO in December 2001 and its accession commitments have served as a catalyst for regulatory reforms in China’s banking sector. In addition to PBOC, the most important government entity overseeing China’s banks is the Chinese Banking Regulatory Commission (CBRC). The CBRC was formed in April 2003 to assume the principal bank regulatory functions from PBOC as a response to the WTO entry requirements and the need to improve banking regulations. Since its establishment, the CBRC has pushed for improved disclosure, management accountability, more prudent regulatory standards and more efficient operations. It has played a key role in carving out bad debt, recapitalizing leading banks, regulating bank operations and driving reform throughout the banking system. The CBRC’s actions have led to significant improvements in corporate governance, risk management, internal controls and financial and operational transparency of China’s banks. While China’s banking industry is still evolving from a level well below the Organization for Economic Co-operation and Development’s (OECD) standards, supervision and regulation of China’s banks has improved dramatically in recent years, and is expected to continue to improve.





As required by the WTO accession agreement, China has gradually phased out limitations on foreign financial institutions. Foreign banks are now able to accept Renminbi denominated deposits, which previously was a significant advantage for domestic banks. In addition, the limitations on geographic network expansion are being reduced, which is promoting greater competition amongst domestic banks and greater access for foreign banks. We believe that the liberalization of the banking and financial services industry in China will force domestic banks and other financial institutions to improve their operations, increase the breadth of their product offerings and enhance their quality of services so that they can more effectively compete with increasingly prevalent international competitors.





As such, we expect China’s banking institutions to more aggressively seek technology and outsourced solutions to resolve inefficiencies and lower costs, so that they can compete more effectively in the marketplace. According to CBRC Report , as of the end of 2010, China’s domestic banks total assets were estimated to be RMB95.3 trillion (USD14.4 trillion), which represents a year over year increase of 21.5%. The tremendous growth in assets is increasing the need for efficient technology. We believe that, as part of a broad-based effort to accelerate compliance with requirements of the WTO and Basel II (the international standards for better risk management for banks), China’s domestic banks will increasingly benchmark themselves to their foreign counterparts, and seek to achieve operational efficiencies through long-term increases in IT spending.





These developments in China’s banking industry indicate strong demand for IT capabilities, a significant portion of which we expect will be outsourced to third-party IT solution and service providers. In addition, due to their limited business scale and resources as compared to large Big Four and Joint-Stock banks, we believe that SMBs will rely even more heavily on third-party service providers to meet their increasingly complex IT needs. We believe that all of these developments present significant growth opportunities for IT service providers in China.


32





Requirements to be a successful third-party IT service provider for China’s banking institutions





As the market for our services continues to evolve, the needs of our clients continue to become increasingly sophisticated. Based on our experience, we believe the following criteria are increasingly relevant to our existing and new clients when selecting a third-party IT provider:





·
extensive experience in providing the specific services required;





·
ability to proactively identify and address additional issues that may be encountered with a given client’s IT operations for a project initially undertaken for different objectives;





·
ability to complete the overall project and interim project milestones on timely basis;





·
ability to deliver solutions and services on budget for each project;





·
best-in-class solutions which can be implemented quickly and cost effectively and which leverage prior solution development experience;





·
flexible project staffing and resource allocation that best meets the project’s scope, scale and length; and





·
client access to the deepest and most valuable technical and industry-specific expertise, such as highly experienced senior staff members.





We believe that as our clients’ needs become increasingly complex, so will the requirements for success in our industry. Our ability to remain competitive will depend, in part, on ongoing investments in our technological capabilities and our human resources, which we believe differentiate us from our competitors. We also expect our industry to continue to undergo rapid consolidation. China’s domestic banks increasingly seek vendors with comprehensive service offerings and the scale necessary to provide solutions and services seamlessly to numerous client locations across China. In order to succeed, we may need to continue to seek attractive acquisition candidates to complement our existing core strengths.





OUR SOLUTIONS AND SERVICES





We provide a broad range of solutions and services to meet China’s banking institutions IT needs. Based on the nature of our solutions and services, we categorize them as Software & Solutions, Platform & Maintenance Services. Software & Solutions includes the development and sale of our software solutions, IT consulting and implementation and customized software development. Platform & Maintenance Services relates to the procurement, re-sale, installation, integration and maintenance of third-party hardware and software.


Software & Solutions





We primarily provide Software & Solutions to our banking clients via customized software, standard software, customized solution development, and consulting services; however, we believe that conceptually it is more relevant to discuss the end result of our business. Therefore, we classify our Software & Solutions into the following sub-categories:





·
Business Solutions. Our Business Solutions include a wide range of transaction-related solutions, such as core-banking, foreign exchange and loan management. We provide our core banking solutions, which manage all operations relevant to deposit and loan accounts, principally to SMBs, as they usually lack the internal IT capabilities needed to develop and maintain their own systems. In 2008, 2009 and 2010, our revenues from Business Solutions were RMB72.3 million, RMB78.9million and RMB131.1 million (USD19.8 million), respectively, and accounted for 27.4%, 28.0% and 39.3% of our Software & Solutions revenues, respectively.


33





·
Channel Solutions. Channel Solutions are designed to facilitate banks’ interactions with their customers, to improve communication and transaction efficiency and to enhance the overall customer banking experience. Channel Solutions include: customized online banking solutions, our E-Banking ASP, mobile banking, and call center solutions, which allow our clients to serve their customers in a more timely and cost effective manner. Our solutions automate our clients’ operations and allow them to better track performance of different interaction methods. According to a July 2010 report issued by IDC, a third-party research organization, we ranked first among all of the banking IT solution providers in China for Channel Solutions as measured by 2009 revenues. In 2008, 2009 and 2010, our revenues from Channel Solutions were RMB97.7 million, RMB131.7 million and RMB122.7 million(USD18.5 million), respectively, and accounted for 37.0%, 46.7% and 36.8% of our Software & Solutions revenues, respectively.





·
Management Solutions. Management Solutions help banks to collect and analyze data, so that they can monitor and manage risks and performance in a timely manner, as well as business intelligence. These solutions support intelligent data analysis to enhance management reporting and sound decision making. We provide a suite of consulting and implementation services in risk and performance management, such as asset and liability management, funds transfer pricing and profitability analysis. In 2008, 2009 and 2010, our revenues from Management Solutions were RMB93.9 million, RMB71.3 million and RMB79.7 million (USD 12.0 million), accounted for 35.6%, 25.3% and 23.9% of our Software & Solutions revenues, respectively.





We develop customized, function-specific applications according to our clients’ needs and integrate these applications into our clients’ existing IT systems. Increasingly, we are leveraging our customized development work, so that we can use the same core technology in customized projects for other clients and extract economies of scale from our own business. We believe that providing “repeatable” solutions will become increasingly important as we target new segments of the market, such as SMBs, which have limited budgets for large-scale, highly customized IT work.





Platform & Maintenance Services





We primarily provide Platform & Maintenance Services in conjunction with our Software & Solutions business. Platform & Maintenance Services, although not a primary focus or growth area for us, is necessary as it assure that our clients IT investments function correctly and smoothly in relation to their IT infrastructure. We classify our Platform & Maintenance Services into the following sub-categories:





·
Platform Services.Platform Services is comprised in large part of our former System Integration business. As a total solutions provider, our Platform Services assists our clients with the selection of appropriate third-party hardware or software, manufacturer negotiations (proposals, bids and pricing terms) and, as required, installation support and testing of the third-party hardware and software. We can also integrate the new equipment and software with our clients’ existing IT architecture. In 2008, 2009 and 2010, our revenues from platform services were RMB339.7 million, RMB12.5million and RMB8.4 million (USD1.3 million), accounted for 51.3%, 3.5% and 2.1% of our total revenues, respectively.





·
Maintenance & Ancillary Services.Comprised mainly of our former IT Services business, this category focuses on the maintenance and support services that we provide after a project is completed. In addition, we perform limited agency services where we procure third-party IT equipment for other system integrators and charge a commission. We record these revenues as Maintenance & Ancillary Services. In 2008, 2009 and 2010, our maintenance and ancillary services revenue amounted to RMB58.7 million, RMB60.1 million and RMB61.7 million (USD 9.3 million), respectively, accounted for 8.9%, 16.9% and 15.3% of our total revenues, respectively.


34





Nature of our client engagements





Our objective is to maximize our share of IT spending with new and existing clients by developing an initial service relationship and then cross-selling additional services. Large, multi-year projects are usually separated into different phases; each phase is covered by a separate contract. For our Software & Solutions and our Platform Services, we typically enter into one contract with our clients for each project or phase that we undertake. Our Software & Solutions contracts typically last between two and twelve months (averaging six to seven months) and our contracts for Platform & Maintenance Services are generally shorter.





Each project typically involves multiple service components to fulfill the project or particular project phase’s requirements. We typically price our Software & Solutions relating to a project or a project phase based on an all-inclusive, fixed-price basis, rather than on an à la carte basis for individual components or segments. To the extent we are successful in managing projects, fixed-price contracts have historically allowed us to employ various process methodologies designed to improve the overall project profitability, while maintaining the highest quality and milestone-oriented service. Our Platform Service projects are generally priced based on the cost of the third-party hardware or software, plus an applicable margin to cover our service costs. Our clients are generally required to pay us in installments, with a portion of payment made upon executing the contract, upon achieving certain interim milestones, and upon completing the client inspection.





We are starting to implement a re-occurring revenue model, when the functionality of our solutions is per-user or per-transaction based. Under this model, we set up the entire IT architecture and software platform, such as an entire online banking IT platform, and charge our clients for the use of the IT platform and on a per-user or per-transaction basis.





In January 2008, we entered into a collaboration agreement with China Financial Certification Authority (CFCA) to develop our E-Banking ASP platform targeted toward SMBs. The CFCA is China’s regulatory agency for secured online transactions. It will host and maintain the online banking platform to ensure the highest level of transaction security and service availability. We will provide the necessary hardware and solution technology to operate the platform. In exchange for using the E-Banking ASP services, clients are expected to pay a fixed annual fee for hosting and maintenance, as well as variable fees depending on the number of users, the transaction type and the transaction volume. These revenues will then be shared between Yucheng and the CFCA. As part of the agreement, we will also customize elements of the E-Banking ASP platform per our client’s request, in return for additional fees. Compared to our traditional project-based revenue model, the client’s initial charge using a recurring revenue model is relatively small; however, we are confident that in the long run it will generate increased revenues tied to the platform usage.





We believe this revenue model appeals to the SMBs, which may not have the financial resources and internal IT capabilities to maintain their own online banking platform.





To better serve the market, we established Yuxin Data, a joint-venture with NTT Data Group, to operate the E-Banking ASP business. Navigating the operational complexity of serving this market is where NTT DATA's core competency in hosted IT systems will add value to the joint venture. NTT DATA will contribute to the joint venture with its experiences from its ANSER Unit Operation Center and Core Operating System Data Center, as well as experience operating outsourced platforms.





OUR COMPETITIVE STRENGTHS





We believe the following competitive strengths enable us to compete more effectively as an IT service provider to China’s banking institutions.





Broad client base and extensive domestic Chinese bank experience.





Our client base includes all of China’s most prominent Top Four banks as well as many of the Joint-Stock and SMBs. We have successful reference sites at the Top Four banks, and count 16 of China’s 17 largest banks as our clients. As the Top Four and Joint-Stock banks tend to set IT norms in China’s banking industry, our close client relationships in these segments enable us to gather the deep expertise required to maintain our leadership position. Through the acquisition of Easycon and also organic growth, we have also expanded our client base to include numerous SMB clients. We believe that our broad client base and extensive industry expertise serve as a testament to our solution quality and as an endorsement to new customers.


35





Deep relationships with existing clients and effective new client development strategy.





In the course of serving our existing clients, we typically develop a detailed and proprietary understanding of our clients’ internal IT operations, as well as their existing and future IT needs. As our clients typically prefer to maintain continuity in their third-party IT outsourcing relationships, we believe we are well-positioned to serve our clients’ needs on future projects, especially where we have had significant prior input into the client’s IT systems. By undertaking of one project with a new client, we are often able to gain insights into the client’s additional IT needs and cross-sell or up-sell solutions and services to the client, which in turn further strengthens our relationship and increases our competitiveness.





Extensive suite of solution and service offerings.





To date, we have developed a broad range of solutions, which we deliver via our suite of proprietary applications. Our solutions are often packaged with our other services, such as consulting, custom application development, legacy system integration, third-party packaged software application implementation, application testing, and system integration services, to create a comprehensive service. Our broad range of capabilities allows us to tailor our solutions to each of our clients’ particular business needs, providing our clients with a “one-stop shopping” experience. Our approach has enabled us to become increasingly important to our clients’ overall IT strategies, allowing us to more effectively cross-sell and up-sell additional solutions and services to help better meet their long-term needs.





Highly leveragable product suite.





The substantial experience, both industry-specific and technology-related, that we have gained in providing a broad range of solutions to numerous clients historically has allowed us to develop deep insight into how best to serve both new and existing clients. This has also enabled us to engineer applications during the course of a specific client engagement that allow us to more easily facilitate upgrades and additional solutions at a subsequent client engagement. We believe that this capability provides us with a significant competitive advantage as we target new clients, such as SMBs.





Strong management team and highly experienced IT employees.





We believe that our management team and employees are our most important assets and provide us with a substantial competitive advantage during our day-to-day business operations. Our executive management team, on average, possesses 15 or more years of directly relevant industry experience. These individuals have been instrumental in growing our businesses organically, as well as in identifying, acquiring and integrating acquisition targets to date. We believe that they have demonstrated a superior understanding of and ability to effect consolidation in our rapidly changing industry. With significant industry experience and strong track record, we believe that our management team, our founders in particular, has established a favorable reputation within our industry and in the broader marketplace, which can help us win additional clients as well as business partners and future acquisition targets. In addition, we believe that our employee base, which has come together both organically and via acquisition, is a highly experienced and capable group, allowing us to target, assess and deliver client engagements more effectively and efficiently.





Broad geographic presence.





In addition to our headquarters in Beijing, we maintain subsidiaries and branch offices in 19 other cities across China. As many of our clients, in particular the Top Four and Joint-Stock banks, have a nationwide or multi-province presence, our broad geographic presence allows us to be close to our clients in multiple locations, which further helps us to maintain close relationships with them. In addition, as we further expand our SMB client base, our broad geographic coverage makes it easier for us to connect with them and provide our solutions and services in a client-facing fashion, which we believe is critical for effective cross-selling and up-selling of additional services and solutions.


36





Strong brand in the marketplace.





We have an established reputation as a leading provider of IT services to China’s premier banking institutions with our clients and among China’s banking IT service provider community. We have enjoyed close business relationships with many Top Four and Joint-Stock banks, including China Construction Bank, which has been our customer on an annual basis since 1999. Our services to these premier banking institutions has earned us credibility and prestige in the industry. For example, we were named to the Global FinTech 100 for the third year in a row in October, 2009 by American Banker, Banker Technology News, and Financial Insights, an IDC company, and we were recognized as “Most Trusted IT Services Brand by SMB” in 2009 and 2010 ” by Chinese Finance Network and Chinese Finance Institute;  We were named “Outstanding Chinese Financial Technology Products 2008” by New Financial World magazine in 2008, a Chinese IT industry magazine. Yucheng was recognized as “One of the ten best IT solution providers for China’s financial industry” by Computer Partner World in 2007, a leading IT focused magazine in China. We believe that our established reputation and credibility provide us advantages in our competition for new businesses opportunities.





OUR STRATEGIES





Our objective is to become the leading provider of IT services to China’s diversified financial services sector.  While we believe that we have already established an attractive market position, we intend to further grow our business and enhance our overall market standing by implementing the following strategies:





Continue to drive organic growth through cross-selling and up-selling of new and existing services to our existing bank clients.





We have established close relationships with a larger number of banks in China, and have successfully undertaken multiple projects for these banks.  We intend to further leverage such relationships and cross-sell more solutions and services to these banks.  For example, we have provided numerous services, such as online banking, call center, risk management, business intelligence, foreign exchange, performance management solutions, to China Construction Bank, which has been our largest client by revenue in each of the past three years.  In comparison, we have provided much more limited IT solutions and services to many other banks.  We intend to leverage our experience with China Construction Bank to actively promote our other IT solutions and services in other banks.





Continue to expand into new client segments, such as SMBs.





We intend to build on top of our solid SMB client base and broaden our client base.  As compared to large Top Four and Joint-Stock banks, SMBs do not have the business scale, financial resources or internal IT capabilities to develop highly sophisticated IT systems and solutions. As such, they generally demand less customization of IT solutions, providing us opportunities to sell our solutions in a more standardized manner with minimal incremental cost per sale. In addition, due to their smaller size and increasing needs, oftentimes we are in a superior position to negotiate contract terms with SMBs as compared to large banks. By the end of 2010, SMBs and other banks accounted for 24.3%of our revenues, compared to 23.2% of revenues in 2009, and we expect to continue expand our SMB market share.





Complement our project-based revenues with a transaction-based revenue model in certain segments.





Our traditional business model involves negotiating a fixed-price contract with our clients based on the complexity and duration of each project we undertake. Such projects generate one-time revenues and generally must be renegotiated should the client decide to expand the project or make improvements, either in the current year or in subsequent years. We have initiated our transaction-based revenue model by delivering certain of our offerings, such as online banking solutions, to our clients through a combination of a fixed fee plus subsequent variable fees. We believe that such a delivery method is more economical and of particular interest to SMBs, which are more likely to forgo a custom online banking project due to the upfront costs.


37





We entered into this model in January 2008 via a collaboration agreement with Chinese Financial Certification Authority (CFCA), the Chinese governmental body regulating e-commerce security. In return for our E-Banking ASP, SMBs are expected to pay CFCA and us a combination annual maintenance fee, plus subsequent per-transaction or per-user fees. As of June 2011, we have 35 clients on our E-Banking ASP. We plan to expand this model to cover other services, as feasible.





Expand our solutions and service offerings to address new growth opportunities.





As banks in China are more and more mature in understanding their needs for IT services, there are increasingly appreciating the needs for high end consulting in various areas such as risk management, core banking systems, and IT infrastructure planning. To address these customer needs, we established Sihitech Huazhi Consulting Service, a joint venture with SmartSoft, to provide high end IT consulting services for banks in China. The Smartsoft team has a strong track record in the abovementioned areas. Since the establishment of the joint venture, we were able to secure consulting projects with one of the big four banks, along with the implementation phase of the project.





We have expanded our CRM capabilities by putting together an experienced Siebel CRM implementation team in December 2008.The team has extensive experience customizing Siebel CRM systems for customers across many industries, including banking. As Chinese banks become more complex, having the right solutions to improve management team capabilities will be critical. With the new team joining us, we now have the flexibility to provide our proprietary CRM software or consulting and implementation services of Siebel CRM software to our customers.





Pursue selective acquisitions, joint ventures and strategic alliances.





Historically, we have supplemented our organic growth strategy through selective acquisitions and strategic alliances to increase our solutions and service offerings and overall market share. In 2007, we acquired five companies. In 2008, we had a total of six cooperation agreements with banks for POS merchant acquiring business; we entered into an agreement with CFCA for hosting our E-Banking ASP platform; On March 15, 2010, Yucheng formed Yuxin Data Limited in Tianjin, a joint-venture with NTT Data Group to further expand our E-Banking ASP businesses. These acquisitions, strategic alliances and cooperations have expanded our revenue sources, increased our solution and service offerings, diversified our client base, enhanced our research and development capabilities, augmented our management resources and employee base, and enhanced our long-term competitive position.





PROJECT DEVELOPMENT AND MANAGEMENT





The following chart illustrates our typical project development and management process.


38











Project management





We manage our projects principally through the following steps:





·
Project setup. We conduct feasibility and margin analysis before the set-up of each project, which requires approval of the sales, pre-sales implementation and technology management teams.





·
Project planning. Following project setup approval, the project manager designs the overall project plan, including estimates for workload and costs, so that necessary resources can be allocated.





·
Project monitoring. Our project manager then tracks the project’s progress and results are presented both internally and to the client, through various project progress reports. Any changes to the scope of the project need to be approved from our sales, pre-sales implementation and technology management teams.





·
Risk management. We estimate potential risks upon project setup, and establish relevant strategies and measures to respond to any such risks to minimize their impact.





·
Quality assurance. We conduct frequent tests and examinations to ensure the quality of our solutions and services.





·
Client satisfaction survey. We regularly distribute a client satisfaction questionnaire to our clients during project implementation and adopt appropriate measures to address any issues raised.





·
Project closing. Our sales, pre-sales implementation and technology management teams need to approve the completion of each project, and we assess the overall the project achievements and financial return.





Project development





Our project development activities include the following:





·
Needs analysis. The first step of our project development is to understand our client’s business needs for the project. We carry out frequent communications with our client and conduct extensive analyses of their needs based on their business and current IT system.


39




·
System design. Based on our understanding of our client’s business needs, we design the overall system architecture, including databases, customer interfaces and modules to best address such needs.





·
Coding and module testing. Once we have a system design or part of the system design to meet our client’s requirements, we start coding individual functional modules. Each of our functional modules is tested and debugged individually to ensure quality and functionality.





We work closely with our clients during the above steps, and these steps may be repeated or conducted in parallel to ensure that we have a system that best meets our client’s business requirements.





·
System testing. After we finish coding and testing the individual modules, we start connecting the modules and performing testing at the system level.





·
System test run and client examination. After the system passes system testing, we then install it at our client’s site and conduct a real data test run with our client. We work closely with our client to address and resolve any issues that may come up during the test run and client examination.





·
System delivery and maintenance. After passing client examination, the system is delivered to our client and the project development cycle is closed. Generally, we provide one year of maintenance and support for most of our solutions. We assign an employee as the principal contact person to receive client feedback, evaluate the severity of any problem arising from the use of the IT solution, resolve the problem and maintain an issue log.





QUALITY ASSURANCE





We have built quality assurance measures into our project management process. We conduct frequent tests, both in the module level and system level, to ensure our solutions meet our high quality standards and required functionality. We frequently interact with our clients throughout the entire project development process, soliciting feedback and taking measures to improve our solutions and services.





We conduct various technical and management appraisals before, during and after project implementation. Technical appraisals include demand appraisal, design appraisal, code spot tests, internal check and acceptance, and client check and acceptance; management appraisals include project set-up appraisal, plan appraisal and settlement appraisal. These appraisals are designed to ensure the smooth progress of our projects and quality of our implementation.





We have established a set of quality control procedures and follow standard software development protocols in our development processes. Beijing Sihitech received an ISO 9001:2000 certification in March 2005 and e-Channels received an ISO 9001:2000 certification in July 2006. We obtained level 3 certification of Capability Maturity Model Integration, or CMMI, for our software development operations in 2009.CMMI is a framework for business process improvement that is widely accepted in the software industry.





SALES AND MARKETING





We employ a direct sales model to market and sell our solutions and services. As of December 31, 2010, we had 55 sales and marketing staff in 5 cities across China. Our core business sales personnel are organized into geographical regions. Within each region, we organize sales teams based on client type.





Our sales strategy also differs depending on the type of clients. For Top Four and Joint-Stock banks, we establish and maintain long-term partnerships, providing these leading banks with a comprehensive set of IT consulting and implementation services and a focus on growing with the IT needs of each client. We also strive to provide our solutions and services to these clients in follow-on projects by cross-selling our other solutions and services. For SMBs, we aim to secure a foothold with our leading IT solutions, such as online banking or through the acquisition of companies specializing in that banking segment, such as Easycon. Due to their limited experience with third-party IT solution and service providers, in many cases, these clients are unaware initially of the broad range of solutions and services that may be obtained from a third-party provider, and are therefore unaware of the benefits in leveraging the experience and capabilities of a provider such as ourselves. The initial client engagement enables us to understand clients’ IT needs, quickly build relationships internally, and provide us opportunities to demonstrate to them our capabilities and value proposition so that we can cross-sell or up-sell our additional solutions and services to best meet their long-term business needs.


40





Many banks select their IT service providers through competitive bidding. Before submitting a bid, we usually conduct a detailed due diligence study of the bank, our competitors, the technical advantages we have regarding the project, duration of the project, our estimated cost and profitability and potential for a long-term relationship with the client. We selectively submit bids on projects where we believe we have a competitive advantage. In addition to price, we believe clients usually select the winning bidder based on a number of other factors, including reputation and track record of the IT service provider, its technical capabilities, historical relationship with the client and the functionality of the proposed solutions.





Many of our client projects are separated into different phases, often spanning more than one year. For the latter phases of the projects that we initially undertake, banks usually do not engage in any additional open bidding. Instead, we typically conduct new negotiations to determine the scope and cost of the new phase.





Our total selling and marketing expenses were RMB33.4 million, RMB41.1 and RMB44.8 million (USD 6.8 million) for 2008, 2009 and 2010 respectively. In addition to salaries, our sales staff receives a significant portion of their compensation from sales commissions.





OUR CLIENTS





Our current clients consist primarily of Top Four and Joint-Stock banks that look for customized IT solutions to meet specific business and operational requirements. Of the 17 Top Four and Joint-Stock banks, 16 are our clients and some have been so for more than five years. We have also been adding SMBs to expand our client base, and diversify our dependence on any one client.





China Construction Bank, one of the largest banks in China, and our client since 1999, has been our largest client through the headquarters and its branch offices in each of 2008, 2009 and 2010, accounting for 48.7%, 34.0% and 22.7% of our total revenues, respectively, in those three years. Our contracts with China Construction Bank were signed separately with different departments within the bank group, branches at the provincial level and headquarters and we consider each of them effectively separate clients, since the decision makers and budgets are unrelated. Treating the different decision making bodies within China Construction Bank as separate clients, China Construction Bank head office was our largest client in each of the past three years, accounting for 37.7%, 21.5% and 14.3% of our total revenues in 2008, 2009 and 2010, respectively. Revenues from each of other branches of China Construction Bank accounted for less than three percent of our total revenues in each of 2008, 2009 and 2010.





We realize the risks involved with overdependence on one or a few clients, and have taken measures to expand our client base.  As our Joint-Stock client base has grown, its contribution as a percentage of total revenues has also increased and accounted for12.9% in 2008, 24.7% in 2009 and 29.2% in 2010, and one of our Joint-Stock bank clients accounted for 6.9%, 12.4% and 12.3% in 2008, 2009 and 2010. Our revenues from SMBs and other banks as a percentage of total revenues was 19.3% in 2008, 23.2% in 2009 and 24.3% in 2010. We believe over time, Joint-Stock banks and SMBs will experience the greatest competitive pressures and are likely to significantly increase their IT investments. We have positioned ourselves to take advantage of this opportunity as it develops.





In addition to China’s domestic banks, we have also begun marketing our services to the Chinese operations of foreign banks, which have expanded significantly in recent years due to China’s WTO commitments. For example, we entered into contracts with the PRC subsidiary of a Korean bank in late 2007 to develop their bank card processing system and online banking platform, and with the PRC subsidiary of a Hong Kong based bank in early 2008 to develop their online banking platform. We continued our efforts in 2010 and beyond to expand our presence in foreign banks and/or PRC Subsidiary of foreign banks. We expect to add a number of foreign banks to our client list in 2011.


41





SUPPLIERS





We work with third-party suppliers for hardware equipment and certain software components that we incorporate into our solutions. Our hardware suppliers include IBM, HP, DELL and Sun for servers, EMC for storage, Cisco, Huawei and F5 for network equipment. Our software suppliers include Oracle, IBM, Symantec, Microsoft, Genesys and EDIFY. We do not depend on any single supplier for either hardware or software. In 2010, only IBM accounted for more than 10% overall third-party hardware and software purchases.





RESEARCH AND DEVELOPMENT





The market for our solutions and services is characterized by rapid technological change. As China’s banks upgrade their technology to meet international standards, we must ensure that we keep pace with technological developments, client demands, emerging industry standards and an increasingly sophisticated environment by enhancing our current service offering on a timely basis and developing new solutions that capture underdeveloped market segments.





Our research and development at the company level focuses on developing new fundamental platforms and applications that can be used in a variety of our IT solutions.


We also carry on research and development activities at the business division level in our various subsidiaries. Our business divisions are more familiar with our clients’ specific IT needs and focus on developing applications that are more closely linked to immediate trends.





As of December 31, 2010, we had 71 employees carrying on research and development activities.





Including the amount we capitalized, our internal software development costs amounted to RMB13.7 million, RMB22.2 million and RMB 18.3 million (USD2.8 million) as of the end of each of the years 2008, 2009 and 2010, respectively. In addition, as we conduct a substantial amount of research and development activities in connection with our client projects, a significant amount of research and development related expenses are recorded as cost of revenues for the client project rather than research and development expenses.





INTELLECTUAL PROPERTY





We rely on a combination of patent, copyright and trademark laws, licensing agreements, confidentiality agreements, internal confidentiality policies and other contractual provisions, as well as technical measures to protect our intellectual property rights. We have one received patent for our dynamic password method and system based on mobile communication terminals and still have one pending patent application for our dynamic password method and system with encryption with the PRC State Intellectual Property Office. We routinely register our proprietary software to the National Copyright Administration of the PRC pursuant to the Regulations for the Protection of Computer Software (2002) to ensure protection under the PRC copyright laws. As of December 31, 2010, we had 176 software products registered with the National Copyright Administration of the PRC, including primarily system architecture and platforms and various software applications.





Our employees are required to enter into agreements assigning us the intellectual property developed within the scope of their employment. We have also established internal confidentiality procedures to safeguard our intellectual property. We enter into confidentiality agreements with all of our employees, collaborators, clients and suppliers, and prohibit our employees from designing into our solutions intellectual property that belongs to any third party. As intellectual property laws in China are still being developed and offer limited protection, we rely heavily on our confidentiality procedures, confidentiality agreements as well as technical measures to protect our proprietary technology and intellectual property.


42


Pursuant to the majority of our client contracts relating to our software, solutions and services, our clients own the intellectual property developed in connection with the projects, while we retain our proprietary rights to the methodologies, algorithms or patents that we used in the development of custom software solutions. However, it is often difficult to distinguish the part of the software that we developed for our clients, which represents our proprietary rights. As a result, there is a risk that our client may claim that we infringed their intellectual property rights. See “Item 3. Key information — Risk factors — Risks relating to our businesses — We may be subject to intellectual property infringement claims from our clients, which may force us to incur substantial legal expenses and, if determined adversely against us, may materially and adversely affect our business, financial condition and results of operations.” In addition, we typically agree to defend our clients on our own costs for any third-party intellectual property claims filed against them arising from the solutions and services we provided them, and indemnify them for any damages of intellectual property infringement, which may subject us to significant intellectual property indemnity claims. See “Item 3. Key information — Risk factors — Risks relating to our businesses – Our intellectual property indemnification practices may materially and adversely impact our business.”





We have registered one trademark, “Yucheng,” in the Trademark Office of the State Administration of Industry and Commerce of the PRC. We also own a number of domain names, including the domain name of our main website, www.yuchengtech.com.





COMPETITION





The market for IT services in China’s banking industry is intensely competitive and characterized by rapid technological change. Competition in our industry is based to a great extent on industry experience, solution quality, reference sites, breadth of services offered, reputation, price and relationship. Past track records with a particular banking client are also of particular importance. As a result, our success rate is usually higher with banks that we have provided solutions and services to in the past, and we are usually engaged by our existing clients to work on projects that are the expansion of or improvements on the original projects that we undertook.





Our major competitors can be categorized into two groups, global IT vendors and China’s domestic IT solutions and service providers. Our major competitors in the global IT vendor category include Accenture, IBM Global Services and TCS/FNS. These competitors are strong in high-level, enterprise-wide IT strategy consulting. Our major domestic competitors include Longtop Financial Technologies Limited, Digital China Holdings Limited, Global InfoTech Co., Ltd , HiSun Technology Holdings Ltd. and Client Service International Inc.. Each of these competitors has their focus and strength in different types of IT solutions and services, and we compete with different companies depending on the types of solutions we intend to provide to a given client.





We also compete with the internal IT departments of our existing and potential clients, which may be capable of creating in-house solutions, thereby reducing the need for outsourced service providers. For example, a banking client for which we designed an initial online banking platform decided later to conduct further development in-house.





In addition to the competitors listed above, there are many other smaller providers of IT solutions and services to China’s banks. Most of these providers are small- to mid-sized companies focusing on narrowly specified niche markets within the broader IT solutions and services market.





INSURANCE





We own a property in Xiamen which we use as office space, and lease all of our other offices, and we do not maintain any property insurance for such offices. In addition, consistent with industry practice in China, we do not maintain business disruption insurance or key person insurance. We do maintain Director and Officer Liability insurance, in accordance with standard practices for U.S. listed companies.





REGULATION





The following summarizes major PRC laws, rules and regulations applicable to our business.





Regulation of the software and systems integration industries





China’s State Council and a number of ministries and agencies have issued a series of rules and regulations aimed at stimulating and regulating the growth of the software and systems integration industries in China. The principal regulations governing the software and systems integration industries include:


43





·
The Interim Administration Measures for Qualification of Systems Integration of Computer Information (1999);





·
The Certification Standards and Administration Measures of Software Enterprises (2000);





·
The Appraisal Condition for Qualification Grade of Systems Integration of Computer Information (Revised Version) (2003);





·
Certain Policies for Encouraging Development of the Software Industry and Integrated Circuits Industry (2000);





·
The Software Products Administration Measures (2000);





·
The Interim Administration Measures for Qualification of Systems Integration of Computer Information Concerning State Secrets (2001);





·
The Administrative Measures on Verification of Key Software Enterprises within the State Plan (2005);





·
The Administrative Regulation for Commercial Cryptogram (1999); and





·
The Administrative Measures on Examination and Sales Licensing of Security Products for Computer Information Systems (1997).





Under these regulations, except for software developed for self-use, software products developed in China are subject to a registration system administered by the PRC Ministry of Information Industry (MII) and its local branches or agencies. This registration system requires software developers to obtain registration certificates for their software products. A software product cannot be sold in China without such registration. The valid term of each registration is for five years, and it may be renewed upon expiry.





Companies in China engaged in systems integration are required to obtain qualification certificates from MII. Companies planning to setup computer information systems are required to engage systems integration companies with appropriate qualification certificates. This qualification certificate is subject to biannual review and is renewable every four years.





The Qualification Certificate for Integration of Computer Information Systems Concerning State Secrets granted by the PRC State Secrecy Bureau is required for a company to engage in computer systems integration activities involving state secrets. The valid term of such certificate is for three years, and it may be renewed upon expiry, subject to the satisfaction of all the requirements. The State Secrecy Bureau will only issue this special qualification certificate to China’s domestic companies. Foreign invested companies, including Sino-foreign joint ventures and wholly foreign-owned enterprises, are not allowed to engage in any computer systems integration activities that involve state secrets.





Encryption software is an essential component of internet banking systems. The development, production and sale of commercial encryption products in China is regulated by the PRC National Encryption Administrative Bureau (Encryption Bureau) and its authorized local branches. A company engaging in the encryption-related business is subject to certain licensing requirements, such as obtaining a production license, sale and distribution license, and a license for research and development from the Encryption Bureau. In addition, both importing and exporting products and equipment containing encryption technology are subject to the prior approval of the Encryption Bureau.


44




Companies in China engaged in providing security products for computer information systems are required to obtain a sales license after official examination from the PRC Ministry of Public Security (MPS) or its authorized local branches. The valid term of each license is for two years which can be renewed upon expiry.





We generally register our software and have obtained, or are in the process of obtaining, from MII or other regulatory agencies all the certificates, permits or licenses necessary for conducting our business.





Regulation on foreign investment





According to The Guidelines on Foreign Investment issued by State Council on February 11, 2002, and The Catalogue on Foreign Invested Industries (2007 Revision) issued by National Development and Reform Commission and the Ministry of Commerce on October 31, 2007, IT solutions and services fall into the category of industries in which foreign investment is encouraged.





Regulations on foreign exchange





The principal regulations governing foreign exchange in China are the PRC Foreign Exchange Administration Regulations (1996), as amended in 1997. Under these regulations, current account income denominated in foreign currencies shall be sold to designated banks or deposited into foreign exchange bank accounts. The Renminbi is convertible for current account items including the distribution of dividends, interest payments and trade and service-related foreign exchange transactions. For conversion of the Renminbi for capital account items, such as making inbound and outbound direct investments, borrowing foreign loans, repatriating investments and investing in securities outside China, prior approval of or registration with State Administration for Foreign Exchange (SAFE) is required.





Pursuant to the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange (1996), foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE or its local branches. Foreign investment enterprises are permitted to remit 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. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by SAFE, the Ministry of Commerce of the PRC and the PRC National Development and Reform Commission or their local counterparts.





Pursuant to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Return Investments via Overseas Special Purpose Vehicles, generally known in China as SAFE Circular 75, which became effective November 1, 2005, (i) a legal person entity incorporated in China, a PRC citizen, or an individual with habitual residence in China due to certain economic benefits, who is referred to as an onshore resident under SAFE Circular 75, shall register with the local branch of SAFE before it establishes or controls an overseas special purpose vehicle (SPV) for the purpose of overseas equity financing (including convertible debts financing); (ii) when a PRC resident contributes the assets or equity interests it holds in a domestic enterprise into an SPV, or engages in overseas financing after contributing assets or equity interests into an SPV, such PRC resident shall modify its SAFE registration in light of its interest in the SPV and any change thereof; and (iii) where an SPV undergoes material events relating to increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investments, or external guarantees, or other material events that do not involve return investments, such PRC resident shall, within 30 days from the occurrence of such material event, apply to the local branch of SAFE to amend or file the registration of foreign exchange of overseas investment. Onshore residents who have established or controlled SPVs and completed return investments before November 1, 2005, the effective date of SAFE Circular 75, were also required to register with the local SAFE branch before March 31, 2006.


45


To further clarify the implementation of SAFE Circular 75, SAFE issued The Notice of the State Administration of Foreign Exchange on Operating Procedures concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investment via Overseas Special Purpose Companies on May 29, 2007 (Circular 106). Under Circular 106, if the investment in the overseas SPV fails to be registered with SAFE by the onshore residents, (1) the overseas SPV is not qualified to conduct overseas financing or return investment; and (2) the PRC subsidiaries of the SPV are prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to the overseas SPV. Moreover, failure to comply with the above SAFE registration requirements could result in liabilities under PRC laws for evasion of foreign exchange restrictions. All our PRC resident beneficial owners have registered with local SAFE branch as required under the SAFE regulations in respect to return investment.





Regulations on offshore parent holding companies’ direct investment in and loans to their PRC subsidiaries





An offshore company may make an equity investment in a PRC company, which will become the PRC subsidiary of the offshore holding company after the investment. Such equity investment is subject to a series of laws and regulations generally applicable to any foreign-invested enterprise in China, which include the Wholly Foreign-Owned Enterprise Law, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Contractual Joint Venture Enterprise Law, all as amended from time to time, and their respective implementation rules. Under these laws and regulations, the contribution and increase of the registered capital of a foreign-invested enterprise is subject to prior approval by the relevant authorities.





Shareholder loans made by offshore parent holding companies to their PRC subsidiaries are regarded as foreign debts in China for regulatory purposes, and are subject to a number of PRC laws and regulations, including the PRC Foreign Exchange Administration Regulations, the Interim Measures on Administration on Foreign Debts, the Tentative Provisions on the Statistics Monitoring of Foreign Debts and its implementation rules, and the Administration Rules on the Settlement, Sale and Payment of Foreign Exchange. Under these regulations, shareholder loans made by offshore parent holding companies to their PRC subsidiaries shall be registered with SAFE. Furthermore, the total amount of foreign debt that can be borrowed by such PRC subsidiaries, including any shareholder loans, shall not exceed the difference between the total investment amount and the registered capital amount of the PRC subsidiaries, both of which are subject to governmental approval.





Regulations on dividend distribution





Under the relevant PRC laws and regulations, foreign-invested enterprises in China may distribute dividends only out of their accumulated profits determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to contribute at least 10% of their after-tax profits based on PRC accounting standards each year to their general reserves fund until the accumulative amount of the reserve fund reaches 50% of the registered capital of such wholly foreign-owned enterprise. Contributions to the fund may not be distributed as dividends.


46








47





The following summarizes relevant information concerning our subsidiaries:





Beijing Yuxinyicheng Technology Limited, or Yuxinyicheng. Yuxinyicheng was established as a wholly foreign-owned enterprise in China on October 19, 2006. It is 68.25% owned by Sihitech BVI and 31.75% owned by e-Channels BVI. It is a holding company in China without its own business operations.





Beijing Sihitech Technology Co., Ltd., or Beijing Sihitech. Beijing Sihitech, along with its subsidiaries Shanghai Software, Beijing Software, Shanghai Yucheng, Xiamen Yucheng, ChengduYucheng and TianjinYucheng, engages in the provision of system integration, software development, information technology consulting, maintenance and support services. Beijing Sihitech and its subsidiaries mentioned above were the principal operating entities of Sihitech BVI prior to the three-party merger.





Beijing e-Channels Century Technology Co., Ltd., or e-Channels. E-Channels engages in the provision of technology development, technology transfer, consulting and training services, in particular relating to online booking-related solutions. E-Channels was the principal operating entity of e-Channels BVI prior to the three-party merger.





Beijing Easycon Electronics Limited, or Easycon. We acquired 75% interest of Easycon in June 2007 and the remaining 25% interest in January 2008. Easycon specialized in providing IT services to smaller and regional commercial banks in China. Its banking integrative service management system and credit management system both hold a significant market share and are very well received among SMBs.





Beijing Yuxinhengsheng Information Technology Limited, or Yuxinhengsheng. We initially acquired 100% interest of Sunrisk in March 2007. Sunrisk is a risk management total solutions provider for the Chinese banking industry, focusing on consulting, product implementation and system integration in the area of enterprise risk management for financial institutions. In April 2008, Yuxinyicheng introduced a strategic investor to acquire 49% of Sunrisk’s equity interest. As a result, Yuxinyicheng’s equity interest in Sunrisk was reduced to 51% from 100%.





Chengdu Recency Technologies Limited, or Recency. We acquired 100% interest of Recency in June 2007. Recency is a business intelligence solution and consulting service provider for the Chinese banking industry, focusing on software development, information technology consulting, maintenance and support.





Shanghai Fujie Business Consulting Limited, or FujieWe acquired 100% interest of Fujie in October 2007. Fujie  is focusing on Enterprise Resource Planning, or ERP, management consulting, software development, maintenance and support.





Guangzhou Yuxinyicheng Information Technology Limited, or Guangzhou Yuxinyicheng. We established Guangzhou Yuxinyicheng in November 2007, and it provides system integration, software development, information technology consulting and maintenance and support to our customers.





Beijing Yuxinyicheng Software Co. Ltd., or Yuxinyicheng Software.We established Yuxinyicheng Software in 2008, a wholly owned subsidiary.





Beijing Sihitech Huazhi Consulting Service Co.,Ltd. or Huazhi.We established Huazhi in April 2009 in conjunction with SmartSoft and hold 40% interest, to provide high end IT consulting services for banks in China.





Yuxin Data Technologies Co., Ltd.(Tianjin) or Yuxin Data.We established Yuxin Data in March 2010, a joint venture with NTT Data Group and hold 49% interest, to provide E-Banking ASP services to small banks in China.





Yucheng Internet Technologies Co., Ltd or Yucheng Internet. We established Yucheng Internet in January 2011, to provide internet finance services. We hold 30% of equity interests in the company.


48





D. Property, plant and equipment.




Our principal executive offices is located at Beijing Global Trade Center, 36 North Third Ring Road East, Dongcheng District, Beijing where we lease approximately 3,593 square meters of office space. We have 7 other office locations in China, including Shanghai, Guangzhou, Xiamen, Chengdu, Dalian, Changchun and Tianjin. We own one property in Xiamen with a gross floor area of 1,258 square meters and another property in Beijing with a gross floor area of 373 square meters, and we lease properties in all other cities with an aggregate gross floor area of 5,208 square meters. We use all these properties as office space for our employees. The aggregate rent for all our offices is RMB764, 744 (USD122, 811) per month.




ITEM 4A.          UNRESOLVED STAFF COMMENTS




There are two outstanding SEC comments regarding the disclosure concerning (i) the assessment of goodwill impairment to conclude it is not impaired although the market capitalization of the company is less than the net book value of the company and (ii) disclosures related to restrictions placed on the registered capital and additional paid-in-capital of the company’s PRC entities.  The company is working to resolve these comments.




ITEM 5.             OPERATING AND FINANCIAL REVIEW AND PROSPECTS





The following discussion and analysis of our financial condition and results of operations in should be read in conjunction with the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements. In evaluating our business, you should carefully consider the information provided in “Item 3. Key Information — Risk factors”.





OVERVIEW





We are a leading provider of information technology, or IT, solutions and services to China’s domestic banking sector. Our solutions and services enable our clients to establish and maintain IT platforms and operational capabilities to better manage their operations and serve their customers’ needs.





Historically, we derived a majority of our revenues from providing system integration services (now included under Platform Services), which included selecting, procuring and reselling third-party hardware equipment and software applications to our clients, monitoring and assisting in the installation of such equipment and software at our clients’ sites and assisting in the integration of the installed equipment and software with our clients’ existing IT systems. Due to the lower gross margin and growth potential of Platform Services as compared to software-related solutions and services, in 2006 we began to shift our focus away from providing Platform Services.





Our current business focus is to develop and deliver an extensive suite of software-related solutions and services tailored toward specific functional needs of our clients. Our software-related solutions and services encompass all major categories of IT solutions used in China’s banking industry, namely Channel Solutions, Management Solutions and Business Solutions. Our revenues derived from providing software-related solutions and services have grown at a much faster pace than our revenues derived from Platform Services in recent years, in part due to our shifted business focus, and in part due to our acquisitions. For a detailed description, please see “Item 4. Information on the Company - A. History and development of the Company. - Corporate History.”




49





Our clients are primarily banking institutions in China; for a complete description, see “Item 4. B. Business Overview — Our Clients”.





We have one operating segment, we track our revenues by types and did not track expenses, operating income, or net income by revenue streams.





Our revenues was RMB403.6 million (USD 60.9 million) in 2010 from RMB354.5 million in 2009 and from RMB662.2 million in 2008.





·
Our Software & Solutions revenue grew from RMB263.9 in 2008 to RMB281.9 million in 2009 and to RMB333.5 million (USD 50.4 million) in 2010, representing a CAGR of 12.4%.





·
Our Platform Services revenue decreased to RMB8.4 (USD1.3 million) in 2010 from RMB12.5 million in 2009 and from RMB339.7 million in 2008.





·
Our Maintenance Services revenue grew from RMB58.7 in 2008 to RMB60.1 million in 2009 and to RMB61.7 million (USD 9.3 million) in 2010, representing a CAGR of 2.5%.





·
Our gross margins were 33.5% in 2008, 46.0% in 2009 and 48.8% in 2010.





Our net income was RMB 2.0 million (USD0.3 million) in 2010 as compared to the net loss of RMB4.2 million in 2009 and net income RMB81.0 million in 2008.





Our growth has been and will continue to be driven in large part by the sales of our solutions and services to our banking clients. We expect our sales of solutions and services to Joint-Stock banks and SMBs to continue to increase at a faster pace than our sales to the Top Four banks. Our past growth has been partly attributable to the acquisitions we made in 2007 as well as our acquisition of e-Channels in November 2006. We expect to continue to grow both organically and through acquisitions.





FACTORS AFFECTING OUR RESULTS OF OPERATIONS





Our results of operations in any period are affected by a number of factors, including factors affecting our industry and factors related to the management and operations of our businesses.





Factors affecting our industry





Growth of the banking industry in China and the need for third-party IT services providers





Our growth has been attributable to the rapid development of China’s banking industry. China’s banking industry has undergone significant reforms and modernization in recent years in order to manage the challenges associated with a rapidly developing economy and to fulfill China’s requirements as a WTO member. As part of such efforts, since 2005, a number of Chinese banks have listed their shares on the international stock exchange, including ICBC, which is the largest IPO to date, China Construction Bank, and Bank of China.





To continue to meet the demands of the changing market landscape in China, banks have greatly increased their IT spending in order to upgrade their systems and capabilities. As most of Chinese banks do not have strong in-house IT development capabilities, these banks largely rely on third-party IT service suppliers, such as us, to meet their IT needs. We expect that as competition in China’s banking industry intensifies, and as China’s banks strive to meet Basel II requirements, they will rely more heavily on third-party IT solution and service providers for their IT needs. Any factors that adversely affect the growth of China’s banking industry, such as a general slow-down in China’s economy, a global economic downturn, or the adoption of economic growth and inflation rate policies by the PRC central government, may reduce the profitability of China’s banks and result in a decrease in their IT spending, which could in turn adversely affect our business. Furthermore, our results of operations are also affected by the extent China’s banks continue to outsource their IT services. Any increase or decrease in the extent of outsourcing IT solutions and services by China’s banks will positively or negatively affect business opportunities available to us.


50





Changes in decision making over IT spending among our clients





We derive the substantial majority of our revenues by providing IT related solutions and services to China’s banks on a project-by-project basis. We have observed a recent shift in the way IT spending is decided in China’s banks, with more decisions being made at banks’ head offices instead of provincial level branches. Such centralization changes the competitive dynamics in our industry and generally favors large IT service providers with premium brands, broad product offerings and deep client relationships, in particular relationships with the bank’s head offices.





Competition in China’s banking IT service industry





Our results of operations have been, and will continually be primarily affected by, the competitive landscape in China’s banking IT service industry. Due to competitive pressures between banks, we have observed that SMBs in China are focusing more on an IT service provider’s reputation and service quality as compared to price when awarding IT projects, which enhances our competitive position. On the other hand, as more competitors enter the IT service market for big banks, these banks may be able to extract increasing pricing concessions. In addition, as China’s banking IT service industry develops, more global IT service providers are entering the market, which may further intensify competitive pressures.





Factors related to the management and operation of our businesses.





Revenue mix





We derive our revenues primarily from two sources, Software & Solutions and Platform & Maintenance Services. Platform Services has a much lower gross margin as compared to Software & Solutions and Maintenance Services. Our consolidated gross profit and gross margin are greatly affected by our revenue mix.




We began to shift our business focus to Software & Solutions in 2006. We currently typically only provide Platform & Maintenance Services as part of a larger client engagement that includes Software & Solutions, or if we anticipate that the Platform & Maintenance Services component will lead to future Software & Solutions revenue from the same client. As a result of these factors, our revenues from Platform & Maintenance Services as a percentage of total revenues on a net basis was 26.0% in 2008, 18.0% in 2009and15.8% in 2010. Our gross margins have therefore fluctuated in line with our revenue mix and were 33.5% in 2008, 46.0% in 2009 and 48.8% in 2010. We intend to continue to focus on providing Software & Solutions, and expect the percentage of our revenues from Platform & Maintenance Services to gradually decrease.


Timing of Chinese banks’ outsourced IT projects





Substantially all of our revenues are derived from outsourced IT projects for China’s Banks. As a result, our revenues for any given period are affected by the timing of our clients’ IT projects, which in turn depends on their internal budgeting and planning process. This process may differ, depending on the type of client and project. For example, the head offices of our Top Four and Joint-Stock bank clients generally determine the major IT solutions and services projects according to an annual budget and plan, which is usually finalized in the first calendar quarter of each year. In contrast, regional branches of these big banks and our SMB clients may decide smaller projects on ad hoc basis and follow a less precise schedule. For more detailed information, please see “Item 3. Key Information – D. Risk factors. – Risks relating to our business – Fluctuations in our clients’ annual IT budgets and spending cycles and other factors can cause our revenues and results of operations to vary significantly from quarter to quarter and from year to year.”


51





Client composition





In 2006, our clients were primarily China’s Top Four banks. Beginning in 2007, we have gradually expanded our client base to include more Joint-Stock banks as well as SMBs. The percentage of our revenues derived from Joint-Stock banks accounted for 12.9% in 2008, 24.7% in 2009 and 29.2% in 2010. At the same time, SMBs represented the following percentages of our revenues 19.3% in 2008, 23.2% in 2009 and 24.3% in 2010.





Top Four banks, because of their size, generally have the strongest bargaining power in their negotiations with us, and generally require extensive customization of our solutions. On the other hand, they have not been as price sensitive in the past because of the complexity of their projects and their financial resources; however, this trend may be changing due to increasing competition in the banking IT service industry. Joint-Stock banks project requirement and budgets are in many respects similar to the Top Four banks. In contrast, SMBs generally have fewer customization requirements, enabling us to sell repeatable solutions with minimal customization. In addition, we are more in an equal footing in contract negotiations with SMBs, which have gradually realized the benefits of our leading products. Our changing client composition and changes in their behavior are expected to affect our future results of operations.





Success in our acquisition and integration of acquired businesses





In addition to organic growth, we intend to grow by continuing to acquire or invest in complementary businesses to our existing business. Our acquisition of e-Channels in November 2006 and our acquisitions of five companies in 2007 broadened our solution and service offerings, increased our client base, strengthened our management talent and employee base and created a wider range of cross-selling and up-selling opportunities, which greatly contributed to our past growth, in particular our revenue growth from Software & Solutions and the improvement of our overall gross margin. Our future growth will continue to be affected by our ability to identify appropriate acquisition targets, acquire such targets at appropriate costs, integrate the acquired businesses with our existing businesses and realize synergies from such acquisitions. In addition, as China’s banks are becoming more sophisticated in their IT requirements, they are increasingly favoring large solution and service providers with solid financial background and broad product offerings. As a result, our industry will be consolidating, which we believe will present larger players in the industry, such as us, more opportunities to grow by acquisition.





CRITICAL ACCOUNTING POLICIES





Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of our assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.





An accounting policy is considered critical, if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this annual report.





Revenue recognition





The Company generates revenues primarily from Software & Solutions, Platform & Maintenance Services and POS services. Revenue is recognized as follows:


52


(i)Software & Solutions–Software & Solutions consist of software development services that require significant production, modifications, or customization of software or software system. Due to the long-term nature of software development, contract accounting is applied in accordance with ASC Topic 605-35, Construction-Type and Production-Type Contracts, and ASC Topic 985-605,Software - Revenue Recognition. Based on our fact pattern, we apply the percentage-of-completion method of revenue recognition to account for the software development to the period from the start of the significant production, modification, or customization through to the last element delivered, which is the end of the software development contract. Labor costs and direct project expenses are used to determine the stage of completion. Revisions in estimated contract profits are made in the period in which the circumstances requiring the revision first become known. Provisions, if any, are made for anticipated losses on uncompleted contracts whenever it appears there may be a loss.





Costs and estimated earnings in excess of billings on uncompleted contracts consist of recognized recoverable costs and accrued profits on contracts for which billings had not been presented to customers as of the balance sheet date.  Billings in excess of revenue recognized for which payments have been received are deferred until the applicable revenue recognition criteria have been met.





The determination of the amount of revenue requires us to make estimates about total cost to complete the project, including primarily labor costs, materials costs, travelling, etc., and the stage of completion. The assumptions, estimates, and uncertainties inherent in determining the stage of completion affect the timing and amounts of revenues and expenses reported. If we do not have a sufficient basis to measure the progress of completion or to estimate the total contract revenues and costs, revenue is recognized when the project is complete and, if applicable, the final acceptance is received from the customer. The over or under recognized contract profits will be recognized in the income statement when the actual costs were known or in the year in which the project is complete.





(ii) Platform & Maintenance Services–Platform & Maintenance Services consist of system integration service, agency sales and maintenance services. System integration services mainly consist of value added services of planning, designing, installing, integrating and testing of hardware sold to customers.  Revenue from system integration services is recognized in accordance with FASB ASC Topic 605, Revenue Recognition, when the following conditions are all met:  persuasive evidence of an arrangement exists, system integration services have been rendered and products have been delivered and accepted, the price is fixed or determinable and, collectibility is reasonably assured. Customer’s acknowledgement evidences their acceptance of the system integration work being completed at which time revenue is recognized. The contract revenue and related costs are deferred if the customer’s acknowledgement is not obtained.





Revenue from sales of IT equipment and software to the end users, which are limited to passing the IT equipment and software from vendors to end users, is treated as agency sales. The Company records the net difference between the amount it bills to end users and the fees charged by third party vendors as revenue. The Company considers the criteria set out in ASC Topic 605-45, Principal Agent Considerations, in determining whether it should recognize such revenues at gross or net of revenue. The Company believes that based on its arrangement with the system integrators, end users (banks) and the third party IT manufacturers, the net approach is appropriate as the Company is not the primary obligor to the end users, does not take general inventory risk, does not have latitude in establishing price and does not have discretion in supplier selection with respect to the IT equipment or software delivered to end users.





Maintenance service revenue is recognized ratably over the maintenance period.
 (iii) POS service–POS service is a business process outsourcing service, including merchant acquisition, deployment, installation and maintenance of POS terminals, merchant training and technical support. POS revenue is recognized in accordance with ASC Topic 605, when the following conditions are all met: persuasive evidence of an arrangement exists, service is performed, the price is fixed or determinable and, collectibility is reasonably assured. As of December 31, 2010, POS service was discontinued.


Allowance for Doubtful Accounts





Our allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.


53





Impairment of long-lived assets





The Company evaluates for impairment its long-lived assets to be held and used, including properties and equipment, intangible assets and other non-current assets, when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable in accordance with ASC Topic 360, Property, Plant and Equipment, or ASC Topic 350-30, General Intangibles Other than Goodwill, or ASC Topic 340,Other Assets and Deferred Cost. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to be generated by the asset.  If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value.





Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of carrying amount or estimated fair value less the cost to sell, and are no longer depreciated.





Judgments and assumptions are inherent in management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the consolidated financial statements.





Capitalization of internal software development costs





Internal development of software products is accounted for in accordance with ASC Topic 985-20, Costs of Software to be Sold, Leased, or Marketed. ASC Topic 985-20 requires that the cost of developing software be expensed prior to establishing technological feasibility and those costs be capitalized once technological feasibility has been established. Capitalization ceases upon general release of the software. The determination of whether internal software development costs are subject to capitalization is, by its nature, highly subjective and involves significant judgments. This decision could significantly affect earnings during the development period. Also, judgment is required in determination of no significant subsequent testing cost will be incurred after the capitalization of software development costs. Further, once capitalized, the software costs are generally amortized on a straight-line basis over the estimated economic life of the product. The determination of the expected useful life of a product is highly judgmental. Finally, capitalized software costs must be assessed for realizability at the end of each reporting period.





Pre-contract costs





Due to the business environment in which the Company operates, it is common practice that the Company commences the software development or IT consulting project for its banking clients without commercial contracts being signed. If the contracts are not obtained during the reporting period where implementation costs have been incurred, the Company defers revenue recognition for the related contracts until contracts are obtained. In accordance with ASC Topic 720-15, Start-Up Costs, costs that are incurred for a specific anticipated contract and that will result in no future benefits unless the contract is obtained, including cost of equipment, direct labour costs, and other ancillary costs, are deferred until receipt of the signed contract, and are then included in contract costs or inventory.  Such deferred costs, subject to their not being related to costs of start-up activities, are evaluated periodically for probability of recoverability.  If deemed unrecoverable, deferred costs are expensed to operating expenses.





Costs of start-up activities, including organization costs, are expensed as incurred.





Costs incurred in connection with anticipated contracts are deferred outside the contract cost or inventory classification if their recovery from future contract revenue or from other dispositions is considered probable.




54


Goodwill
 
 The company initially measures goodwill in accordance with ASC 805, “Business Combinations”. Goodwill as of the acquisition date is measured as the excess of consideration transferred, which is also generally measured at fair value, and the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed.
 
 Goodwill is required to be tested at least on an annual basis for impairment or on an interim basis if an event occurs of circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Company assesses goodwill for impairment by periodically comparing the fair value of its reporting units to their carrying amounts to determine if there is potential impairment. If there is a potential impairment, an impairment loss is recognized for any excess of the carrying amount of the goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit goodwill. Fair values for reporting units are determined based on discounted cash flow analysis, market multiples or appraised values, as appropriate. The carrying value at December 31, 2010 of goodwill of the reporting unit is USD49.6 million. For step one of our impairment test, we determined the fair value of the reporting unit using a discounted cash flow analysis. The principal factors in the discounted cash flow analysis are:
 
 l
Forecasted revenues from three business lines, software and solutions, maintenance services, and platform service.
 l
Forecasted 18% weighted average cost of capital which is based on the average of the capital structure, cost of capital and inherent business risk profiles of the Company
 
 The calculated fair value of the reporting unit exceeds the carrying value of goodwill, of approximately 10%.
 
 Based on above, the management concluded that there was no impairment of goodwill as of December 31, 2010.
 
 The following events could change the results of our analysis, therefore, they could have a material adverse effect on the estimated future discounted cash flows:
 l
Significant underperformance of our business relative to expected operating results;
 l
Significant adverse economic and industry trends;
 l
Significant decline in our market capitalization for an extended period of time relative to net book value; and
 l
Expectations that a reporting unit will be sold or otherwise disposed.


Income taxes





Our effective tax rate includes the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be indefinitely reinvested outside the United States. Remittances of foreign earnings to the U.S. are planned based on projected cash flow, working capital and investment needs of our foreign and domestic operations. Based on these assumptions, we estimate the amount that will be distributed to the U.S. and provide U.S. federal taxes on these amounts. Material changes in our estimates could impact our effective tax rate.





We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We consider future growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.


55





RECENTLY ISSUED ACCOUNTING STANDARDS





Recently Adopted Accounting Pronouncements





In February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various Topics. This update’s purpose is to eliminate GAAP inconsistencies, update outdated provisions, and provide needed clarifications. The adoption of ASU No. 2010-08 did not have a material impact on the Company’s consolidated financial statements.




In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair Value Measurements, under ASC Topic 820, Fair value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3.  This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosure is effective for interim and annual reporting periods beginning after December 15, 2009, which the Company adopted this statement as of January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company is currently accessing the impact, if any, of ASU No. 2010-06 disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements the Company’s consolidated financial statements.




RECENT ACCOUNTING PRONOUCEMENTS NOT YET ADOPTED





In October 2009, the FASB amended the Accounting Standards Codification (“ASC”) as summarized in ASU 2009-14, Software (ASC Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application.The Company is currently evaluating the impact of ASU 2009-13 and ASU 2009-14, if any, that they may have on the Company’s consolidated financial statements.


56





A. Operating Results.





The following table sets forth a summary of our consolidated statement of operations for the periods indicated. The operation results of any period are not necessarily indicative of the results that may be expected for any future period.




2008


2009


2010RMB


RMB


RMB


USDRevenues


662,197



354,470



403,644



60,949Cost of revenues


(440,120
)


(191,333
)


(206,647
)


(31,203
)Gross profit


222,077



163,137



196,997



29,746Research and development


(10,148
)


(13,829
)


(10,531
)


(1,590
)Selling and marketing


(33,369
)


(41,126
)


(44,762
)


(6,759
)General and administrative


(88,572
)


(117,207
)


(104,465
)


(15,774
)Gain (loss) on disposal of intangible assets and fixed assets


-



(182
)


4,315



652(132,089
)


(172,344
)


(155,443
)


(23,471
)Other income (expenses):Interest income


1,244



406



319



48Interest expense


(3,783
)


(2,861
)


(4,527
)


(684
)Investment gain (loss)


(529
)


1,203



-



-Other income, net


510



8,414



(94
)


(14
)Total other income (expenses)


(2,558
)


7,162



(4,302
)


(650
)Income (loss) before income taxes


87,430



(2,045
)


37,252



5,625Income tax (expenses) benefits


5,181



5,250



(5,259
)


(794
)Income (loss) before equity method investees


92,611



3,205



31,993



4,831Loss from equity method investees


(1,280
)


(3,830
)


(557
)


(84
)Income (loss) before discontinued operations


91,331



(625
)


31,436



4,747Loss from operations of discontinued subsidiaries


(10,444
)


(6,816
)


(32,206
)


(4,863
)Income (loss) before non-controlling interests


80,887



(7,441
)


(770
)


(116
)Non-controlling interests


108



3,241



2,735



413Net income(loss)


80,995



(4,200
)


1,965



297





REVENUES





In 2008, 2009 and 2010, our overall revenues amounted to RMB662.2 million, RMB354.5 and RMB403.6 million (USD60.9 million), respectively. We categorize our revenues by source as Software & Solutions and Platform & Maintenance Services.





Software & Solutions





Software & Solutions includes revenues we generated from software and software-related solutions, such as sale of software licenses, custom software development, IT consulting services and implementation.





We generally provide software-related solutions and services to our clients on a project-by-project basis, and record revenues based on the percentage of completion of our client projects. Our Software & Solutions revenues can be further broken into Channel Solutions, Business Solutions and Management Solutions.





Software & Solutions is the focus of our core business. Software & Solutions revenue as a percentage of our revenues accounted for 39.8% in 2008, 79.5% in 2009 and 82.6% in 2010. We expect that Software & Solutions revenue will be our primary area of revenue growth in the near future, and its percentage of our revenues will continue to increase over time.





Platform & Maintenance Services





Platform & Maintenance Services revenue consists of revenues we generated from the procurement and resale of third-party hardware and software to our clients, the related installation and integration services, IT maintenance and other services. Similar to our Software & Solutions, we also provide Platform & Maintenance Services on a project-by-project basis, and record revenues based on the delivery of the service.




57





Platform & Maintenance Services have been historically a major part of our business. However, we increase the breadth of our IT capabilities and our service strength; we have been focusing on our Software & Solutions business, which have higher margins and greater long-term potential. We currently provide Platform & Maintenance Services as a component of a larger client engagement that includes Software & Solutions projects, or if we anticipate that the Platform & Maintenance Services project will lead to future Software & Solutions projects from the client. Platform & Maintenance Services revenue as a percentage of our revenues accounted for 60.2% in 2008, 20.5% in 2009, and 17.4% in 2010. We expect to gradually reduce Platform & Maintenance Services as a percentage of our revenues





Revenues by sources





The following table sets forth our revenue sources and the corresponding percentage relative to our total revenues for the periods indicated. We had a CAGR of -21.9% from 2008 to 2010, including a CAGR of 13.6% for Software & Solutions.




For the Year Ended December 31,2008


2009


2010% change








% change% of





% of


from





% of


fromRevenues by sources

Amount


total


Amount


total


2008


Amount


total


2009RMB


%


RMB


%


%


RMB


USD


%


%(in thousands, except percentages)Software & Solutions


263,881



39.8



281,894



79.5



6.8



333,543



50,364



82.6



18.3Platform services


339,656



51.3



12,505



3.5



(96.3
)


8,441



1,275



2.1



(32.5
)Maintenance and ancillary services


58,660



8.9



60,070



16.9



2.4



61,659



9,310



15.3



2.6Total


662,197



100.0



354,470



100.0



(46.5
)


403,644



60,949



100.0



13.9




Software & Solutions revenue by solution type





We provide different types of software-related solutions, including Channel Solutions, Management Solutions and Business Solutions. We experienced rapid growth in Channel Solutions and Business Solutions from 2008 to 2010. The following table sets forth our Software & Solutions revenue by solution type.




For the Year Ended December 31,2008


2009


2010% change








% changeSoftware & Solutions




% of





% of


from





% of


fromrevenue by type

Amount


total


Amount


total


2008


Amount


total


2009RMB


%


RMB


%


%


RMB


USD


%


%(in thousands, except percentages)Channel related


97,748



37.0



131,660



46.7



34.7



122,737



18,533



36.8



(6.8
)Business related


72,283



27.4



78,928



28.0



9.2



131,130



19,800



39.3



66.1Management related


93,850



35.6



71,306



25.3



(24.0
)


79,676



12,031



23.9



11.7Total


263,881



100.0



281,894



100.0



6.8



333,543



50,364



100.0



18.3




Revenues by client types





Our clients are primarily China’s banks; however, we also provide IT-related solutions and services to certain non-banking clients, such as government agencies and other corporations when such market demand arises. However, we generally do not actively market our solutions and services to these clients and we do not consider them as our core clients.


58





We provide Software & Solutions primarily to Top Four banks, in particular China Construction Bank. In 2008, 2009 and 2010, our revenues from China Construction Bank, our largest client, amounted to RMB322.3 million, RMB120.7 million and RMB 91.6 million (USD14.7 million), respectively, and accounted for 48.7%,34.0% and 22.7%, respectively, of our total revenues. Our contracts with China Construction Bank were signed separately with different departments within the bank group, branches at the provincial level and headquarters and we consider each of them effectively separate clients, since the decision makers and budgets are unrelated. China Construction Bank has been our client since 1999, and we have maintained a good relationship with various organizations within the bank.





Starting in 2007, we have actively expanded our client base to include more Joint-Stock banks and SMBs, both through organic growth and through acquisitions of companies with clients in those segments. As a result, revenues from our Joint-Stock bank clients increased by RMB32.3 million, from RMB85.4 million in 2008 to RMB117.7 million (USD17.8 million) in 2010, and their percentage of our total revenues increased from 12.9% in 2008 to 24.7% in 2009 and to 29.2% in 2010. Furthermore, our revenues from SMBs and other banks was RMB127.9 million in 2008, RMB82.2 million in 2009 and RMB98.2 million (USD14.8 million) in 2010, and their percentage of our total revenues increased from 19.3% in 2008 to 23.2% in 2009 and to 24.3%in 2010.





The following table sets forth our Software & Solutions revenue by client type for the periods indicated.




2008


2009


2010Software &













% change








% changeSolutions by













from








fromclient type

Amount


% of total


Amount


% of total


2,008


Amount


% of total


2,009RMB


%


RMB


%


%


RMB


USD


%


%(In thousands,except percentage)Top Four Banks (Tier I)


119,455



45.3



121,551



43.1



1.8



101,560



15,335



30.4



(16.4
)Joint-Stock Banks (Tier II)(1)


46,630



17.7



59,195



21.0



26.9



104,060



15,713



31.2



75.8SMBs (Tier III)and Other Banks(2)


63,653



24.1



75,138



26.7



18.0



81,826



12,355



24.5



8.9Other(3)


34,142



12.9



26,010



9.2



(23.8
)


46,096



6,960



13.8



77.2Total


263,881



100.0



281,894



100.0



6.8



333,543



50,364



100.0



18.3


59





(1) Includes policy banks.


(2) Includes PBOC and foreign banks.


(3)Includes mostly platform revenues from security brokerage companies and telecom companies, and software revenues subcontracted from third parties, whose end customers are also banks in China





From 2009 to 2010, our Software & Solutions revenue from Joint-Stock banks grew at 75.8%, which is much faster than our total revenue growth because we focused on providing Software & Solutions to these bank clients. As a result, our percentage of Software & Solutions revenue from Joint-Stock banks increased to 31.2% in 2010, compared to 21.0% in 2009. The percentage of Software & Solutions from SMBs decreased to 24.5%, compared to 26.7% in 2009.





The following table sets forth our Platform & Maintenance Services revenue by client type for the periods indicated.




2008


2009


2010Platform &













% change











% changemaintenance services by













from











fromclient type

Amount


% of total


Amount


% of total


2,008


Amount


% of total


2,009RMB


%


RMB


%


%


RMB


USD


%


%(In thousands,except percentage)Top Four Banks (Tier I)


262,598



65.9



17,143



23.6



(93.5
)


22,246



3,359



31.7



29.8Joint-Stock Banks (Tier II)(1)


38,729



9.7



28,404



39.1



(26.7
)


13,609



2,055



19.4



(52.1
)SMBs (Tier III)and Other Banks(2)


64,274



16.1



7,039



9.7



(89.0
)


16,413



2,478



23.4



133.2Other(3)


32,714



8.2



19,990



27.5



(38.9
)


17,833



2,693



25.4



(10.8
)Total


398,316



100.0



72,576



100.0



(81.8
)


70,101



10,585



100.0



(3.4
)




(1) Includes policy banks.


(2) Includes PBOC and foreign banks.


(3)Includes mostly platform revenues from security brokerage companies and telecom companies, and software revenues subcontracted from third parties, whose end customers are also banks in China





As we further penetrate into Joint-Stock banks and SMBs, we expect our revenue contributions from these clients to continue to increase, in particular revenues from Software & Solutions, resulting in further optimization of our revenue mix. Meanwhile, we expect our revenue concentration on Top Four banks and China Construction Bank to continue to decline.





COST OF REVENUES





Our cost of revenues includes costs directly attributable to revenues. Our overall cost of revenues increased 8.0% to RMB206.6 million (USD31.2 million) in 2010, compared to RMB191.3 million in 2009 in line with the revenues growth. For Software and Solutions line of businesses, cost of revenues consists mostly of wages, benefits, and travel costs for engineers who work on projects. The headcount of our engineers increased from 1383 in 2008, 1527 in 2009 to 1971 in 2010, resulting the cost of revenues increased over the year.


60




The following table sets forth our cost of revenues by revenue source for the periods indicated.




For the Year Ended December 31,2008


2009


2010Cost of




% of





% of








% ofrevenues by sources

Amount


total


Amount


total


Amount


totalRMB


%


RMB


%


RMB


USD


%(in thousands, except percentages)Software & Solutions


(118,167
)


26.8



(156,678
)


81.9



(170,737
)


(25,781
)


82.6Platform services


(305,639
)


69.4



(10,515
)


5.5



(7,687
)


(1,161
)


3.7Maintenance and ancillary services


(16,314
)


3.7



(24,140
)


12.6



(28,223
)


(4,261
)


13.7Total


(440,120
)


100.0



(191,333
)


100.0



(206,647
)


(31,203
)


100.0




Our cost of revenues on a net basis grew from RMB134.5 million in 2008 to RMB180.8 million in 2009 and to RMB199.0 million (USD30.0 million) in 2010, representing a CAGR of  17.8%, including a CAGR of 16.8% for Software & Solutions and a CAGR of  24.0% for Maintenance Services. We have included a net basis representation to reflect our costs and distinguishes between our own costs and the cost of third-party hardware and software. Below are our costs of revenues as recognized on a net basis.





For the Year Ended December 31,2008


2009


2010Cost of




% of





% of








% ofrevenues by sources

Amount


total


Amount


total


Amount


totalRMB


%


RMB


%


RMB


USD


%(in thousands, except percentages)Software & Solutions


(118,167
)


87.9



(156,678
)


86.6



(170,737
)


(25,781
)


85.8Platform services


0



0.0



0



0.0



0



0



0.0Maintenance and ancillary services


(16,314
)


12.1



(24,140
)


13.4



(28,223
)


(4,262
)


14.2Total


(134,481
)


100.0



(180,818
)


100.0



(198,960
)


(30,043
)


100.0





Software & Solutions





Our cost of revenues for Software & Solutions primarily relates to costs associated with the design, implementation, delivery and maintenance of our solutions and related services, which includes primarily staff costs, travel expenses and outsourcing costs in connection with the development and implementation of IT solutions and service projects for our clients, and to a lesser extent, amortization of intangible assets related to our solutions that we provide to our clients and allocated overhead costs relating to our project development and implementation staff. The allocated overhead costs include primarily communication costs, depreciation and other general office-related costs.





Platform & Maintenance Services





Our cost of revenues for Platform & Maintenance Services primarily consists of costs for purchase of third-party hardware and software that we resell to our clients. It also includes related transportation and insurance costs as well as staff costs for the procurement and installation of such hardware and software. We expect cost of revenues relating to Platform & Maintenance Services to increase generally in line with the increase in revenues from such service.





GROSS PROFIT AND GROSS MARGIN




The following table sets forth our gross profit and gross margin for the periods indicated, our gross margin is more volatile due to our revenue mix since Platform Services has a much lower gross margin as compared to Software & Solutions.


61




For the Year Ended December 31,2008


2009


2010Gross


Gross


Gross


Gross


Gross


Grossprofit


margin


profit


margin


profit


marginRMB


%


RMB


%


RMB


USD


%(in thousands, except percentages)Software & Solutions


145,714



55.2



125,216



44.4



162,807



24,583



48.8Platform services


34,017



10.0



1,990



15.9



754



114



8.9Maintenance and ancillary services


42,347



72.2



35,931



59.8



33,436



5,049



54.2Total


222,077



33.5



163,137



46.0



196,997



29,746



48.8




Software &Solutions: the gross margin was 48.8% for the year ended December 31, 2010 compared to 44.4% for the year end December 31, 2009. The increase was primarily due to the better cost management of the software development project.
 
 Platform Services: the gross margin was 8.9% for the year ended December 31, 2010 compared to 15.9% for the year end December 31, 2009. The decrease was primarily due to the gross margin of several Platform Services projects in 2009 were higher than normal level, which is 10%.
 
 Maintenance Services: the gross margin was 54.2% for the year ended December 31, 2010 compared to 59.8% for the year end December 31, 2009. The decrease was primarily due to the decrease of agency revenue.




OPERATING EXPENSES





Our operating expenses consist of research and development expenses, selling and marketing expenses and general and administrative expenses. Our operating expenses decreased 9.8% from RMB172.3 million in 2009 to RMB155.4 million (USD23.5 million) in 2010, primarily due to decrease in general and administrative expenses, which will be analyzed in greater detail in the following section. The following table sets forth our operating expenses for the periods indicated.




For the Year Ended December 31,2008


2009


2010RMB


RMB


RMB


USD(in thousands)Research and development


(10,148
)


(13,829
)


(10,531
)


(1,590
)Selling and marketing


(33,369
)


(41,126
)


(44,762
)


(6,759
)General and administrative


(88,572
)


(117,207
)


(104,465
)


(15,774
)Gain (loss) on disposal of intangible assets and fixed assets


-



(182
)


4,315



652Total


(132,089
)


(172,344
)


(155,443
)


(23,471
)


Research and development expenses





R&D expenses consist primarily of staff costs, which include salaries, bonuses and benefits for research and development personnel. R&D expenses also include travel expenses of our research and development personnel as well as depreciation of hardware equipment and software tools and other materials used in our research and development activities. We capitalize certain internal software development expenses after technological feasibility is established, which are amortized according to its estimated useful life. Our internal software development expenses amounted to RMB13.7 million as of the end of 2008, RMB22.2 million as of the end of 2009 and RMB18.3 million (USD2.8 million) as of the end of 2010, of which RMB3.6million, RMB8.4 million and RMB7.8 million (USD1.2 million) were capitalized in 2008, 2009 and 2010, respectively. The capitalized amounts will be amortized according to its useful life. We also incur significant R&D related costs in connection with our client projects, which we record as cost of revenues for the client projects rather than R&D expenses.





The number of our R&D personnel totaled 40 in 2008, 52 in 2009 and 71 in 2010.We expect our R&D expenses to continue to increase as we further expand our solution and service offerings. Our R&D expenses as a percentage of our Software & Solutions revenues were 3.8% in 2008, 5.1 in 2009 and 3.1% in 2010.


62





Selling and marketing expenses





Selling and marketing expenses consist primarily of salaries, bonuses, sales commissions, and benefits for sales and marketing personnel. Selling and marketing expenses also include expenses associated with business development activities with our clients, travel expenses of our sales and marketing personnel, as well as overhead costs allocated to our sales and marketing personnel, such as office rent, furniture cost, communication cost and depreciation. We generally do not advertise to promote our businesses. Instead, we conduct targeted business development activities with our clients.





Our total sales and marketing expenses were RMB33.4 million, RMB41.1 million and RMB44.8 million (USD6.8 million) for 2008, 2009 and 2010 respectively. Our selling and marketing expenses increased by 9.0% from RMB41.1 million in 2009 to RMB44.8 million (USD6.8million) in 2010, primarily due to the increase in personnel cost. Our overall selling and marketing expenses as a percentage of revenues were 5.0% in 2008, 11.6% in 2009 and 11.1% in 2010. Our overall selling and marketing expenses as a percentage of revenues decreased from 11.4% in 2009 to 10.9% in 2010, mainly due to the increase in our revenues.




We expect our selling and marketing expenses to continue increase with revenues as we expand our product offerings and revenues.





General and administrative expenses





General and administrative expenses consist primarily of salaries, bonuses and benefits for administrative personnel, such as personnel in our management, finance and accounting, legal and human resource functions, their travel expenses and other expenses for general administrative functions, costs for professional services, including legal, tax and accounting services, and allocation of overhead costs to general and administrative functions, such as rent, communication and depreciation. Our general and administrative expenses also include amortization of intangible assets relating to our acquisition of e-Channels, which amounted to RMB1.2 million and Stock-based compensations of RMB 8.2 million in 2010.





Our general and administrative expenses were RMB88.6 million in 2008, RMB117.2 million in 2009 and RMB104.5 million (USD15.8 million) in 2010 respectively. Our general and administrative expenses decreased 10.9% from RMB117.2 million in 2009 to RMB104.5 million (USD15.8million) in 2010, primarily attributable to a bad debt charge of RMB18.3 million which we took in 2009.





Our general and administrative expenses are shown net of technology subsidies, value-added tax refunds, business tax and surcharges refunds and other government credits we receive from the relevant PRC government authorities. Technology subsidies are granted by the relevant local PRC government to encourage development of high-tech enterprises. Value-added tax is charged at a rate of 17% of the gross sales proceeds received. Pursuant to relevant PRC laws and regulations, we are entitled to a refund of 14% of the value-added tax for certain self-developed software products. Business tax and surcharges are levied based on 5.5% of revenues. We received refunds for business tax and surcharges for revenues generated from contracts relating to technology development. Others include refund of certain loan interest and other supporting funds from local governments. The table below sets forth the amount of technology subsidies and other refunds that we received in the periods indicated.





2008


2009


2010RMB


RMB


RMB


USD(In thousands)Value-added tax refund for software products sold


4,318



3,920



124



19Technology subsidy


1,314



395



-



-Business tax and surcharges refund


-



60



1,258



190Finance Subsidy


-



-



4,017



607Others


531



30



9



1Total


6,163



4,405



5,408



817


63




INCOME BEFORE INCOME TAXES
 
 As a result of the foregoing, our income before income taxes was RMB87.4 million in 2008,loss before income taxes was RMB2.0 million in 2009 and income before income taxes was RMB37.3 million (USD5.6 million) in 2010 and our margin increased to 9.2% from -0.6% in 2009.
 
 Other income (expenses)
 
 Total other expenses was RMB4.3 million (USD0.6 million) in 2010 as compared to total other income of RMB7.2 million in 2009, primarily due to an decrease in investment income of RMB1.2 million and an decrease in other income of RMB8.5 million.





Non-controlling interests





Non-controlling interests amounted to RMB-2.7million (USD-0.4 million) in 2010 as compared to RMB -3.2 million in 2009, primarily due to the net loss occurred from Sunrisk business.





INCOME TAXES





Our PRC subsidiaries are subject to PRC enterprise income tax, which is calculated based on taxable income determined under PRC accounting principles. On March 1, 2007, the Fifth Plenary Session of the Tenth National People’s Congress passed the Corporate Income Tax Law of the PRC (“New Tax Law”) which was taken effect on January 1, 2008. As a result of the new tax law, the statutory income tax rate changed from 33% to 25% with effect from January 1, 2008. The preferential tax rate previously enjoyed by the Company would be gradually transitioned to the new standard rate of 25% over a five-year transitional period. In addition, article 28 of the New Tax Law states that the income tax rate of the “high-tech” company will remain at 15%. Accordingly, the carrying amount of the deferred tax assets and liabilities, as a result of the change in tax rate, was adjusted in the consolidated statements of operations of the Company for year ended December 31, 2008.





Under current enterprise income tax regime, some of our subsidiaries reacquired the high-tech enterprises qualifications and continued enjoying the preferential income tax rate and /or the tax holidays. As a result, our income tax expenses were RMB-5.2 million, RMB-5.3 million and RMB5.3 million (USD0.8 million) , and our effective tax rate was -6.0%, 89.4% and 14.3% in 2008, 2009 and 2010, respectively. Without the preferential income tax rate and the tax holiday, our income tax expenses would have been RMB26.1 million, RMB0.4million and RMB14.6 million (USD2.2million) in 2008, 2009 and 2010, respectively.




The New EIT Law reduced the statutory tax rate to 25%, but repealed most of the preferential tax treatments, including the preferential tax rates and the tax holidays. However, the New EIT Law provides a five-year transition period that allows enterprises which enjoyed certain preferential tax treatment under the old enterprise income tax regime to gradually transition to the 25% statutory rate in a prescribed fashion. According to a notice issued by the PRC State Council, for enterprises which enjoyed preferential income tax rate of 15% pursuant to certain prior tax rules or regulations specified in the notice, the applicable enterprise income tax rate will increase to 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012 and thereafter. For tax holidays specified in the notice, enterprises already enjoying the holidays prior to January 1, 2008 can generally continue to enjoy such tax holidays until their expiration, upon which time the 25% tax rate will apply. All other preferential tax treatments have generally terminated on December 31, 2007. The New EIT Law also provides that the State Council can grant tax waivers or preferential tax rates for “qualified high-tech or new-tech companies in need of special state support”. Due to the application of the New EIT Law and its implementation rules, certain of our subsidiaries may no longer be able to enjoy any preferential income tax treatment, and certain others may need to pay higher transitional income tax rates starting January 1, 2008. As a result, we expect our effective income tax rate to gradually increase from our 2008 level unless we qualify for new tax benefits under the new tax regime.





In addition, pursuant to the New EIT Law and its implementation rules, we may be deemed as PRC resident enterprise if our “de facto management body” is located in China, in which case our global income will be subject to PRC income tax at the rate of 25%. However, it is currently unclear how the “de facto management body” is determined. See “Item 3. Key information — D. Risk factors — Risks related to doing business in China — We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and we may therefore be subject to PRC income tax for any dividends we receive from our subsidiaries, which may materially and adversely affect the amount of dividends we must pay to our shareholders.” If we are not deemed as a PRC resident enterprise, then our dividend payable by our PRC subsidiaries to us will be subject to 10% withholding tax if such dividend is derived from profits generated after January 1, 2008.


64





Income tax expenses





Income tax expenses were RMB5.3 million (USD0.8 million) in 2010 compared with an income tax benefit RMB5.3 million in 2009 and RMB5.2 million in 2008. Our effective tax rate was 14.3% in 2010 compared with 89.4% in 2009 and -6.0% in 2008.





NET INCOME





As a result of the previous factors, our net income from continued operations increased from RMB 2.6 million in 2009 to RMB 34.2 million (USD 5.2 million) in 2010. Our net income increased from RMB-4.2 million in 2009 to RMB2.0 million (USD0.3 million) in 2010. The corresponding net margin was -1.2% in 2009 and 0.5% in 2010. Our net income from continued operations was RMB 91.4 million, our net income was RMB81.0 million in 2008 and the corresponding net margin was 12.2% in 2008.





INFLATION





According to the National Bureau of Statistics of China, China’s overall national inflation rate, as represented by the general consumer price index, was approximately 5.9%, -0.7% and 3.3% in 2008, 2009 and 2010, respectively. Given the volatility and uncertainty, we cannot make any assurances that we will not be adversely affected by inflation and/or deflation in the future.





B.    Liquidity and capital resources.





LIQUIDITY AND CAPITAL RESOURCES





We have historically financed our operations through sales of equity interests, bank loans and cash generated from operations. For the years ended December 31, 2008, 2009 and 2010, our operating activities, acquisitions and strategic investment have been our principal uses of cash. As of December 31, 2010, we had RMB162.5 million (USD24.5 million) in cash and cash equivalents, consisting of cash on hand and bank deposits with original maturity of three months or less.





We believe that our current cash and anticipated cash flow from operations is sufficient to meet our current cash needs. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. In the long-term, we intend to rely primarily on cash flow from operations and additional borrowings from banks to meet our anticipated cash needs. If our anticipated cash flow is insufficient to meet our requirements, we may also seek to sell additional equity, debt or equity-linked securities. We cannot assure you that any financing will be available in the amounts we need or on terms acceptable to us, if at all.





The following table sets forth our outstanding borrowings as of the dates indicated.





For the Year Ended December 31,2008


2009


2010RMB


RMB


RMB


USD(in thousands)Short-term bank borrowings


60,000



80,000



81,000



12,231Current portion of long-term bank borrowings


-



-



-



-Total


60,000



80,000



81,000



12,231




65




The outstanding short-term borrowings of RMB81.0 million (USD12.2 million) as of December 31, 2010 comprise four short-term loans we borrowed in 2010.  One was for a principal amount of RMB40 million from March 29, 2010 to March 28, 2011 with an annual interest rate of 5.91%. The second was for a principal amount of RMB20 million from June 3, 2010 to June 2, 2011 with an annual interest rate of 5.94%. The third was for a principal amount of RMB 1 million from June 24, 2010 to June 23, 2011 with an annual interest rate of 5.95%. The fourth was for a principal amount of RMB20 million from September 15, 2010 to July 14, 2011 with an annual interest rate of 5.62%.These three loans were guaranteed by Beijing Sihitech and Mr. Weidong Hong, our Chief Executive Officer.





The following table sets forth a summary of our cash flows for the periods indicated.





For the Year Ended December 31,2008


2009


2010RMB


RMB


RMB


USD(in thousands)Net cash (used in) provided by operating activities


106,315



64,974



(24,584
)


(3,712
)Net cash used in investing activities


(88,820
)


(55,438
)


(54,291
)


(8,198
)Net cash provided by (used in) financing activities


(238
)


(2,710
)


(5,166
)


(780
)Net increase in cash


17,257



6,826



(84,041
)


(12,690
)Cash and cash equivalents at beginning of year


222,494



239,751



246,577



37,232Cash and cash equivalents at end of year


239,751



246,577



162,536



24,542




We had a net cash outflow from operating activities of RMB24.6 million (USD3.7 million) in 2010 compared with a net cash inflow of RMB65.0 million in 2009. Our net cash outflow from operating activities in 2010 was primarily due to an increase in trade accounts receivables of RMB77.8 million, including an impact of disposal of POS Company of RMB29.5 million.




The number uncompleted projects as of the end of fiscal year increased from 286 in 2009 to 491 in 2010. Accumulated billings for project which is at an earlier stage of completion is normally less than accumulated billings for project which is at a later stage of completion. The company normally starts issuing invoices when a project is 30% completed. As of December 31, 2010, 26% of uncompleted projects were less than 30% completed whereas 8% of uncompleted projects were less than 30% completed as of December 31, 2009.




We had a net cash inflow from operating activities of RMB65.0 million (USD9.5 million) in 2009 compared with a net cash inflow of RMB106.3 million in 2008, while our revenues decreased to RMB380.4 million (USD55.7 million) in 2009 compared with RMB676.8 million in 2008. Our net cash inflow from operating activities in 2009 was primarily due to an decrease in trade accounts receivables of RMB116.4 million, offset by a decrease in trade accounts payable of RMB51 million and an increase inthe billings in excess of costs and estimated earnings on uncompleted contracts of RMB3.7 million.The decrease of accounts receivables was mainly due to implementation of a new compensation scheme gave incentive to our sales staff which resulted in quicker collection of receivables from our customers.





We had a net cash inflow from operating activities of RMB106.3 million in 2008 compared with a net cash outflow of RMB33.3 million in 2007, while our revenues increased to RMB676.8 million in 2008 compared with RMB435.5 million in 2007. Our net cash inflow from operating activities in 2008 was primarily due to an increase in trade accounts payable of RMB51.3 million, a decrease in other current assets of RMB44.5 million, an increase in other current liabilities of RMB9.9 million. The increase in trade accounts payable was primarily due to better credit terms we were able to get from our suppliers and an increase in our business volume. The decrease in other current assets was primarily due to a decrease of payment in advance to our vendors as of December 31, 2008, the increase in other current liabilities was primarily due to increased VAT payable which was resulted from the increased revenue.





Investing activities





Net cash used in investing activities was RMB54.3 million (USD8.2million) in 2010, primarily comprising payment of capital expenditure of RMB21.4 million, payment of purchase of subsidiaries of RMB1.6 million and new investment of joint venture of RMB29.4 million, partially offset by proceeds from disposal of investment under equity method of RMB2.6 million.


66





Net cash used in investing activities was RMB55.4 million (USD8.1million) in 2009, primarily comprising payment of capital expenditure of RMB35.6 million, advances to investments under equity method of RMB22.8 million, payment of purchase of subsidiaries of RMB11.1 million and investment in equity method investments of RMB13.7 million, partially offset by collection of advances to investments under equity method of RMB21.2 million and proceeds from disposal of investment under equity method of RMB8.0 million.





Net cash used in investing activities was RMB88.8 million in 2008, primarily comprising payment of purchase of subsidiary and establishment of a joint venture, Elegon Infotech Ltd., of RMB62.7 million and capital expenditure of RMB29.7 million, partially offset by proceeds from disposal of an affiliate of RMB3.6 million. Payment of purchase of subsidiary related to our acquisitions of Sunrisk, Recency, Easycon, Fujie and Fuyi, and capital expenditure related to the purchase of POS terminals and other hardware equipment and software tools for our research and development activities as well as office decoration expenses due to the increase of our number of offices nationwide.





Financing activities
 Net cash used in financing activities was RMB5.2 million (USD0.8 million) in 2010, primarily comprising net change in bank borrowings of RMB1.0 million, dividends paid to ex-owners of RMB3.9 million and payment of capital lease of RMB2.2 million.




Net cash used in financing activities was RMB2.7 million (USD0.4 million) in 2009, primarily comprising repayment of bank borrowings of RMB188.5 million and deemed distribution of RMB18.3 million, partially offset by proceeds from bank borrowings of RMB208.5 million.





Net cash used in financing activities was RMB0.2 million in 2008, primarily comprising proceeds from bank borrowings of RMB60.0 million, partially offset by repayment of bank borrowings of RMB35.0 million, and dividends paid to the shareholders of Sihitech BVI and e-Channels BVI of RMB26.5 million.





CAPITAL EXPENDITURES





Our capital expenditures amounted to RMB29.7 million, RMB35.6 million and RMB21.2 million (USD3.2 million) in 2008, 2009 and 2010, respectively. Our capital expenditures can mainly be classified into the following categories: developed software, development tools, computer equipment, office equipment and furniture, and vehicles.




C.   Research and development, patents and license, etc.





For information on our research and development activities and intellectual property information, see “Item 4. Information on the Company — Business overview — Research and development” and “Item 4. Information on the Company — Business overview — Intellectual property.”





D.    Trend information.





For information on the principal trends and uncertainties affecting our results of operations, financial condition and businesses, see “Item 3. Key Information — Risk factors”, “Item 4. Information on the Company — Business overview” and elsewhere in this Item.





E.    Off-balance sheet arrangements.





We have not entered into any financial guarantees or other commitments to guarantee payment obligations of any third-parties.


67





F.    Disclosure of contractual obligations.





The following table sets forth our contractual obligations and commercial commitments as of December 31, 2010.




Within 1








More thanTotal


Year


1-3 years


3-5 years


5 years(RMB in thousands)Bank debt


81,000



81,000Interest on bank debt


1,749



1,749Capital leases


315



315Operating leases


5,985



4,945


1,040Total


89,048



88,008



1,040



-



-




Our capital leases primarily relate to leases of computers, and our operating leases relate to the renting of our offices.





G.    Safe harbor.





All information included in Item 5.E and F of this Item is deemed to be a “forward looking statement” as that term is defined in the statutory safe harbors, except for historical facts. The safe harbor provided in Section 27A of the Securities Act and Section 21E of the Exchange Act (“statutory safe harbors”) shall apply to all forward-looking information provided in Item 5.E and F of this Item.





ITEM 6.             DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES





A.   Directors and senior management.





The following table sets forth certain information regarding our directors and executive officers as of May 31, 2011.





Name

Age

PositionWeidong Hong

44

Chairman of the Board and Chief Executive OfficerShuo Zeng

41

Director, Chief Operating Officer,Steve Dai

44

Chief Financial OfficerLi Liao

45

Independent DirectorJeffrey R. Williams

57

Independent DirectorHenry Wang

52

Independent DirectorZhenwei Ni

75

Independent DirectorTianqing Chen

67

Independent Director


68


Weidong Hong is our Chief Executive Officer and Chairman of our board. Previously, Mr. Hong was the founder, Chairman and Chief Executive Officer of Beijing Sihitech, which was incorporated into Yucheng Technologies in 2006. Prior to founding Beijing Sihitech in June 1999, Mr. Hong was part of the senior management of Secom China Ltd., the Japanese publicly listed electronic security services provider, where from December 1994 to May 1997 he served as Vice President of the PC Department. From May 1997 to June 1999, Mr. Hong held the position of General Manager of Beijing Global Infotech Co., Ltd., a company engaged in the business of providing IT services to the Chinese banking industry. Mr. Hong holds a B.E. and an E.M.B.A. degree from Tsinghua University.





Shuo Zeng is our Chief Operating Officer and has served as a director of our board since November 2004. Mr. Zeng is a founder and Chairman and Chief Executive Officer of e-Channels. From July 1991 to May 2000, Mr. Zeng held several senior positions in the Nantian Group, a manufacturer of electronic and communication equipment in China that is publicly listed in the Shenzhen Stock Exchange, including general manager of the Information Product Department and Finance Project & System Integration Department. Mr. Zeng holds a B.E. in automation from Beijing Polytechnic University.





Steve Daiis our Chief Financial Officer. Mr. Dai joined the company in May 2009. Before that, from June 2007 to April 2009 he was the Chief Financial Officer of Beyondsoft Limited, one of the leading IT outsourcing companies in China. From 2004 to 2007, he was the Chief Financial Officer of Airport City Development Co., Ltd. in Beijing, a leading logistics property and airport city development company in China. He also worked in UBS in New York City and IBM in Austin, Texas. Mr. Dai holds an M.B.A. in Finance and Strategic Management from the Wharton Business School of University of Pennsylvania, and an M.S. in Electrical and Computer Engineering from University of Miami, and a B.S. in Electrical Engineering from the University of Science and Technology of China.





Li Liao has been an independent director of our board since November 2006. Mr. Li is a distinguished academician, and has served as the Associate Dean and Director of EMBA Program as well as a Professor of Finance at the prestigious School of Economics and Management of Tsinghua University since September 2000. Between May 1999 and August 2000, he served as the Assistant to Chairman at the Esquel Group, a company engaged in apparel manufacturing. Mr. Liao holds a B.E. in Electrical Engineering and a Ph.D. in Engineering Economics from Tsinghua University and an M.B.A. in Financial Engineering from the MIT Sloan School of Management.





Henry Wang is an independent director and has served on our board since November 2006. Since February 2003, Mr. Wang has served as the general manager of the Operating Center of China Construction Bank. From July 2000 to February 2003, he served as the general manager of Settlement Accounts Department of China Construction Bank. Before that, he worked in the Funds Clearing Department and conducted project auditing and consulting activities in the Investment and Research Department of China Construction Bank. Mr. Wang graduated from Beihang University and later at South Western University of Finance and Economics.





Jeffrey R. Williams is an independent director and has served on our board since February 2009. He has over 25 years of experience in China, Hong Kong and Taiwan in the financial services industry. He currently serves as an independent director and risk management committee chair of China Universal Asset Management Co. Prior to that, Mr. Williams was the President of Shenzhen Development Bank, where he served as the first foreign president of a Chinese commercial bank. Previously, he held a number of senior executive positions at Citibank, American Express and Standard Chartered within Greater China. Mr. Williams holds an A.B., magna cum laude, from Harvard College and an M.B.A. from Harvard Business School.




Zhenwei Nitaught as a professor at Tsinghua University before he founded Haihua Company along with a number of professors from Tsinghua University in 1984. As the president of the company, Mr. Ni guided Haihua into one of the most prominent IT services companies in China before he retired in 2004.Since then he has been acting as advisor to many publicly listed companies in China including Yucheng during the last two years. Mr. Ni graduated with a Bachelor’s degree in Engineering from Tsinghua University. Mr. Ni is also an independent director of the Hong Kong listed SINO OIL AND GAS HOLDINDS LTD. and VST HOLDINGS LTD.
 Tianqing Chenengaged in IT solutions development and management in China’s banking industry for more than forty years. Mr. Chen is one of the most well-known experts in the industry and has won many top awards from various Ministries of China many times during his career. Mr. Tianqing Chen served as the manager with the technology department of People’s Bank of China before his retirement. Prior to that, Mr. Tianqing Chen worked as deputy chief engineer at Industrial and Commercial Bank of China. Mr. Chen graduated with degree in computational mathematics from Tsinghua University in 1968.


69





B.    Compensation.





In 2010, the aggregate total cash compensation and stock compensation paid to our directors and executive officers as a group was approximately RMB2.9 million (USD0.4 million) and 6,750 shares.




2006 PERFORMANCE EQUITY PLAN





Stock options and other equity based awards may be granted under the China Unistone Acquisition Corporation 2006 Performance Equity Plan, which became the Yucheng Technologies Limited 2006 Performance Equity Plan (the “Plan”) by operation of law under the terms of our merger with China Unistone Acquisition Corporation. On December 13, 2005, China Unistone’s board approved its 2006 Performance Equity Plan and its shareholders subsequently approved the plan. We obtained shareholder approval of the Plan in November 2006, under which we could issue share options and restricted stock to our directors, officers, employees, and consultants with the right to purchase up to 1,500,000 ordinary shares. The purpose of the Plan was to enhance its ability to recruit and retain employees, officers, directors and consultants of outstanding ability and to further motivate them by providing an opportunity to acquire a proprietary interest in our company. We did not issue any shares or stocks under the Plan as of December 31, 2010


Share-based compensation


In 2010, we entered into award agreements pursuant to our 2006 Performance Equity Plan, or the “Equity Plan”.  Under the award agreements, we had 941,132 restricted shares as of December 31, 2010.





We recognize share-based compensation as compensation expense in our statement of operations based on the fair value of equity awards on the grant date. With compensation expense recognized over the period in which the recipient is required to provide service in exchange for the award (usually the vesting period). For options and restricted share units granted to employees, we measure share-based compensation expenses or the fair value of the options and restricted share units at the grant date. We recognize such share-based compensation expenses over the vesting period of the options and restricted share units. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change.





Share Incentive Plans





2006 Performance Equity Plan


We have adopted a 2006 Performance Equity Plan to motivate, attract and retain employees and directors and promote the success of our business. Our board of directors has authorized the issuance of up to 11,550,000 shares of common stock, 7,200,000 warrants and one representative unit purchase option beginning in 2006, upon exercise of awards granted under our 2006 Performance Equity Plan. As of March 31, 2011, there are 941,132 restricted share units under our 2006 Performance Equity Plan.





Plan Administration.


Our board of directors or our compensation committee will administer 2006 Performance Equity Plan. The compensation committee or the full board of directors, as appropriate, will determine the provisions and terms and conditions of our awards.





Types of Awards. The following briefly describe the principal features of the various awards that may be granted under our 2006 Performance Equity Plan.




•                 Restricted Shares. A restricted share award is the grant of our ordinary shares at a price determined by our plan administrator. A restricted share is nontransferable, unless otherwise determined by our plan administrator at the time of award and may be repurchased by us upon termination of employment or service during a restricted period. Our plan administrator shall also determine in the award agreement whether the participant will be entitled to vote the restricted shares or receive dividends on such shares.


70





The following table summarizes, from January 1, 2010 to March 31, 2011, the outstanding restricted shares that we granted to our directors and officers under our 2006 Performance Equity Plan.





Restricted Shares



End of VestingName

Units Granted

Grant Date

PeriodShuo Zeng


50,000

August 3,2010

December 31,2010Steve Dai


*

August 3,2010

December 31,2010





*  Upon exercising of all options that are exercisable with 60 days after March 31, 2011 and vesting of all restricted shares unites that are to be vested within 60 days after March 31, 2011, would beneficially own less than 1% of our outstanding ordinary shares.





Administration. Our compensation committee administers the Plan. Subject to the provisions of the Plan, the compensation committee determines, among other things, the persons to whom from time to time awards may be granted, the specific type of award to be granted, the number of shares subject to each award, share prices, any restrictions or limitations on the awards, and any vesting, exchange, surrender, cancellation, acceleration, termination, exercise or forfeiture provisions related to the awards. The committee makes all determinations of any questions arising under the plan or any rule or regulation established pursuant to the plan.





Eligible participants. Awards may be granted to employees, officers, directors and consultants who are deemed to have rendered or are able to render significant services to us, and who have contributed or have the potential to contribute to our success. Incentive stock options may only be awarded to individuals who are our employees at the time of grant. However, an award may be granted in connection with an individual’s hiring or retention, at any time on or after the date he or she reaches an agreement with us.





Share reserve. The Plan reserves 1,500,000 ordinary shares to be granted as awards. The total number of ordinary shares available for issuance under the plan is subject to the adjustment in the event of any merger, reorganization stock split, reverse stock split, stock dividend payable on our ordinary shares, combination or exchange of shares, or other extraordinary event resulting in a change of our shares as a whole.





Options. Under the Plan our compensation committee may award stock options that are intended to qualify as “incentive stock options” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, as well as those not intended to be so qualified. Our compensation committee will fix the term of each stock option. However, incentive stock options may be granted only within the ten-year period commencing from the effective date of the Plan, and may only be exercised within ten years from the date of the grant, or five years from the date of the grant in the case of a participant who at the time the stock option is granted owns more than 10% of the total combined voting power of all of our classes of voting securities. The exercise price of stock options granted under the Plan will be determined by our compensation committee at the time of the grant, but in no event will the price be less than the market price of any share of common stock. The number of shares covered by incentive stock options which become exercisable for the first time by participants in any year cannot have an aggregate fair market value in excess of USD100,000, measured at the date of the grant. Payment of the exercise price may be made in cash, in shares of our ordinary shares owned by the participant, in a combination of the two, or otherwise, as reflected in the applicable award agreement. Unless otherwise provided in the grant of a stock option, if a participant’s employment with us or any of our subsidiaries is terminated for any reason other than due to death or disability, the participant’s stock option will automatically terminate. In addition, if a holder’s employment with us is terminated for cause, the compensation committee may require this holder to return to us the economic value of any shares realized by that holder during the six month period prior to the holder’s termination. However, if the participant’s employment is terminated without cause or due to retirement on or after the age of 65, then the portion of his or her stock option which has vested as of the date of termination may be exercised: for three months after termination or for the balance of the stock option’s exercise period, whichever is shorter; or for a greater or lesser period as may be specified by the compensation committee in the grant.


71





Stock appreciation rights.  Under the Plan, our compensation committee may grant stock appreciation rights to participants who have received or are receiving stock options.  A stock appreciation right entitles the holder to surrender to us all or a portion of a stock option in exchange for a number of shares of our ordinary shares determined by multiplying the excess of the fair market value per share of our ordinary shares on the exercise date over the exercise price per share by the number of shares subject to the stock option and then dividing it by the fair market value of the ordinary shares on the date the stock appreciation right is exercised





Restricted stock.  Our compensation committee may award shares of our ordinary shares which are subject to restrictions as the compensation committee may determine in addition to, or in lieu of, other awards granted to participants under the plan.  The compensation committee will determine at the time of the award, the period during which the award may be subject to forfeiture and the vesting schedule of the shares under the award.  A participant will have the right to vote the restricted stock granted to him and to receive dividend payments distributed on the shares in the form of cash or cash equivalents.





Deferred stock.  Our compensation committee may award shares of our ordinary shares to be received at the end of a specified deferral period and upon satisfaction of any other applicable restrictions, terms and conditions provided for in the grant of the award.  Any deferred stock that does not vest will be forfeited.  A participant will not have any rights as a stockholder by virtue of the award of deferred stock until the expiration of the applicable deferral period and the issuance and delivery of a stock certificate evidencing the award of the deferred stock.  A participant may request that the compensation committee defer issuance of an award of deferred shares for an additional specified period, subject to certain conditions.





Stock reload options.  Our compensation committee may grant to a participant an option covering a number of shares up to the amount of shares of our ordinary shares held by the participant for at least six months, which is used to pay all or part of the exercise price of an option, and any shares withheld by us as payment for withholding taxes.  Any stock reload option will have an exercise price equal to the fair market value of our ordinary shares as of the date of the exercise of the stock option to which it is related.  Unless otherwise provided in the stock reload option grant, a stock reload option may be exercised commencing one year after it is granted and will expire on the date of expiration of the stock option to which the reload option is related.





Other stock-based awards.  Our compensation committee may award other stock-based awards, subject to limitations under applicable law, in addition to, or in lieu of, other awards granted to participants under the Plan.  These other stock-based awards are payable in, valued in, or otherwise based on, or related to, our ordinary shares.  These other stock-based awards may be in the form of the right to purchase our ordinary shares which are not subject to any restrictions or conditions, convertible or exchangeable debentures or other rights convertible into shares of our ordinary shares, as well as awards valued by reference to the value of securities of, or the performance of, one of our subsidiaries.





Change of control and accelerated vesting.The Plan provides that in the event of a change of control event, as described in the plan, not approved by our board, the vesting periods with respect to options and awards granted and outstanding under the Plan shall become fully vested and exercisable.  Where such change of control event is approved by our board, the compensation committee may (i) accelerate the vesting of any and all stock options and other awards granted and outstanding under the plan or (ii) require a holder of any award granted under the Plan to relinquish the award to us upon payment by us to the holder of cash in an amount equal to the fair market value of the award for ordinary shares, or the difference between the fair market value of the award and the award’s exercise price (if lower than the fair market value) for options or stock appreciation rights, or USD0.01 per share for awards that are out-of-the money.





72





Transferability.  With respect to the transferability of stock options, except as expressly provided in the Plan, expressly provided in the award agreement or in certain limited circumstances, the right to exercise stock options, receive restricted stock after the expiration of the restriction period or deferred stock after the expiration of the deferral period, receive payment under other stock-based awards, or exercise a stock appreciation right cannot be transferred except by will or the laws of descent and distribution.  However, with the approval of the compensation committee, a participant may transfer a stock option under certain limited circumstances.





Amendment and Termination.  The Plan will terminate when there are no awards outstanding and when no further awards may be granted, provided that incentive options may only be granted until December 13, 2015.  Our board has the right to amend, suspend or discontinue any provision of the Plan, provided that the action may not adversely affect awards previously granted between a participant and us without the participant’s consent.





EMPLOYMENT AGREEMENTS





We have entered into employment agreements with each of Messrs. Weidong Hong and Shuo Zeng.  Compensation of our executives is comprised of salaries and bonuses, including equity bonuses.  They are also provided regular benefits in accordance with PRC laws and regulations.  In addition, if the employment of an executive is terminated by us without cause, the executive is entitled to USD300,000 and other benefits throughout the term of the agreement.  Our employment agreements with independent directors can be terminated with or without cause.





C.      Board Practices.





TERMS OF DIRECTORS AND EXECUTIVE OFFICERS





Our board consists of five directors.  Our directors are not subject to a term of office limitation, and hold office until the next annual meeting of members or until such director’s earlier resignation, removal from office, death or incapacity.  Any vacancy on our board resulting from death, resignation, removal or other cause, and any newly created directorship resulting from any increase in the authorized number of directors between meetings of members, may be filled either by the affirmative vote of a majority of all the directors then in office (even if less than a quorum) or by a resolution of members.





Our officers are appointed by our board.  The officers shall hold office until their successors are duly elected and qualified, but any officer elected or appointed by the directors may be removed at any time, with or without cause, by resolution of directors.  Any vacancy occurring in any office may be filled by resolution of directors.





INDEPENDENCE OF DIRECTORS





We have elected to follow the rules of NASDAQ to determine whether a director is independent.  Our board will also consult with counsel to ensure that our board’s determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors.  The NASDAQ listing standards define an “independent director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company that would interfere with the director’s exercise of independent judgment.  Consistent with these considerations, our board has affirmatively determined that, Messrs.  Li Liao, Henry Wang, Jeffrey R. Williams,Zhenwei Ni and Tianqing Chen are our independent directors.




BOARD COMMITTEES





Our board has established an audit committee, a nominating committee and a compensation committee.





Audit Committee





Our audit committee consists of Messrs. Williams, Wang, and Liao.  Our board 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 Securities and Exchange Act of 1934, as amended, or the Exchange Act.





73





Our board has determined that each of Messrs. Williams, Wang, and Liao has an understanding of generally accepted accounting principles and financial statements, the ability to assess the general application of such principles in connection with our financial statements, including estimates, accruals and reserves, experience in analyzing or evaluating financial statements of similar breadth and complexity as our financial statements, an understanding of internal controls and procedures for financial reporting, and an understanding of audit committee functions.





We adopted an audit committee charter under which the committee is responsible for reviewing the scope, planning and staffing of the audit and preparation of the financial statements.  This includes consultation with management, the auditors and other consultants and professionals involved in the preparation of the financial statements and reports.  The committee is responsible for performing oversight of relationship with our independent auditors.  The committee also has a general compliance oversight role in assuring that our directors, officers and management comply with our code of ethics, reviewing and approving of related party transactions, dealing with complaints regarding accounting, internal controls and auditing matters, and complying with accounting and legal requirements applicable to us.





Pursuant to the terms of its charter, the audit committee’s responsibilities include, among other things:





·
periodically reviewing and reassessing the adequacy of the committee’s formal charter;




·
reviewing our annual audited financial statements with our management and our independent auditors and the adequacy of our internal accounting controls;




·
reviewing analyses prepared by management and independent auditors concerning significant financial reporting issues and judgments made in connection with the preparation of our financial statements;




·
the engagement of the independent auditors;




·
reviewing the independence of the independent auditors;




·
reviewing our auditing and accounting principles and practices with the independent auditors, and reviewing major changes to our auditing and accounting principles and practices as suggested by the independent auditors or our management;




·
the appointment of the independent auditors to our board, which firm is ultimately accountable to the audit committee and our board;




·
approving professional services provided by the independent auditors, including the range of audit and non-audit fees; and




·
reviewing all related party transactions on an ongoing basis for potential conflicts of interest.





The audit committee will pre-approve the services to be provided by our independent auditors.  The audit committee will also review and recommend to the board of directors whether or not to approve transactions between us and any officer or director that occurs outside the ordinary course of business.





Compensation Committee





Our compensation committee consists of Messrs. Williams and Li Liao, each of whom is an “independent director” as that term is used in the NASDAQ corporate governance rules.  Our compensation committee assists the board in reviewing and approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and executive officers.  The responsibilities of our compensation committee include, among other things:





74




·
reviewing and recommending to the board with respect to the total compensation package for our executive officers;




·
reviewing and recommending to the board with respect to the compensation of our directors;




·
reviewing periodically and recommending to the board with respect to any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans; and administer our stock option plans, including authority to make and modify awards under such plans.  Currently, our only equity award plan is the 2006 Performance Equity Plan; and




·
evaluating the risk to our company of the compensation structures, policies, and amounts.





Nominating Committee





Our nominating committee consists of Messrs. Williams and Li Liao.  The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board.  The nominating committee will identify, evaluate and recommend candidates to become members of our board with the goal of creating a balance of knowledge and experience. The committee does not consider diversity to be a factor in its evaluation process.





The committee will also consider suggestions from individual shareholders, based upon its assessment of certain criteria, including the proposed person’s merits.  The suggested nominee must provide a statement of consent to being considered for nomination.





D.      Employees.





We had 1,941, 2,208 and 2,271employees as of December 31, 2008, 2009 and 2010, respectively. The number of employees in 2008 and 2009 include the employees of POS Company. The following table sets forth our employees as of December 31, 2010 based on functional area.





Category

Number of EmployeesProject development and implementation


1,971Research and development


71Sales and marketing


55General and administrative


174Total


2,271





We pay our sales staff a combination of salaries, sales commissions and bonuses.  We pay salaries to all other employees, which are supplemented by periodic cash bonuses that are generally based on performance.  We also contribute to social insurance for our employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and housing provision funds in accordance with PRC regulations.  Our compensation and benefits packages are competitive in the industry.  Our employees are not represented by any collective bargaining agreement and we have never experienced any strike or similar work stoppage.  We consider our relations with our employees to be good.





75





We invest significant resources in the training and development of our employees.  We require our employees to participate in our various internal training programs.  Through these programs, we help ensure that each entry-level employee acquires the necessary skills to execute its duties and other employees continue to maintain and improve their current skill-sets.  In addition to trainings on technical skills and development, we also provide training programs that cover topics ranging from our clients, our market and the financial services industry in general.





E.      Share ownership.





The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of May 31, 2011, by:




·
each of our directors and executive officers who beneficially own our ordinary shares; and




·
each person known to us to own beneficially more than 5.0% of our ordinary shares.





Related parties identified for the years ended December 31, 2008, 2009, and 2010 are summarized as follows:





Relationship with

Shareholding in Yucheng or shareholding being held by the

Companythe Company

for 2008


for 2009


for 2010Mr. Weidong Hong

Shareholder and CEO


15.10
%


16.47
%


16.47
%Mr. Shuo Zeng

Shareholder and COO


4.65
%


5.19
%


5.19
%Chengdu Elegon Infotech

Investment underLimited (“Elegon”)

equity method


49
%


0
%


0
%Sihitech (HK) Co., Ltd.

Controlled byMr. Weidong Hong


N/A



N/A



N/AHainan Baodaotong

Investment underTechnologies Limited

cost method(“Baodaotong”)




0
%


15
%


0
%Yucheng Sinowise

Investment underConsultancy Services

equity methodLimited (“Sinowise”)




0
%


40
%


40
%Yuxin Data Technologies

Investment underCo., Limited (“Yuxin Data”)

equity method


0
%


0
%


49
%





Note 1:
Before the Share Exchange Transaction was completed on November 24, 2006, Mr. Weidong Hong held 42% of Sihitech.


Note 2:
Before the Share Exchange Transaction was completed on November 24, 2006, Mr. Shuo Zeng held 43% of e-Channels.





None of the above shareholders have voting rights that differ from the voting rights of other shareholders. We have not granted any stock options.





76





ITEM 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS




A.    Major shareholders





Please refer to “Item 6. Directors, Senior Management and Employees — E. Share ownership.”





B.    Related party transactions.





CASH ADVANCES AND BORROWINGS WITH RELATED PARTIES





In 2006, we made cash advances to, and borrowed from certain related parties, including our executive officers and investments under equity method.  These transactions had no fixed terms and were non-interest bearing and payable on demand.   In compliance with the provisions of the Sarbanes-Oxley Act of 2002, we, neither directly nor indirectly nor through any subsidiary, will make loans, extend credit, maintain credit or arrange for the extension of credit or renew an extension of credit in the form of a personal loan to or for any director or executive officer of the Company in the future.  Moreover, we have adopted an audit committee charter that requires our audit committee to review and approve all related party transactions, assure compliance with the Company’s code of ethics and monitor and discuss with the auditors and outside counsel policies and compliance with applicable accounting and legal standards and requirements.





Cash advances made to and borrowings with our executives





We have made cash advances to Mr. Weidong Hong, our Chief Executive Officer and principal shareholder and Mr. Shuo Zeng, our Chief Operating Officer and principal shareholder for incurring and paying operating expenses on behalf of the Company.   In 2008, we made cash advances to the two executives of an aggregate of approximately RMB0.2 million, and collected the amount in 2008. There was no balance due to the two executives as of December 31, 2008. In 2009, we made cash advances to the two executives of an aggregate of approximately RMB0.1 million (USD0.01 million), and collected the amount in 2009. In 2010, we made cash advances to the two executives of an aggregate of RMB0.1 million (USD 0.02 million), and collected the amount in 2010. There was no balance due to the two executives as of December 31, 2010.





Cash advances made to and borrowings from our affiliates





Our affiliate companies in 2008, 2009 and 2010 included the following:


·
Beijing Hengli Plastic Machinery Co., Ltd., or Hengli, a plastic mold manufacturer, in which we held a 50% interest.  In June 2008, we recorded RMB2.1 million in gains from the disposal of this affiliate.





·
Chengdu Elegon Information Technologies Limited, or Elegon, a software and solution services company, in which we held 49% interest. We sold our 49% equity stake in Elegon to 3i Infotech, Ltd. in June, 2009.





·
Hainan Baodaotong Technologies Limited, or Baodaotong, in which we held 15% interest in 2009. On April 30, 2010, Yuxinyicheng sold its entire interest in Baodaotong to a third party due to business consideration.





·
Beijing Sihitech Huazhi Consulting Service Co.,Ltd., or Huazhi, a consulting service company, in which we held 40% interest.





Yuxin Data Technologies Co., Limited (Tianjin), or Yuxin Data, in which we held 49% interest.





In 2008, we collected RMB0.7 million and RMB0.9 million from Hengli and Sanjian respectively; we made cash advances to Elegon approximately RMB1.8 million, and collected from Elegon was approximately RMB1.8 million. The balance due from Elegon was RMB143.


In 2009, we collected RMB143 from Elegon and there was no balance due from Elegon as of December 31, 2009. We made cash advances of approximately RMB20.9 million (USD3.1 million) to Baodaotong, and collected approximately RMB20.6 million (USD3.0 million) from Baodaotong in 2009. The balance due from Baodaotong was RMB0.3 million as of December 31, 2009. We made cash advances of approximately RMB1.9 million (USD0.3 million) to Huazhi, and collected approximately RMB0.6 million (USD0.1 million) from Huazhi in 2009. The balance due from Huazhi was RMB1.3 million (USD0.2 million) in 2009.





77




In 2010, we made cash advances of approximately RMB4.6million (USD0.7 million) to Huazhi. The balance due from Huazhi was RMB5.9million (USD0.9 million) as of December 31, 2010. We made cash advances of approximately RMB0.9 million (USD0.1 million) to Yuxin Data, and collected approximately RMB0.7 million (USD0.1 million) from Yuxin Data in 2010. The balance due to Yuxin Data was RMB3.9 million (USD0.6 million) in 2010, including a purchase from Yuxin Data was RMB 4.1 million (USD 0.6 million)




C.    Interests of experts and counsel.





Not applicable.




ITEM 8.          FINANCIAL INFORMATION





A.   Consolidated statements and other financial information.





We have appended consolidated financial statements filed as part of this annual report.  See “Item 18. Financial Statements.”





LEGAL PROCEEDINGS





We are subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time.  Other than the legal proceeding described below, we are neither currently a party to, nor are we aware of, any legal proceeding, investigation or claim that is likely to have a material adverse effect on our business, financial condition or results of operations.





The Company was a defendant in the matter of Justin Jiang v. Yucheng Technologies Limited et al., filed on March 21, 2007 in the United States District Court for the Southern District of California, Civil Case No. 3:07-CV-00514-H-BLM (“Federal Court”). The other defendants were Beijing Sihitech Co. and Chih T. Cheung. As against the Company, Plaintiff alleged the Company breached an oral contract with him regarding a finder’s fee. Plaintiff has requested specific performance and/or a constructive trust.





Additionally, Plaintiff has made a demand for general damages, $109,275.36 cash, the issuance of 150,179 shares of the Company to Plaintiff, and the payment of 4% of any future compensation which Sihitech and its shareholders are entitled to receive as a result of China Unistone’s acquisition of Sihitech.





Counsel for the Company filed a Motion to Dismiss the action on the ground that the court lacked personal and subject matter jurisdiction over the Company. The Motion to Dismiss was granted and the Federal Court dismissed the case on July 20, 2007. The grounds for dismissal at that time permitted the refiling of the claims in a court of appropriate jurisdiction.





Plaintiff refiled its action in the Superior Court of the State of California for the County of San Diego (“State Court”) in which the matter was pending as Case No. 37-2007-00073543-CU-BC-CTL. The lawsuit named as defendants the Company, China Unistone Acquisition Corporation, Beijing Sihitech Co., Ltd. and Chih T. Cheung. Counsel for the Company moved to dismiss the action for lack of proper service and lack of personal jurisdiction. On April 22, 2008, the State Court granted the motion to dismiss and ordered the case dismissed for, among other things, lack of personal jurisdiction over the defendants as they are not residents of California and did not have sufficient contacts with California to allow this matter to proceed in California.





On September 9, 2008 plaintiff filed an appeal of the dismissal of the State Court action and that appeal was not successful. The court of appeal issued its order denying the appeal and affirming the dismissal on November 2009. The decision of the court of appeal is now final, and plaintiff has no right to bring the claim against the Company in California. Because the decision of the court was on jurisdictional grounds only, it would not prevent plaintiff from bringing claims in such other jurisdiction as might be appropriate.





78





DIVIDEND POLICY





We have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future.  We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.





Our board of directors may, by resolution, authorize payment of dividends if the directors are satisfied, on reasonable grounds, we will, immediately after the distribution of dividends, satisfy the solvency test as stipulated in Section 56 of the BVI Business Companies Act.  Even if our board decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our board may deem relevant.




Our ability to pay dividends depends substantially on the payment of dividends to us by our PRC subsidiaries.  In particular, each of our PRC subsidiaries may pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association and the accounting standards and regulations in China.  Moreover, pursuant to applicable PRC laws and regulations, 10% of after-tax profits of each of our consolidated PRC entities is required to be set aside in a statutory surplus reserve fund annually until the reserve balance reaches 50% of such PRC entity’s registered capital.  As of December 31, 2010, the accumulated balance of our statutory reserve funds amounted to RMB50.4 million (USD7.6 million), and the accumulated profits of our consolidated PRC entities that were available for dividend distribution amounted to RMB218.4 million (USD33.0 million), there are differences between the accumulated profits pursuant to Chinese Generally Accounting Principles and the reported accumulated profits in our Form 20-F under U.S. GAAP. The total difference approximated RMB21.3million (USD3.2 million) as of December 31, 2010. The major differences are due to different treatment in the areas of i) revenue recognition; ii) capitalization of intangible assets; iii) recognition of pre-contract costs and iv)recognition of tax losses. Pursuant to the applicable PRC laws and regulations, 10% of after-tax profit of each of the Company’s PRC entities, as determined under the Chinese Generally Accepted Accounting Principles, is required to be set aside in a statutory surplus reserve fund annually until the reserve balance reaches 50% of such PRC entity’s registered capital. Allocations from these statutory surplus reserves may only be used for specific purposes and are not distributable to us in the form of loans, advances, or cash dividends. In addition, the paid-in capital of the Company's PRC entities may not be transferred to the Company in form of loans, advances or cash dividend without the consent of PRC government.  As of December 31, 2010, the paid-in capital and statutory surplus reserves amounted to RMB411.3million (US$62.1 million). Furthermore, if any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. Moreover, under the New EIT Law and its implementation rules issued by the PRC State Council, both of which became effective on January 1, 2008, dividends from our PRC subsidiaries to us may be subject to a withholding tax at the rate of 10% if such dividend is derived from profits generated after January 1, 2008. If we are deemed to be a PRC resident enterprise, the withholding tax may be exempted, but in such a case we will be subject to a 25% tax on our global income, and our non-PRC investors may be subject to PRC income tax withholding. However, we have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. As a result, currently it has no adverse impact on our operations and our planned use of our capital.




Under the New EIT Law and its implementation rules issued by the PRC State Council, both of which became effective on January 1, 2008, dividends from our PRC subsidiaries to us may be subject to a withholding tax at the rate of 10% if such dividend is derived from profits generated after January 1, 2008.  If we are deemed to be a PRC resident enterprise, the withholding tax may be exempted, but in such a case we will be subject to a 25% tax on our global income, and our non-PRC investors may be subject to PRC income tax withholding.  See “Item 10. Additional Information — E. Taxation — PRC Taxation”.





Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.





79





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 OFFER AND LISTING





A.    Offering and listing details.





The common stock of China Unistone was quoted on the Over-The-Counter Bulletin Board, or OTCBB, under the symbol “CUAC.OB.”  China Unistone merged with and into Yucheng for the purpose of redomestication out of the United States.  From November 27, 2004 to March 13, 2007, our ordinary shares were quoted on the OTCBB under the symbol “YCHTF.OB.”  On March 14, 2007, our ordinary shares were admitted for listing on the NASDAQ Global Market under the symbol “YTEC.”





The following table sets forth the historical high and low trading prices for our ordinary shares, and those for the common stock of China Unistone, for the periods indicated.  The OTCBB market quotations reported below reflect inter-dealer prices, without markup, markdown or commissions and may not represent actual transactions.





80





The OTCBB


The NASDAQPrice Per


Global MarketCommon Stock


Price Per ShareHigh


Low


High


Low(USD)Annual Market PricesYear 2004 (from November 24, 2004)


5.20



4.78



N/A



N/AYear 2005


6.75



0.98



N/A



N/AYear 2006


8.85



5.35



N/A



N/AYear 2007 (until March 13, 2007)


8.30



6.47



N/A



N/AYear 2007 (from March 14, 2007)


N/A



N/A



17.45



7.25Year 2008


N/A



N/A



18.49



4.66Year 2009


N/A



N/A



9.50



4.07Quarterly Market PricesFirst Quarter 2007(until March 13, 2007)


8.30



6.47



N/A



N/AFirst Quarter 2007(from March 14, 2007)


N/A



N/A



8.80



6.65Second Quarter 2007


N/A



N/A



9.50



7.46Third Quarter 2007


N/A



N/A



11.00



7.15Fourth Quarter 2007


N/A



N/A



18.01



9.95First Quarter 2008


N/A



N/A



19.36



10.74Second Quarter 2008


N/A



N/A



18.53



10.80Third Quarter 2008


N/A



N/A



14.80



8.22Fourth Quarter 2008


N/A



N/A



10.62



4.20First Quarter 2009


N/A



N/A



8.20



4.07Second Quarter 2009


N/A



N/A



9.50



6.10Third Quarter 2009


N/A



N/A



8.69



7.02Fourth Quarter 2009


N/A



N/A



9.19



7.08Monthly Market PricesNovember 2009


N/A



N/A



8.42



7.16Dec-09


N/A



N/A



9.19



7.86Jan-10


N/A



N/A



8.80



3.55Feb-10


N/A



N/A



3.77



3.24Mar-10


N/A



N/A



4.20



3.56Apr-10


N/A



N/A



4.12



3.82May-10


N/A



N/A



3.82



3.08





81





The OTCBB


The NASDAQPrice Per


Global MarketCommon Stock


Price Per ShareHigh


Low


High


Low(USD)Annual Market PricesYear 2004 (from November 24, 2004)


5.20



4.78



N/A



N/AYear 2005


6.75



0.98



N/A



N/AYear 2006


8.85



5.35



N/A



N/AYear 2007 (until March 13, 2007)


8.30



6.47



N/A



N/AYear 2007 (from March 14, 2007)


N/A



N/A



17.45



7.25Year 2008


N/A



N/A



18.49



4.66Year 2009


N/A



N/A



9.50



4.07Year 2010


N/A



N/A



9.54



2.98Quarterly Market PricesFirst Quarter 2007(until March 13, 2007)


8.30



6.47



N/A



N/AFirst Quarter 2007(from March 14, 2007)


N/A



N/A



8.80



6.65Second Quarter 2007


N/A



N/A



9.50



7.46Third Quarter 2007


N/A



N/A



11.00



7.15Fourth Quarter 2007


N/A



N/A



18.01



9.95First Quarter 2008


N/A



N/A



19.36



10.74Second Quarter 2008


N/A



N/A



18.53



10.80Third Quarter 2008


N/A



N/A



14.80



8.22Fourth Quarter 2008


N/A



N/A



10.62



4.20First Quarter 2009


N/A



N/A



8.20



4.07Second Quarter 2009


N/A



N/A



9.50



6.10Third Quarter 2009


N/A



N/A



8.69



7.02Fourth Quarter 2009


N/A



N/A



9.19



7.08First Quarter 2010


N/A



N/A



9.54



3.07Second Quarter 2010


N/A



N/A



4.19



3.00Third Quarter 2010


N/A



N/A



3.63



2.98Fourth Quarter 2010


N/A



N/A



4.13



3.08Monthly Market PricesNovember  2010


N/A



N/A



3.96



3.14Dec-10


N/A



N/A



3.66



3.22Jan-11


N/A



N/A



4.10



3.48Feb-11


N/A



N/A



4.50



3.64Mar-11


N/A



N/A



4.31



3.79Apr-11


N/A



N/A



4.11



3.31May-11


N/A



N/A



4.05



3.60




82




On June 27 2011, the closing price of our ordinary shares was USD3.03 per share.




B.    Plan of distribution.





Not applicable





C.   Markets.





See Item 9.A above.





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.





SUMMARY OF MEMORANDUM AND ARTICLES OF ASSOCIATION





Charter





Our charter documents consist of our Memorandum of Association and Articles of Association.  The Memorandum of Association and the Articles of Association loosely resemble the articles of incorporation and the bylaws, respectively, of a corporation incorporated in a state in the United States.  We may amend our Memorandum of Association and Articles of Association by a resolution of our shareholders or by a resolution of our directors.  This description and summary does not purport to be complete and does not address all differences between BVI corporate laws and those in the United States.  Copies of our Memorandum of Association and Articles of Association have been filed as exhibits to our initial registration statement on Form S-4 (file number 333-132814).





Corporate Powers





Yucheng was first incorporated as a company under the International Business Companies Act, 1984, or the IBC Act, on November 17, 2005 and became subject to the BVI Business Companies Act, 2004 on January 1, 2007 when the BVI Business Companies Act, 2004 replaced the IBC Act.  Our Memorandum of Association and Articles of Association state that the Company can carry out any object not prohibited by the laws of the BVI.





Directors





The directors may fix their compensation for services rendered to us.





83





By a resolution of directors, the directors may exercise all our powers to borrow money, mortgage our property, issue debentures, and issue stock or other securities for any debt, liability or obligation given by us.





A director may resign or retire from our board at any time.  The director must give one month written notice of his resignation to us.  Directors hold office until the next annual meeting of members or until such director’s earlier resignation, removal from office, death or incapacity.  We currently do not have a staggered election of directors.





The shareholding qualification for directors may be fixed and varied by a resolution of members and, unless it is fixed, no shareholding qualification is required.  A director must be an individual.





To the fullest extent permitted by the BVI Business Companies Act, 2004, none of our directors shall be personally liable to the Company or its shareholders for or with respect to any acts or omissions in the performance of his or her duties as a director of the Company.





Rights of Shares





We are authorized to issue 60,000,000 ordinary shares.  The ordinary shares have one vote each, are subject to purchase or acquisition by us for fair value and have the same rights with regard to dividends and distributions upon our liquidation.  We are also authorized to issue 1,000,000 preferred shares in one series of no par value.  The directors are authorized to issue the preferred shares and to fix the rights and preferences attached to the preferred shares.





Shareholder Meetings





As of November 2008, Yucheng has availed itself of the market place rules applicable to foreign private issuers and will hold shareholder meetings as it sees fit; however, there is no annual requirement.  Special meetings of members may be called by the directors pursuant to a resolution of directors to that effect or upon the written request of members holding more than 50 percent of the votes of our outstanding voting shares.  No less than seven days’ notice of meetings is required to be given to members.





A meeting of members may be called on short notice if members holding not less than 90 percent of the total number of shares entitled to vote on all matters to be considered at the meeting, or 90 percent of the votes of each class or series of shares where members are entitled to vote thereon as a class or series together with not less than a 90 percent majority of the remaining votes, have agreed to a short notice of the meeting, or if all members holding shares entitled to vote on all or any matters to be considered at the meeting have waived notice of the meeting and for this purpose presence at the meeting shall be deemed to constitute waiver.





The inadvertent failure of the directors to give notice of a meeting to a member, or the fact that a member has not received notice, does not invalidate the meeting.





A member may be represented at a meeting of members by a proxy who may speak and vote on behalf of the member.  A written instrument giving the proxy such authority must be produced at the place appointed for the meeting before the time for holding the meeting.





A meeting of members is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than 50 percent of the votes of the shares or class or series of shares entitled to vote on resolutions of members to be considered at the meeting.





Limitations on Ownership of Securities





There are no limitations on the right of nonresidents or foreign persons to own our securities imposed by BVI law or by our Memorandum and Articles of Association.




84




Change in Control of Company




There are no provisions in our Memorandum and Articles of Association that would operate only to delay, defer or prevent a change of control of our company.  However, the board of directors has the power to issue preferred shares with such rights attaching to them as they decide and this power could be used in a manner that would delay, defer or prevent a change of control of our company.





Ownership Threshold





There are no provisions governing the ownership threshold above which shareholder ownership must be disclosed.





Changes in Capital





Subject to the provisions of the BVI Business Companies Act, 2004, we may, by a resolution of directors or members, amend our Memorandum and Articles of Association to increase or decrease the number of shares authorized to be issued.  The directors of a company may, by resolution, authorize a distribution (including a capital distribution) by the company at a time, of an amount, and to any members they think fit if they are satisfied, on reasonable grounds, that the company will, immediately after the distribution, satisfy the solvency test.  The solvency test is satisfied if the value of the company’s assets exceeds its liabilities, and the company is able to pay its debts as they fall due.





DIFFERENCES IN CORPORATE LAW





The companies law of the BVI differs from laws applicable to U.S. corporations and their shareholders.  Set forth below is a summary of the significant differences between the provisions of the companies law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.





Protection for minority shareholders





Under the laws of most U.S. jurisdictions, majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to the minority shareholders.  Corporate actions taken by majority and controlling shareholders, which are unreasonable and materially detrimental to the interests of minority shareholders, may be declared null and void.  Minority shareholders may have less protection for their rights under BVI law than they would have under U.S. law.





Powers of directors





Unlike most U.S. jurisdictions, the directors of a BVI company, subject in certain cases to court’s approvals but without shareholders’ approval, may implement the sale, transfer, exchange or disposition of any asset, property, part of the business, or securities of the company, with the exception that shareholder approval is required for the disposition of over 50% in the value of the total assets of the company.





Conflict of interests





Similar to the laws of most U.S. jurisdictions, when a director becomes aware of the fact that he has an interest in a transaction which the company is to enter into, he must disclose it to our board.  However, with sufficient disclosure of interest in relation to that transaction, the director who is interested in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document on behalf of the company, or do any other thing in his capacity as a director, that relates to the transaction.





Written consent and cumulative voting





Similar to the laws of most U.S. jurisdictions, under the BVI law, shareholders are permitted to approve matters by way of written resolution in place of a formal meeting.  BVI law does not make a specific reference to cumulative voting, and our current Memorandum and Articles of Association have no provision authorizing cumulative voting.





85





Independent directors





There is no requirement for a majority of the directors of the company to be independent as a matter of BVI law.





Redemption





Our shares are not redeemable at the shareholders’ option.  We may redeem our shares only with the consent of the shareholders whose shares are to be redeemed, except that the consent from the shareholders is not needed under the circumstances of (i) the compulsory redemption with respect to fractional shares held by our shareholders in the circumstance of share division and (ii) the compulsory redemption, at the request of the shareholders holding 90% of the votes of the outstanding shares entitled to vote, of the remaining issued shares.





Takeover provisions





The Memorandum and Articles of Association of our company does not alter the general provisions of BVI law and therefore measures such as a “poison pill” would have to be in place before a takeover offer, as, if not, the directors could be seen as exercising their powers for an improper purpose in trying to introduce such a measure.





Furthermore, the creation of additional class of shares would require an amendment to the Memorandum and Articles of Association of our company.  This can only be done by a resolution of shareholders or a resolution of directors.  The directors do not however, have the power to amend the memorandum and articles to (a) restrict the rights or powers of the members to amend the memorandum or articles, (b) to change the percentage of members required to pass a resolution to amend the memorandum and articles, or (c) in circumstances where the memorandum or articles cannot be amended by the members.  The introduction of a poison pill would require an amendment to the Memorandum and Articles of Association of our company which may only be done by way of shareholder resolution.





Shareholder’s access to corporate records





A shareholder is entitled, on giving written notice to the company, to inspect the company’s (i) Memorandum and Articles of Association; (ii) register of members; (iii) register of directors; and (iv) minutes of meetings and resolutions of members and of those classes of members of which the shareholder is a member.





The directors may, if they are satisfied that it would be contrary to the company’s interests to allow a member to inspect any document listed above (or any part thereof), refuse the member to inspect the document or limit the inspection of the document.  Our board may also authorize a member to review the company account if requested.





Indemnification





Under our Memorandum and Articles of Association, we may indemnify our directors or any person who is or was, at the request of the company, serving as a director of, or in any other capacity is or was acting for, another body corporate or a partnership, joint venture, trust or other enterprise against expenses (including legal fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such persons in connection with legal, administrative or investigative proceedings to which they are a party or are threatened to be made a party by reason of their acting as our directors or agents.  To be entitled to indemnification, these persons must have acted honestly and in good faith and in the best interest of the company, and they must have had no reasonable cause to believe their conduct was unlawful.





Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.





86





Mergers and similar arrangements





Under the laws of the BVI, two or more companies may merge or consolidate in accordance with Section 170 of the BVI Business Companies Act, 2004.  A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company.  In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by a resolution of shareholders.





While a director may vote on the plan even if he has a financial interest in the plan of merger of consolidation, in order for the resolution to be valid, the interest must have been disclosed to our board forthwith upon him becoming aware of such interest.  The transaction will not be avoidable if the shareholders approve or ratify it.





Shareholders not otherwise entitled to vote on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment.  In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.





The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company, but may receive debt obligations or other securities of the surviving or consolidated company, or other assets, or a combination thereof.  Furthermore, some or all of the shares of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset.  As such, not all the shares of a class or series must receive the same kind of consideration.





After the plan of merger or consolidation has been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs in the BVI.





A shareholder may dissent from a mandatory redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation.  A shareholder properly exercising his dissent rights is entitled to payment of the fair value of their shares.





A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless notice of the meeting was not given to the shareholder.  If the merger or consolidation is approved by the shareholders, the company must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who did not receive notice of the meeting.  Such shareholders then have 20 days to give to the company their written election in the form specified by the BVI Business Companies Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger is delivered to the shareholder.





Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares.  As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.





Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the company must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value.  The company and the shareholders then have 30 days to agree upon the price.  If the company and a shareholder fail to agree on the price within the 30 days, then the company and the shareholder shall each designate an appraiser and these two appraisers shall designate a third appraiser.  These three appraisers shall fix the fair value of the shares as of the close of business on the day before the shareholders approved the transaction without taking into account any change in value as a result of the transaction.





87





Shareholders’ suits





Similar to the laws of most U.S. jurisdictions, BVI law permits derivative actions against its directors.  However, the circumstances under which such actions may be brought, and the procedures and defenses available may result in the rights of shareholders of a BVI company being more limited than those of shareholders of a company incorporated and/or existing in the United States.





We are not aware of any reported class action having been brought in a BVI court.  Reported derivative actions have been brought but unsuccessfully for technical reasons.  The court of the BVI may, on the application of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company, or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.  In determining whether to grant leave, the High Court of the BVI must take into account (i) whether the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative claim is available.





Leave to bring or intervene in proceedings may be granted only if the High Court of the BVI is satisfied that (i) the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or (ii) it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.





In determining whether to grant leave to a shareholder in these circumstances, the BVI Court must take the following matters into account:





(a)   whether the member is acting in good faith;





(b)   whether the derivative action is in the interests of the company taking account of the views of the company’s directors on commercial matters;





(c)   whether the proceedings are likely to succeed;





(d)   the costs of the proceedings in relation to the relief likely to be obtained; and





(e)   whether an alternative remedy to the derivative claim is available.





C.  Material contracts.





We have not entered into any material contracts related to our business operations other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” and in “Item 7. Major Shareholders and Related Party Transactions” or elsewhere in this annual report.





D.  Exchange controls.





BRITISH VIRGIN ISLANDS





There are no material exchange controls restrictions on payment of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct of its operations in the BVI, where we were incorporated.  There are no material BVI laws which impose any material exchange controls on us or that affect the payment of dividends, interest or other payments to nonresident holders of its ordinary or preferred shares.  BVI law and our Memorandum and Articles of Association impose no material limitations on the right of nonresidents or foreign owners to hold or vote our ordinary or preferred shares.





88





CHINA





For exchange controls in China, see “Item 4. Information on the Company — B. Business overview — Regulation — Regulations on foreign exchange.”





E.  Taxation.





BRITISH VIRGIN ISLANDS TAXATION





Under the present laws of the BVI, there are no applicable taxes on our profits or income.  There are no taxes on profits, income, nor are there any capital gains tax, estate duty or inheritance taxes applicable to any ordinary shares held by nonresidents of the BVI.  In addition, there is no stamp duty or similar duty on the issuance, transfer or redemption of the ordinary shares as the Company does not hold any interest in land in the BVI.  Dividends remitted to the holders of ordinary shares resident outside the BVI will not be subject to withholding tax in the BVI.





European Union Directive on the Taxation of Savings Income (Directive 2003/48/EC)





The European Union has formally adopted a new Directive regarding the taxation of savings income, or the EU Savings Tax Directive.  Since July 1, 2005, member states are required to provide to the tax authorities of another member state details of payments of interest and other similar income paid by a person within its jurisdiction to or for an individual resident in that other member state, except that Austria, Belgium and Luxembourg instead impose a withholding system for a transitional period (unless during such period they elect otherwise).





The BVI is not a member of the European Union and not within the European Union fiscal territory, but the government of the United Kingdom had requested that the Government of the BVI voluntarily apply the provisions of the EU Savings Tax Directive.  The Mutual Legal Assistance (Tax Matters) (Amendment) Act introduces a withholding tax system in respect of payments of interest, or other similar income, made to an individual beneficial owner resident in a European Union member state by a paying agent situated in the BVI.  The withholding tax system will apply for a transitional period prior to the implementation of a system of automatic communication to European Union member states of information regarding such payments.  During this transitional period, such an individual beneficial owner resident in a European Union member state will be entitled to request a paying agent not to withhold tax from such payments but instead to apply a system by which the details of such payments are communicated to the tax authorities of the European Union member state in which the beneficial owner is a resident.





No stamp duty is payable in the BVI in respect of instruments relating to transactions involving our company as our company does not hold any interest in land in the BVI.





PRC TAXATION





The New EIT Law and its implementation rules became effective on January 1, 2008.  Under the previous income tax regime, foreign investors were exempted from PRC income tax on dividends and gains realized upon liquidation of or transferring equity interest in a foreign-invested enterprise.  Under the New EIT Law and its implementation rules, we, as a BVI company with substantially all of our management located in China, may be deemed a resident enterprise for income tax purposes, in which case our global income may be subject to 25% of PRC income tax, and an income tax rate of 10% will normally be applicable to dividends payable to our non-PRC investors, and gains realized on our liquidation or the transfer of our shares by our non-PRC investors, if such income or gain is derived from sources within China.  According to a notice issued by the PRC State Council, dividend from profits generated before January 1, 2008 will still be exempt from such taxation.  However, it is currently uncertain whether we may be deemed a resident enterprise, or how to interpret whether any income or gain is derived from sources within China.  See “Item 3. Key information ─ D. Risk factors ─ Risks related to doing business in China ─ We may be treated as a resident enterprise for PRC tax purposes under the New EIT Law and we may therefore be subject to PRC income tax for any dividends we receive from our subsidiaries, which may materially and adversely affect the amount of dividends we must pay to our shareholders.” and “Item 3. Key information ─ D. Risk factors ─ Risks related to doing business in China ─ Dividends payable by us to our non-PRC shareholders, and gains on the sales of our ordinary shares, may be subject to withholding taxes under PRC tax laws, which may materially reduce the value of your investment.”  If we are not deemed a resident enterprise, then dividends payable to our non-PRC investors, and gains realized on our liquidation or the transfer of our shares by our non-PRC investors will not be subject to PRC income tax withholding.





89





UNITED STATES FEDERAL TAXATION





The following is a discussion of the material U.S. federal tax consequences of purchasing, owning and disposing of shares by U.S. Holders (as described below), but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire the securities.





The discussion applies to investors in shares that hold the shares as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:




·
certain financial institutions;




·
insurance companies;




·
dealers and traders in securities or foreign currencies;




·
persons holding shares as part of a hedge, “straddle,” integrated transaction or similar transaction;




·
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;




·
partnerships or other entities classified as partnerships for U.S. federal income tax purposes;




·
persons liable for the alternative minimum tax;




·
tax-exempt organizations;




·
persons holding shares that own or are deemed to own 10% or more of our voting stock; or




·
persons who hold the shares in connection with a trade or business outside the United States; or




·
persons who acquired our shares pursuant to the exercise of any employee stock option or otherwise as compensation.





This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof.  These laws are subject to change, possibly on a retroactive basis.  Persons considering the purchase of ordinary shares should consult their own tax advisors with regard to the application of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.





As used in this discussion, the term “U.S. Holder” means a beneficial owner of shares that, for U.S. federal income tax purposes, is:





90





·
a citizen or resident of the United States;


·
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or


·
an estate or trust the income of which is subject to U.S. federal income taxation, regardless of its source.





This discussion assumes that we are not, and will not become, a passive foreign investment company, a “PFIC,” for U.S. federal income tax purposes, as described below.





Taxation of dividends





The gross amount of any distributions paid with respect to shares, other than certain pro rata distributions of shares, generally will be treated as foreign source dividend income for U.S. federal income tax purposes.  U.S. Holders will not be entitled to claim a dividends-received deduction with respect to distributions paid by us.  Dividends will be included in a U.S. Holder’s income on the date of such U.S. Holder’s receipt of the dividend.





Subject to applicable limitations, dividends received by certain non-corporate U.S. Holders in taxable years beginning before January 1, 2011 will be taxable at a maximum rate of 15%.  Non-corporate U.S. Holders should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to be taxed at this favorable rate.





In the event that we are deemed to be a Chinese “resident enterprise” under PRC tax law, you may be subject to PRC withholding taxes on dividends paid to you with respect to the ordinary shares.  In addition, subject to certain conditions and limitations, PRC withholding taxes on dividends not in excess of the rate allowed under the Treaty, if applicable, may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability.  The rules governing the foreign tax credit are complex.  We urge interested parties to consult a tax advisor, regarding the availability of the foreign tax credit, to review their particular circumstances.





Taxation of capital gains





Upon sale or other disposition of the shares, a U.S. Holder will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between such holder’s tax basis in the shares sold or disposed of and the amount realized on the sale or other disposition.  Such gain or loss will be long-term capital gain or loss if the U.S. Holder has held the shares for more than one year and will generally be U.S. source gain or loss for foreign tax credit purposes.  However, in the event that we are deemed to be a Chinese “resident enterprise” under PRC tax law, gains on disposal may be subject to PRC tax.  In that event, a U.S. Holder may be eligible for the benefits of the Treaty.  Under the Treaty, if any PRC tax were to be imposed on any gain from the disposition of the shares, the gain would be treated as PRC source income.  We urge interested parties to consult a tax advisor to review their particular circumstances, regarding the tax consequences if a foreign tax is imposed on gain on a disposition of our shares, including the availability of the foreign tax credit.





Passive foreign investment company rules





We believe that we were not a PFIC for United States federal income tax purposes for our taxable year ended December 31, 2010.  However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including goodwill) from time to time, and since we have and will continue to have a significant amount of passive assets and the value of our assets may be based, in part, on the market value of our shares, which is subject to change, there can be no assurance that we will not be a PFIC for any taxable year.





91





In general, if we were a PFIC for any taxable year during which a U.S. Holder held shares, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the shares would be allocated ratably over the U.S. Holder’s holding period for the shares.  The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income.  The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year.  Similar rules would apply to any distribution in respect of shares in excess of 125% of the average of the annual distributions on shares received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter.  Certain elections may be available that would result in alternative treatments (such as a mark-to-market treatment) of the shares.  U.S. Holders should consult their tax advisers to determine whether such elections are available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.





Information reporting and backup withholding





Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that backup withholding does not apply.





The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that the required information is furnished to the Internal Revenue Service.





F.   Dividends and paying agents.





Not applicable.





G.   Statement by experts.





Not applicable.





H.   Documents on display.





We have filed this annual report on Form 20-F with the SEC under the Securities Exchange Act of 1934, as amended, or the Exchange Act.  Statements made in this annual report as to the contents of any document referred to are not necessarily complete.  With respect to each such document filed as an exhibit to this annual report, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.





We are subject to the informational requirements of the Exchange Act and file reports and other information with the SEC.  Reports and other information which the Company filed with the SEC, including this annual report on Form 20-F, may be inspected and copied at the public reference room of the SEC at 100 F. Street N.E., Washington, D.C. 20549.  You can also obtain copies of this annual report on Form 20-F by mail from the Public Reference Section of the SEC, 100 F. Street N.E., Washington, D.C. 20549, at prescribed rates.  Additionally, copies of this material may be obtained from the SEC’s Internet site at http://www.sec.gov.  The SEC’s telephone number is 1-800-SEC-0330.  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.





I.     Subsidiaries information.





Not applicable.




92




ITEM 11.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


INTEREST RATE RISK





Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by bank deposits and other interest earning short-term investments.  As of December 31, 2010, we had short-term bank borrowings in the amount of RMB81.0 million (USD12.2 million).  Our short-term bank borrowings are subject to floating interest rates.  Assuming the principal amount of the outstanding bank borrowings remains approximately the same as of December 31, 2010, each 1% increase in applicable interest rate would add RMB0.81 million per year to our interest expenses.  On the other hand, any decrease in interest rate would reduce interest income generated from our interest-earning instruments.  We have not used any derivative financial instruments to manage our interest risk exposure.  We have not been exposed to material risks due to changes in interest rates.  However, our future interest expenses may be higher and interest income may be lower than expected due to changes in market interest rates.





FOREIGN EXCHANGE RISK





The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.  The conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, the central bank of the PRC.  On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of Renminbi to the U.S. dollar.  Under this new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies.  As a result, from July 21, 2005 to June 28, 2011, the Renminbi has appreciated approximately 20.2% to the U.S. dollar.  While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.




We use Renminbi as our reporting currency, and all of our revenues and a substantial majority of our costs are denominated in Renminbi.  However, proceeds from many of our financing activities are denominated in U.S. dollars, and certain of our costs, in particular third-party hardware and software products, are also denominated in U.S. dollars.  Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our costs and operating margins as well as our net income.  For example, to the extent that we need to convert U.S. dollars we receive from our future financing activities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion.  Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.  We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.





ITEM 12.        DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES





Not applicable.





PART II




ITEM13.         DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES





Not applicable.





ITEM 14.       MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
 PROCEEDS





Not applicable.




93




ITEM 15.       CONTROLS AND PROCEDURES
 
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES


Our management has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the fiscal year covered by this report.  Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the fiscal year covered by this report, our disclosure controls and procedures were effective in (1) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and (2) ensuring that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure,.





MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, 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 and includes those policies and procedures that:





·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;


·
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


·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  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.





The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010.  In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on our assessment, management believes that, as of December 31, 2010, the Company’s internal control over financial reporting was effective based on those criteria.





There has been no change in our internal control over financial reporting during the year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




Our independent auditor, BDO Limited, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. The report is as follows:




94





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Board of Directors and Stockholders of


Yucheng Technologies Limited




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 effective internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.





A company’s 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 company’s 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 company’s 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.




In our opinion, Yucheng Technologies Limited maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
 
 We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Yucheng Technologies Limited as of December 31, 2009 and 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010 and our report dated June 30, 2011 expressed an unqualified opinion thereon.
  BDO Limited
 Hong Kong, June 30, 2011




95




ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT.
 
 The board of directors believes that Mr. Williams, Wang, and Liao , members of our audit committee, meet the criteria for an “audit committee financial expert” as established by the SEC.
 
 Mr. Liao will not be deemed an “expert” for any purpose, including, without limitation, for purpose of Section 11 of the U.S. Securities Act of 1933, as amended, as a result of being designated or identified as an audit committee financial expert.  The designation or identification of Mr. Williams and Wang as an audit committee financial expert does not impose on him any duties, obligations or liabilities that are greater than the duties, obligations and liabilities imposed as a member of the audit committee and board of directors in the absence of such designation or identification.
 
 ITEM 16B.     CODE OF ETHICS.
 
 Our board of directors adopted a code of ethics on March 20, 2006 that applies to our directors, officers and employees and to those of our subsidiaries.  A copy of the form of our code of ethics was filed as Annex G to our registration statement on Form S-4 filed with the SEC on March 29, 2006, and was effective as of November 3, 2006.
 
 ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES.
 
 The following are the fees billed by BDO Limited, our principal independent auditor, for the years ended December 31, 2010 and 2009:
 
 2010


2009USD


USDAudit Fees (1)

260,000



260,000Audit Related Fees (2)


50,000



90,000Tax Fees (3)


-



-All Other Fees (4)


-



-310,000



350,000
 
 (1)
Audit Fees consist of the aggregate fees billed for professional services rendered for the audit of our annual financial statements included in our Form 20-F and for other services that are normally provided by our independent auditor in connection with our statutory and regulatory filings or engagements.
 (2)
Audit Related Fees consist of the aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under (1) of this Item.
 (3)
Tax Fees consist of the aggregate fees billed for tax compliance, tax advice, and tax planning.
 (4)
All Other Fees consist of the aggregate fees billed for products and services provided by our independent auditor, other than the services reported in (1) through (3) of this Item.
 
 The Audit Committee is to pre-approve all auditing services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act which are approved by the Audit Committee prior to the completion of the audit).
 
 ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
 
 We have not been granted an exemption from the applicable listing standards for the audit committee of our board of directors.
 
 ITEM 16E.     PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
 
 None
  96


ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANTS.





BDO McCabe Lo Limited changed its name to BDO Limited on May 1, 2009





ITEM 16G. CORPORATE GOVERNANCES





As a foreign private issuer with ordinary shares listed on NASDAQ, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.


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 the Company and its subsidiaries are included at the end of this annual report.





ITEM 19.EXHIBITS





ExhibitNumber

Description1.1

Memorandum of Association of Registrant (incorporated by reference from Registration Statement No. 333-132814 - Annex B)1.2

Articles of Association of Registrant (incorporated by reference from Registration Statement No. 333-132814 - Annex C)2.1

Specimen Common Stock Certificate of Registrant (incorporated by reference from Registration Statement No. 333-132814 – Exhibit 4.1)4.1

Securities Purchase Agreement among Registrant, Yucheng Technologies Limited, Sihitech Company Limited, Mega Capital Group Services Limited, Profit Loyal Consultants Limited, Elite Concord International Limited, China Century Holdings Group Limited, Shinning Growth Investment Group Limited, Chih Cheung, James Li, James Preissler, for the acquisition of Ahead Billion Venture Limited, and Port Wing Development Company Limited, dated December 20, 2005 (incorporated by reference from Registration Statement No. 333-132814 – Annex A)





97




4.2

Amendment to Securities Purchase Agreement dated June 29, 2006 (incorporated by reference from Registration Statement No. 333-132814 - Annex A)4.3

Amendment to Securities Purchase Agreement dated October 27, 2006 (incorporated by reference from Registration Statement No. 333-132814 - Annex A)4.4

Amendment to Securities Purchase Agreement dated July 31, 2007 (incorporated by reference from Foreign Issuer Report on Form 6-K, filed August 24, 2007)4.5

China Unistone/Yucheng 2006 Performance Equity Plan (incorporated by reference from Registration Statement No. 333-132814 –Annex D)4.6

Equity Interest Transfer Agreement  re. Beijing Sunrisk Information Technology Company Limited (incorporated by reference from Exhibit 4.1 to Form 6-K filed February 13, 2007)4.7

Form of Employment Agreement between Yucheng Technologies Limited and Hong Weidong (incorporated by reference from Registration Statement No. 333-132814 – Exhibit 10.18)4.8

Form of Employment Agreement between Yucheng Technologies Limited and Zeng Shuo (incorporated by reference from Registration Statement No. 333-132814 – Exhibit 10.19)8.1*

List of subsidiaries11.1

Code of Ethics (incorporated by reference from Registration Statement No. 333-132814 - Annex G)12.1*

CEO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))12.2*

CFO Certification Pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-1(a) (17 CFR 240.15d-14(a))13.1*

CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2*

CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








* Filed with this annual report on Form 20-F





SIGNATURE





The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.





Date: June 30, 2011


YUCHENG TECHNOLOGIES

LIMITED/s/ Weidong HongName:
Weidong HongTitle:
Chief Executive Officer





98




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport of Independent Registered Public Accounting Firm

F-1Consolidated Balance Sheets as of December 31, 2009 and 2010

F-2Consolidated Statements of Income for the Years Ended December 31, 2008, 2009and 2010

F-4Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2008, 2009and 2010

F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009and 2010

F-6Notes to the Consolidated Financial Statements for the Years Ended December 31, 2008, 2009and 2010

F-8





99




YUCHENG TECHNOLOGIES LIMITED


AND


SUBSIDIARIES





Consolidated Financial Statements





Years Ended December 31, 2008, 2009 and 2010










REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors and Stockholders of
 Yucheng Technologies Limited
 We have audited the accompanying consolidated balance sheets of Yucheng Technologies Limited (“the Company”) as of December 31, 2009 and 2010, and the related consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements 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.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yucheng Technologies Limited as of December 31, 2009 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.


We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Yucheng Technologies Limited's internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 30, 2011 expressed an unqualified opinion thereon.


BDO Limited
  Hong Kong, June 30, 2011


F-1




YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES


Consolidated Balance Sheets
 As of December 31, 2009 and 2010


(Expressed in Chinese Renminbi)




Assets

2009


2010


2010RMB


RMB


USD(note 2 (c))Current assets:Cash and cash equivalents


246,577,140



162,536,258



24,542,295Trade accounts receivable, net (note 3)


147,978,704



196,243,059



29,631,881Costs and estimated earnings in excess of billings on uncompleted contracts (note 4)


105,684,112



132,656,349



20,030,554Due from related parties (note 23)


1,697,890



5,926,033



894,806Inventories


3,393,227



695,192



104,971Pre-contract costs


11,879,098



24,264,187



3,663,791Other current assets (note 5)


38,270,683



67,862,868



10,247,008Deferred tax assets  (note 6)


5,735,143



-



-Total current assets


561,215,997



590,183,946



89,115,306Investments under equity method (note 2(u))


7,570,143



24,846,083



3,751,655Properties and equipment, net (note 7)


64,147,083



30,409,072



4,591,643Intangible assets, net (note 8)


30,248,409



24,908,257



3,761,043Goodwill (note 9)


189,009,599



189,009,599



28,539,659Deferred tax assets (note 6)


15,926,809



10,607,353



1,601,666Total assets


868,118,040



869,964,310



131,360,972


See accompanying notes to consolidated financial statements.


F-2


YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES


Consolidated Balance Sheets (continued)
 As of December 31, 2009 and 2010
 (Expressed in Chinese Renminbi)





Liabilities and stockholders’ equity

2009


2010


2010RMB


RMB


USD(note 2 (c))Current liabilitiesShort-term loan (note 10)


80,000,000



81,000,000



12,230,661Obligations under capital leases (note 11)


2,282,497



314,535



47,493Trade accounts payable


94,005,387



77,613,387



11,719,297Billings in excess of costs and estimatedearnings on uncompleted contracts (note 4)


14,065,351



22,250,243



3,359,694Employee and payroll accruals


3,573,117



18,341,699



2,769,520Dividends payable to ex-owners


3,960,391



76,985



11,624Outstanding payment in relation tobusiness acquisitions


1,727,563



120,367



18,175Income taxes payable


11,633,628



11,103,004



1,676,507Due to a related party


-



3,933,940



594,008Deferred tax liabilities   (note 6)


1,641,265



829,282



125,218Other current liabilities (note 12)


52,810,194



44,720,111



6,752,550Total current liabilities


265,699,393



260,303,553



39,304,747Obligations under capital leases (note 11)


314,535



-



-Deferred tax liabilities  (note 6)


916,748



1,783,584



269,314Total liabilities


266,930,676



262,087,137



39,574,061Commitments and contingencies (note 20)


-



-



-EquityPreferred stock, $0.0001 par value, authorised2,000,000 shares and none issued;


-



-



-Common stock, $0.0001 par value, authorised60,000,000 shares; 18,560,014 shares and18,560,014 shares issued and outstanding as of December 31, 2009 and 2010 (note 1)


20,007,998



20,007,998



3,021,124Additional paid-in capital


385,713,676



385,883,587



58,266,807Stock based compensation


-



8,052,823



1,215,943Reserves (note 14)


43,135,361



50,428,005



7,614,418Retained earnings


146,691,122



141,363,202



21,345,252Accumulated other comprehensive loss (note 15)


(2,230,354
)


(2,992,748
)


(451,892
)Total Yucheng’s equity


593,317,803



602,742,867



91,011,652Non-controlling interests (note 13)


7,869,561



5,134,306



775,259Total Stockholders’ equity


601,187,364



607,877,173



91,786,911Total liabilities and Stockholders’ equity


868,118,040



869,964,310



131,360,972


See accompanying notes to consolidated financial statements.
  F-3


YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES


Consolidated Statements of Operations
 For the year ended December 31, 2008, 2009 and 2010


(Expressed in Chinese Renminbi)
 
 2008


2009


2010


2010RMB


RMB


RMB


USD(note 2 (c))Revenues (note 16):Software & Solutions


269,360,418



286,892,256



340,295,171



51,383,145Platform


339,773,531



12,575,504



8,460,490



1,277,499Maintenance Services


61,251,269



62,251,487



63,576,554



9,599,794Total revenues


670,385,218



361,719,247



412,332,215



62,260,438Business taxes


(8,188,384
)


(7,249,519
)


(8,688,023
)


(1,311,855
)Net revenues


662,196,834



354,469,728



403,644,192



60,948,583Cost of sales:Software & Solutions


(118,167,472
)


(156,677,911
)


(170,736,573
)


(25,780,508
)Platform


(305,639,200
)


(10,515,013
)


(7,687,484
)


(1,160,778
)Maintenance Services


(16,313,291
)


(24,139,808
)


(28,222,982
)


(4,261,552
)Total cost of sales


(440,119,963
)


(191,332,732
)


(206,647,039
)


(31,202,838
)Gross profit


222,076,871



163,136,996



196,997,153



29,745,745Research and development expenses


(10,148,304
)


(13,828,380
)


(10,530,618
)


(1,590,079
)Selling and marketing expenses


(33,368,880
)


(41,126,026
)


(44,761,799
)


(6,758,844
)General and administrative expenses (note 18)


(88,571,855
)


(117,207,162
)


(104,465,484
)


(15,773,851
)Gain (loss) on disposal of intangible assetsand fixed assets


-



(182,104
)


4,314,669



651,497(132,089,039
)


(172,343,672
)


(155,443,232
)


(23,471,277
)Other income (expense):Interest income


1,244,182



405,618



319,484



48,241Interest expense


(3,783,067
)


(2,860,851
)


(4,526,625
)


(683,501
)Income (loss) from short-term investment


(529,036
)


1,203,274



-



-Other income, net (note 17)


510,270



8,413,140



(95,519
)


(14,423
)Income (loss) before income taxes


87,430,181



(2,045,495
)


37,251,261



5,624,785Income tax (expense) benefits (note 6)


5,181,038



5,250,410



(5,259,223
)


(794,121
)Income (loss) before equity method investees


92,611,219



3,204,915



31,992,038



4,830,664Loss from equity method investees


(1,280,200
)


(3,829,962
)


(556,665
)


(84,054
)Income (loss) before discontinued operations


91,331,019



(625,047
)


31,435,373



4,746,610Loss from discontinued operations, net of tax (note 25)


(10,443,590
)


(6,815,634
)


(32,205,904
)


(4,862,957
)Income (loss) before non-controlling interests


80,887,429



(7,440,681
)


(770,531
)


(116,347
)Non-controlling interests


107,755



3,241,083



2,735,255



413,012Net income (loss) attributable to Shareholders of Yucheng


80,995,184



(4,199,598
)


1,964,724



296,665Foreign currency translation adjustment


(1,188,399
)


521,895



(762,394
)


(115,118
)Comprehensive income (loss)


79,806,785



(3,677,703
)


1,202,330



181,547
  Weighted average common shares outstanding– basic


17,566,898



18,541,289



18,560,014



18,560,014– diluted


18,691,852



18,584,226



18,949,359



18,949,359Earnings per share from continuing operations (note 19)– basic


5.21



0.14



1.84



0.28– diluted


4.89



0.14



1.80



0.27Earnings per share (note 19)– basic


4.61



(0.23
)


0.11



0.02– diluted


4.33



(0.23
)


0.10



0.02
  See accompanying notes to consolidated financial statements.


F-4





YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES


Consolidated Statements of Stockholders’ Equity
 (Expressed in Chinese Renminbi)





AccumulatedAdditional








other


Non-


TotalCommon


shares


paid-in





Retained


comprehensive


controlling


stockholders’Shares


Amount


capital


Reserves


earnings


loss


interests


equityRMB


RMB


RMB


RMB


RMB


RMB


RMBBalance as at January 1, 2008


16,610,853



20,006,616



361,624,414



24,868,832



88,162,065



(1,563,850
)


5,199,312



498,297,389Bonus shares


952,832



696



43,290,856



-



-



-







43,291,552Shares issued to independentdirectors


12,000



8



973,078



-



-



-







973,086Deemed distribution (note 1)


-



-



(41,540,598
)


-



-



-







(41,540,598
)Decrease of interests in Sunrisk


-



-



(18,820,019
)


-



-



-







(18,820,019
)Net income


-



-



-



-



80,995,184



-



(2,710,968
)


78,284,216Increase (decrease) in non-controlling interest arising from acquisition / disposal of subsidiary, net


























9,535,299



9,535,299Transfer to reserves


-



-



-



13,140,014



(13,140,014
)


-



-



-Foreign currency translationadjustment


-



-



-



-



-



(1,188,399
)


-



(1,188,399
)Reversal of stock issuance cost


-



-



1,726,728



-



-



-



-



1,726,728Balance as at December 31, 2008


17,575,685



20,007,320



347,254,459



38,008,846



156,017,235



(2,752,249
)


12,023,643



570,559,254Bonus shares


952,832



656



37,887,742



-



-



-



-



37,888,398Shares issued to independent directors


5,250



4



221,452



-



-



-



-



221,456Issuance on acquisition of a Subsidiary


26,247



18



1,411,185



-



-



-



-



1,411,203Increase of interests in Yuxinyicheng Information


-



-



(1,061,162
)


-



-



-



-



(1,061,162
)Net loss


-



-



-



-



(4,199,598
)


-



(3,715,244
)


(7,914,842
)Increase (decrease) in non-controlling interest arising from acquisition / disposal of subsidiary, net


-



-



-



-



-



-



(438,838
)


(438,838
)Transfer to reserves


-



-



-



5,126,515



(5,126,515
)


-



-



-Foreign currency translation adjustment


-



-



-



-



-



521,895



-



521,895Balance as at December 31, 2009


18,560,014



20,007,998



385,713,676



43,135,361



146,691,122



(2,230,354
)


7,869,561



601,187,364Stock based compensation expenses


-



-



8,052,823



-



-



-



-



8,052,823Stock based compensation expenses to independent directors


-



-



169,911



-



-



-



-



169,911Net income


-



-



-



-



1,964,724



-



(2,735,255
)


(770,531
)Transfer to reserves


-



-



-



7,292,644



(7,292,644
)


-



-



-Foreign currency translation adjustment


-



-



-



-



-



(762,394
)


-



(762,394
)Balance as at December 31, 2010


18,560,014



20,007,998



393,936,410



50,428,005



141,363,202



(2,992,748
)


5,134,306



607,877,173In USD(note 2 (c))






3,021,124



59,482,570



7,614,418



21,345,252



(451,892
)


775,259



91,786,911





See accompanying notes to consolidated financial statements.




F-5




YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Consolidated Statements of Cash Flows
 (Expressed in Chinese Renminbi)





2008


2009


2010


2010RMB


RMB


RMB


USD(note 2 (c))Cash flows from operating activities:Net income (loss)


80,995,184



(4,199,598
)


1,964,724



296,665Adjustments to reconcile net income to  net cash provided by operating activities:Depreciation and amortization


28,481,819



33,100,808



27,147,524



4,099,163Impairment loss on receivables


-



18,348,463



-



-(Gain) loss on disposal of intangible assets and fixed assets


243,958



243,455



(4,296,232
)


(648,713
)Loss (gain) on disposal of subsidiary


(247,256
)


-



25,419,346



3,838,215Loss (gain) on disposal of investments  under equity method


(2,102,566
)


(6,291,960
)


14,543



2,196Non-controlling interests


(2,710,968
)


(3,715,244
)


(2,735,255
)


(413,012
)Loss from equity method investees


2,791,802



3,829,961



542,122



81,858Stock based compensation to independent directors


973,086



221,456



169,911



25,656Compensation expenses to ex-owners


-



1,411,203



-



-Stock based compensation to employees


-



-



8,052,823



1,215,943(Increase) decrease in trade accounts receivable


(77,576,334
)


116,403,846



(77,767,521
)


(11,742,570
)Increase in costs and estimated earnings in  excess of billings on uncompleted contracts


(22,248,611
)


(36,871,193
)


(26,972,237
)


(4,072,695
)Decrease (increase) in due from related parties


(1,568,105
)


1,477,963



407,564



61,540Decrease (increase) in inventories


5,682,947



(498,457
)


2,678,684



404,470Increase in pre-contract costs


(6,968,278
)


(1,985,384
)


(12,385,089
)


(1,870,097
)(Increase) decrease in other current assets


44,470,781



4,294,739



(34,021,862
)


(5,137,159
)Decrease (increase) in deferred tax assets


(10,398,508
)


(8,677,236
)


2,152,005



324,944(Decrease) increase in trade accounts payable


51,288,579



(51,042,923
)


(16,192,000
)


(2,444,924
)Increase  in billings in excess of costs andestimated earnings on  uncompleted contracts


3,091,360



4,052,173



8,184,892



1,235,884Increase (decrease) in employee and payroll accruals


4,076,500



(8,910,863
)


15,017,488



2,267,577(Decrease) increase in income taxes payable


(1,066,768
)


1,840,266



(530,624
)


(80,122
)Increase in other current liabilities


9,875,681



3,744,120



54,393,397



8,213,175Increase in due to a related party


-



-



4,116,524



621,578Increase (decrease) in deferred tax liabilities


(768,891
)


(1,801,721
)


54,853



8,283Net cash (used in) provided by operating activities


106,315,412



64,973,874



(24,584,420
)


(3,712,145
)Cash flows from investing activities:Capital expenditure


(29,716,811
)


(35,646,705
)


(21,438,377
)


(3,237,106
)Additional investment in a subsidiary


-



(1,500,000
)


-



-Payment of purchase of subsidiaries, net of cash acquired


(57,684,392
)


(11,117,440
)


(1,607,196
)


(242,680
)Investment in equity method investments


(5,042,027
)


(13,746,920
)


(29,400,000
)


(4,439,277
)Advances to investments under equity method


(1,828,333
)


(22,830,589
)


(5,489,135
)


(828,836
)Collection of advances to investments under equity method


3,494,585



21,222,984



670,844



101,295Proceeds from disposal of equipment


353,063



192,918



9,342,164



1,410,628Proceeds from disposal of investment under equity method


3,628,834



7,988,321



2,590,909



391,216Proceeds from disposal of subsidiary, net of cash disposed


(2,025,391
)


-



(8,959,768
)


(1,352,887
)Net cash used in investing activities


(88,820,472
)


(55,437,431
)


(54,290,559
)


(8,197,647
)




See accompanying notes to consolidated financial statements.
  F-6


YUCHENG TECHNOLOGIES LIMITED AND SUBSIDIARIES
 Consolidated Statements of Cash Flows (continued)
 (Expressed in Chinese Renminbi)





2008


2009


2010


2010RMB


RMB


RMB


USD(note 2 (c))Cash flows from financing activities:Deemed distribution


(5,778,611
)


(18,281,588
)


-



-Capital received


4,460,000



-



-



-Proceeds from bank borrowings


60,000,000



208,540,000



101,000,000



15,250,578Repayments of bank borrowings


(35,000,000
)


(188,540,000
)


(100,000,000
)


(15,099,582
)Repayment of capital leases


(3,167,113
)


(2,867,754
)


(2,282,497
)


(344,648
)Dividends paid to ex-owners


(20,751,999
)


(1,561,017
)


(3,883,406
)


(586,378
)Net cash used in financing activities


(237,723
)


(2,710,359
)


(5,165,903
)


(780,030
)Net (decrease) increase in cash and cash equivalents


17,257,217



6,826,084



(84,040,882
)


(12,689,822
)Cash and cash equivalents at beginning of year


222,493,839



239,751,056



246,577,140



37,232,117Cash and cash equivalents at the end of year


239,751,056



246,577,140



162,536,258



24,542,295Supplemental disclosures of cash flow information:Interest paid


3,783,067



2,860,851



4,421,938



667,694Income taxes paid


2,255,268



1,112,009



3,990,181



602,501Supplemental disclosures of non-cash investing activities:Capital lease obligation


4,062,450



-



-



-Additional consideration on acquisitions


20,787,876



-



-



-Deemed distributions to ex-owners


41,540,599



-



-



-Consideration on disposal of a subsidiary


-



-



21,500,000



3,246,410


See accompanying notes to consolidated financial statements.





F-7




1
Organization and description of business




Yucheng Technologies Limited (“Yucheng”), incorporated on November 24, 2006 under the laws of the British Virgin Islands (“BVI”), and its subsidiaries are engaged in systems integration, software solution services,  information technology (“IT”) consulting and training services, maintenance and support, sales of self-developed IT products, computer software, hardware and peripheral equipment, communication equipment and undertaking computer network projects. Its major customers are first and second tier state-owned commercial banks in China.





On January 15, 2007, Beijing Yuxinyicheng Technologies Limited (“Yuxinyicheng”) established a subsidiary, Beijing Yuxinyicheng Information Technology Limited. On July 18, 2007, Yuxinyicheng established another subsidiary, Shanghai Yuxinhongzhi Information Technology Limited. During 2007, Yuxinyicheng acquired 5 companies, Beijing Sunrisk Information Technology Limited (“Sunrisk”), Beijing Easycon Electronics Limited, Chengdu Recency Technologies Limited, Shanghai Fujie Business Consulting Limited, and Shanghai Fuyi Business Consulting Limited..





On January 22, 2008, Beijing Sihitech acquired a further 25% equity interest of Easycon from its minority shareholders at an aggregate consideration of RMB7,200,000.





On April 28, 2008, the registered capital of Sunrisk was increased to RMB20,000,000 from RMB1,000,000.  Yuxinyicheng introduced a strategic investor to acquire 49% of Sunrisk’s equity interest. As a result, Yuxinyicheng’s equity interest in Sunrisk was diluted to 51% from 100%.





On July 21, 2008, Beijing Sunrisk Information Technology Limited was renamed to Beijing Yuxinhengsheng Information Technology Limited.





On August 13, 2009,Shanghai Sihitech Software Co., Ltd. was renamed as Shanghai Yuxinyicheng Software Co., Ltd.





On May 13, 2009,Guangzhou Yuxinhongtai Technology Co., Ltd. was renamed as Guangzhou Shenglihongtai Technology Co., Ltd. On August 30, 2009, Yuxinyicheng transferred its interest in Guangzhou Sihitech to a third party.





On October 14, 2009, Yuxinyicheng established a wholly owned subsidiary named Tianjin Yuxinyicheng Technologies Limited in Tianjin. Total registered capital is RMB 50 million.





On November 30, 2009, Shanghai Fuyi Business Consulting Limited which had been inactive was closed.





On December 31, 2010, Yuxinyicheng transferred its interests of 100% in Beijing Yuxinyicheng Information Technology Limited(“Yuxinyicheng Information”) to the third parties.




F-8




1
Organization and description of business - Continued




At December 31, 2008, 2009 and 2010, details of Yucheng’s subsidiaries (collectively with Yucheng  referred to as the “Company”) are as follows:





Name

Date of
incorporation
or
establishment

Place of
incorporation
or
establishment

Percentage of
ownership


Principal activity2008


2009


2010Port Wing Development Co., Ltd. (“e-Channels BVI”)

November 3, 2005

BVI


100
%


100
%


100
%

Investment holdingAhead Billion Venture Ltd. (“Sihitech BVI”).

November 3, 2005

BVI


100
%


100
%


100
%

Investment holdingBeijing Yuxinyicheng Technologies Ltd. (“Yuxinyicheng”)

October 19, 2006

People’s Republic of China (“PRC”)


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportBeijing e-Channels Century Technology Co., Ltd.(“e-Channels”)

February 5, 2001

PRC


100
%


100
%


100
%

Technology development, technology transfer, consulting and training services, sales of self-developed products, computer software, hardware and peripheral equipment, communication equipment and undertaking computer network projects




F-9




1
Organization and description of business - Continued




Name

Date of
incorporation
or
establishment

Place of
incorporation
or
establishment

Percentage of
ownership


Principal activity2008


2009


2010Beijing Sihitech Technology Co., Ltd.(“Beijing Sihitech”)

June 16, 1999

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportBeijing Sihitech Software Co., Ltd.(“Beijing Software”)

January 28, 2002

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportShanghai  Sihitech Technology Co., Ltd.(“Shanghai Sihitech”)

June 20, 2001

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportShanghai Yuxinyicheng Software Co., Ltd.(“Shanghai Software”)

May 28, 2005

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportGuangzhou Shenglihongtai Technology Co., Ltd.(“Guangzhou Sihitech”)

January 5, 2000

PRC


100
%


-



-


System integration, software development, information technology consulting, maintenance and supportBeijing Yuxinyicheng Information   Technology Limited(“YuxinyichengInformation”)

January 15, 2007

PRC


80
%


100
%


-


Launching Point of Sale ( “POS” ) merchant-acquiring outsourced services for bank in China and providing related maintenance supportBeijing Yuxinhengsheng Information Technology Limited(“Sunrisk”)

April 14, 2005

PRC


51
%


51
%


51
%

System integration, Software development, information technology consulting, maintenance and supportBeijing Easycon Electronics Limited(“Easycon”)

December 25, 1997

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and support




F-10




1
Organization and description of business - Continued




Name

Date of
incorporation
or
establishment

Place of
incorporation
or
establishment

Percentage of
ownership


Principal  activity2008


2009


2010Chengdu Recency Technologies Limited(“Recency”)

July 15, 1997

PRC


100
%


100
%


100
%

Software development, information technology consulting, maintenance and supportShanghai Fujie Business Consulting Limited(“Fujie”)

December 13, 2005

PRC


100
%


100
%


100
%

Software development, information technology consulting, maintenance and supportShanghai Fuyi Business Consulting Limited(“Fuyi”)

December 6, 2005

PRC


100
%


-



-


Software development, information technology consulting, maintenance and supportXiamen Yucheng Technology Limited(“Xiamen Yucheng”)

April 9, 2007

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportBeijing Yuxinyicheng Software Co. , Ltd.(“Yuxinyicheng Software”)

August 6, 2007

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportGuangzhou Yuxinyicheng Information Technology Limited (“GuangzhouYuxinyicheng”)

November 26, 2007

PRC


100
%


100
%


100
%

System integration, software development, information technology consulting, maintenance and supportChengdu Yuxinyicheng Technology Limited(“Chengdu Yuxinyicheng”)

March 16, 2009

PRC


-



100
%


100
%

System integration, software development, information technology consulting, maintenance and supportTianjin Yuxinyicheng Technology Limited(“Tianjin Yuxinyicheng”)

October 14, 2009

PRC


-



100
%


100
%

System integration, software development, information technology consulting, maintenance and support




F-11




1
Organization and description of business - Continued




The IT industry is characterized by rapid technological change and competitive pricing pressures. The Company financial results are affected by a wide variety of factors, including general economic conditions in the local market, economic conditions specific to the IT industry, technological and creative skills of its personnel, the timely development of new products and the ability to safeguard patents and intellectual property in a rapidly evolving market. As a result, the Company may experience significant period-to-period fluctuations in future operating results due to the factors mentioned above or other factors.





The majority of the revenues of the Company are from customers who are concentrated in the financial services industry in PRC.  Any unfavourable economic conditions affecting the local financial services industry could have a material adverse effect on the Company’s future financial position and results of operations.





The trade accounts receivable of the Company include amounts due from banks and IT service companies. The Company performs on-going credit evaluations of its customers (see Note 2 (t)).  Sales to the Company's largest customer, a bank and its subsidiaries, were approximately 57.7%, 39.1% and 30.7% of revenues in 2008, 2009 and 2010, respectively.  The Company’s total revenue from its largest customer in 2010 resulted from 62 (2009: 111) separate and independent contracts, the head office of the largest customer, which is one of the primary banks in China, contributed to 14.3% (2009: 20.0%) of the Company’s total revenues. Trade accounts receivable as at December 31, 2009 and 2010 included receivables from the Company’s largest bank customer and its subsidiaries totalling RMB29.3  million and RMB54.5 million, respectively.





The Share Exchange Transactions





On December 20, 2005, China Unistone Acquisition Corporation (“CUAC”) entered into a Stock Purchase Agreement with Sihitech BVI and e-Channels BVI and all stockholders of Sihitech BVI and e-Channels BVI for CUAC’s acquisition of Sihitech BVI and e-Channels BVI. For the acquisition, CUAC formed its wholly owned subsidiary, Yucheng. On November 24, 2006, the closing date of the acquisition (the “Closing Date”), CUAC merged with and into Yucheng for the purpose of redomestication out of the United States of America. The redomestication merger was achieved by a one-for-one exchange of all the outstanding common stock of CUAC for common stock of Yucheng and the assumption of all the rights and obligations of CUAC by Yucheng, including assumption of the outstanding warrants of CUAC. Immediately after the redomestication merger, Yucheng acquired all the common stock of Sihitech BVI and e-Channels BVI by the issuance of shares and payments of cash consideration to the shareholders of Sihitech BVI (“Sihitech BVI Shareholders) and of e-Channels BVI (“e-Channels BVI Shareholders”) or their designee, making them wholly owned subsidiaries (the “Share Exchange Transactions”).





Sihitech BVI Shareholders and their designee were paid an aggregate of USD2,731,884 in cash, using the funds held in the trust account of CUAC, and were issued an aggregate of 3,754,484 ordinary shares of Yucheng for all the outstanding common stock of Sihitech BVI. This transaction was accounted for as a recapitalisation of Sihitech BVI. Since Yucheng is not an operating company, this transaction is treated as the issuance of shares of Sihitech BVI for the net tangible assets (consisting principally of cash and short-term investments) of Yucheng. The carrying value of the assets of Yucheng approximated their fair value, therefore, no "purchase accounting" fair value adjustments were required and no goodwill had been recorded in this portion of this transaction. The payment of the cash consideration was accounted for as a deemed distribution.


F-12





1
Organization and description of business - Continued




The Share Exchange Transactions - Continued





e-Channels BVI Shareholders and their designee were paid an aggregate of USD1,268,116 in cash, using the funds held in the trust account of CUAC, and were issued an aggregate of 1,573,836 shares of common stock of Yucheng for all the outstanding common stock of e-Channels BVI. This transaction, between the recapitalized Sihitech BVI and e-Channels BVI, was accounting for using the purchase method of accounting with Sihitech BVI treated as the accounting acquirer.





As a result of the Share Exchange Transactions the historical financial statements of Yucheng for the periods prior to the Closing Date are those of Sihitech and its subsidiaries and all references to the consolidated financial statements of Yucheng apply to the historical consolidated financial statements of Sihitech and its subsidiaries prior to the Closing Date and the consolidated financial statements of Yucheng and its subsidiaries subsequent to the Closing Date. Yucheng’s equity components are stated in terms of Sihitech before the Closing Date, with an adjustment to reflect the effect of the recapitalisation on the equity components at the Closing Date.





The aggregate consideration paid at the Closing Date were USD4,000,000 and 5,328,320 common shares of Yucheng. Of the USD4,000,000, as security for the indemnification obligations of Sihitech BVI Shareholders and e-Channels BVI Shareholders, USD250,000 has been held back by Yucheng pending resolution of an outstanding claim.  The holdback amount is not a limitation on the indemnification amounts, which are generally limited to the full consideration paid.





Of the total number of shares issued at the Closing Date, an aggregate of 773,045 shares of common stock issued to Sihitech BVI Shareholders were subject to return and cancellation if the net profit as shown in the audited consolidated financial statements of Yucheng prepared in accordance with the generally accepted accounting principles in the United States of America (“US GAAP”) for the year ended December 31, 2006 plus all compliance expenses of being public is less than USD6,073,941. Pursuant to the supplemental agreement dated May 9, 2007, this clause was amended such that the 773,045 shares would be returned and cancelled if the proforma table in the notes to the audited consolidated financial statements of Sihitech and its subsidiaries and e-Channels under US GAAP for the year ended December 31, 2006 was lower than USD6,073,941.  The condition was met and accordingly, no adjustment for the purchase price in respect to the 773,045 shares of common stock was recorded in the consolidated financial statements of Yucheng for the year ended December 31, 2006.





Additional purchase price payment will be made to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their designee up to an amount of USD9,960,000 has been paid or accrued based on the following events:





(1)
Yucheng will pay an additional USD5,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their designee if Yucheng receives at least USD34,500,000 in gross proceeds in additional financing, including from the exercise of outstanding public warrants, the successful completion of a secondary offering, or a private investment by a strategic investor. According to an amendment agreement dated on August 24, 2007 (the “Amendment”), the additional USD5,000,000 was changed to USD4,960,000.





(2)
Yucheng will pay an additional USD1,000,000 if the average closing price of the stock of Yucheng in any sixty consecutive trading days of 2006 is above USD10.00; USD2,000,000 if the average closing price of the stock of Yucheng in any sixty consecutive trading days of 2007 is above USD12.00; and USD3,000,000 if the average closing price of the stock of Yucheng in any sixty consecutive trading days of 2008 is above USD14.40.


F-13





1
Organization and description of business - Continued




The Share Exchange Transactions - Continued





Notwithstanding the foregoing, the maximum amount to be paid under the above events shall not exceed USD10,000,000.





As of December 31, 2007, Yucheng received USD34,332,430 (equivalent to approximately RMB252,606,922) in gross proceeds as a result of the exercise of outstanding public warrants (note 21). Accordingly, Yucheng paid an additional USD4,960,000 (equivalent to approximately RMB37,772,880) to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their designee. Among the payments of the additional purchase price, USD3,494,707(equivalent to approximately RMB26,613,939) was paid to Sihitech BVI Shareholders and their designee which are accounted for as a deemed distribution. The remaining of USD1,465,293 (equivalent to approximately RMB11,158,941) was paid to e-Channels BVI Shareholders and their designee which are accounted for as an adjustment to the purchase price in respect of the acquisition of e-Channels.





As of December 31, 2008, the 2007 and 2008 average closing price of the stock of Yucheng in any sixty consecutive trading days targets were met.  USD1,200,000 has been paid in relation to the 2007 stock price target and USD800,000 has been accrued.  USD3,000,000 has been accrued in relation to the 2008 stock price target.





In addition, the condition of the average closing price of the stock of Yucheng in any sixty consecutive trading days of 2007 being above USD12.00 was achieved, Yucheng was obligated to make payments of the additional purchase price of USD2,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their designee. Among the obligations of the additional purchase price, USD1,409,156 (equivalent to approximately RMB10,293,321) was accrued to Sihitech BVI Shareholders and their designee which are accounted for as a deemed distribution. The remaining balance of USD590,844 (equivalent to approximately RMB4,315,879) was accrued to e-Channels BVI Shareholders and their designee which are accounted for as an adjustment to the purchase price in respect of the acquisition of e-Channels.





In addition, the condition of the average closing price of the stock of Yucheng in any sixty consecutive trading days of 2008 being above USD14.40 was achieved, Yucheng was obligated to make payments of the additional purchase price of USD3,000,000 to Sihitech BVI Shareholders, e-Channels BVI Shareholders and their designee. Among the obligations of the additional purchase price, USD2,113,734 (equivalent to approximately RMB14,836,299) was accrued to Sihitech BVI Shareholders and their designee which are accounted for as a deemed distribution. The remaining balance of USD886,266 (equivalent to approximately RMB6,057,274) was accrued to e-Channels BVI Shareholders and their designee which are accounted for as an adjustment to the purchase price in respect of the acquisition of e-Channels.





Following to the Amendment, additional common shares, on an all-or-none basis, may be issued to Sihitech BVI shareholders, e-Channels BVI shareholders and their designee on a pro rate basis, based on the amount of consideration shares issued on November 24, 2006, aggregating 952,832 common shares each year for four years beginning in 2008, if the Company achieves net profit targets in the prior year as indicated in the following table according to the financial statements audited each year in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), where net profit shall be determined for this purpose only, as net profit (determined on the basis of US GAAP) before the amortization expenses related to the acquisition of e-Channels.  If the net profits of the Company are not achieved, the obligation of Yucheng to issue the common shares for that year is terminated, with no effect on subsequent years.


F-14





1
Organization and description of business - Continued




The Share Exchange Transactions - Continued





Year ended/ ending December 31,

Net Profit2007

USD 8.5 million2008

USD 11.9 million2009

USD 16.7 million2010

USD 23.3 million




As the net profit target for year ended December 31, 2009 had not been achieved, no shares was required to be issued to Sihitech BVI shareholders, e-Channels BVI shareholders and their designee for 2009 and the subsequent years.


As the net profit target for year ended December 31, 2008 was achieved, Yucheng issued 952,832 common shares valued at USD5,545,482 (equivalent to approximately RMB37,901,151), to Sihitech BVI shareholders, e-Channels BVI shareholders and their designee in 2009 as additional purchase price. Of the 952,832 common shares issued, 671,344 common shares, amounting to USD3,907,222 (equivalent to approximately RMB26,704,299), were issued to Sihitech BVI Shareholders and their designee which was accrued as a liability and a deemed distribution as of December 31, 2008.  The remaining 281,488 common shares, amounting to USD1,638,260 (equivalent to approximately RMB11,196,852), were issued to e-Channels BVI Shareholders and their designee which was accrued as a liability and an adjustment to the purchase price in respect of the acquisition of e-Channels as of December 31, 2008.





As the net profit target for year ended December 31, 2007 was achieved, Yucheng issued 952,832 common shares, valued at USD5,930,220 (equivalent to approximately RMB43,317,887),  to Sihitech BVI shareholders, e-Channels BVI shareholders and their designee in 2008 as additional purchase price. Of the 952,832 common shares issued, 671,344 common shares, amounting to USD4,178,302 (equivalent to approximately RMB30,520,828), were issued to Sihitech BVI Shareholders and their designee which was accrued as a liability and a deemed distribution as of December 31, 2007.  The remaining 281,488 common shares, amounting to USD1,751,918 (equivalent to approximately RMB12,797,059), were issued to e-Channels BVI Shareholders and their designee which was accrued as a liability and an adjustment to the purchase price in respect of the acquisition of e-Channels as of December 31, 2007.


F-15





2
Summary of significant accounting policies and practices





The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (US GAAP).





(a)
Principles of consolidation





The consolidated financial statements include the financial statements of Yucheng and its subsidiaries.  All significant inter-company transactions and balances are eliminated upon consolidation. Investments under equity method are accounted for under the equity method. Yucheng’s share of these companies’ earnings or losses is included in the consolidated statement of operations as loss from equity method investees.





(b)
Use of estimates




The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amounts of properties and equipment, intangible assets, goodwill, valuation allowances for receivables and inventories, percentage of completion calculations relating to revenue recognition, pre-contract costs and valuation allowance for deferred tax assets.  Actual results could differ from those estimates.





(c)
Convenience translation into United States dollars




The translation of Renminbi amounts into United States dollars has been made for the convenience of the reader and has been made at the exchange rate quoted by the People’s Bank of China on December 31, 2010 of RMB6.6227 (2009: RMB6.8282) to USD1.00. Such translation amounts should not be construed as representations that the Renminbi amounts could be readily converted into United States dollars at that rate or any other rate.





(d)
Cash and cash equivalents




Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts and time certificates of deposit which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased.





(e)
Inventories




Inventories are stated at the lower of cost or market.  Cost is determined using the first-in, first-out method (FIFO). Inventories consist of IT hardware equipment, all of which are finished goods.


F-16





2
Summary of significant accounting policies and practices - Continued




(f)
Properties and equipment




Properties and equipment are stated at cost less accumulated depreciation and impairment losses (2(i)). Depreciation is calculated on the straight-line method over the estimated useful lives of the assets as follows:





Estimated useful lifeProperties
20 yearsOffice equipment and furniture
3-5 yearsMachinery
3-5 yearsMotor vehicles
5-10 yearsLeasehold improvements
Shorter of lease terms or 5 years





(g)
Leases





Leases are categorized as either operating or capital leases depending on certain criteria defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 840, Leases.





Where a lease is classified as a capital lease, the asset is treated as if it had been purchased outright. The amount initially recognized as an asset is the lower of fair value of the leased asset or the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, together with any profit thereon. The corresponding lease commitment is shown as liability. Lease payments are analyzed between capital and interest. The interest element is charged to the consolidated statement of operations over the period of the lease and is calculated so that it represents a constant proportion of the lease liability. The capital element reduces the balance owed to the lessor.





Where a lease is classified as an operating lease, the total rental payments made under the leases are recognized in the consolidated statement of operations on a straight-line basis over the terms of the leases.  Lease incentives received are recognised in the consolidated statement of operations as an integral part of the total lease payments made.


F-17





2
Summary of significant accounting policies and practices - Continued




(h)
Intangible assets




(i)
Cost of intangible assets




Intangible assets consist primarily of purchased software, capitalized costs for computer software development, customer relationships and other technology. Intangible assets are stated at cost or fair value less accumulated amortization and any impairment write-downs.  Fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections.





The Company capitalizes development costs for marketable software incurred from the time of technological feasibility until the software is ready for use in accordance with ASC Topic 985-20, Costs of Software to be Sold, Leased, or Marketed. All costs to establish technological feasibility of a computer product to be sold, leased or otherwise marketed are charged to research and development expense as incurred. Technological feasibility is established through completeness of the working model and its consistency with the product design. Costs incurred for modification, components of large products, and enhancements are expensed. As the working model is normally built during the process of project implementation for clients, there are no high-risk development issues.





Under the provisions of ASC Topic 350-40, Internal-Use Software, the Company capitalizes costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and management has authorized further funding for the project which it deems probable of completion and use for the function intended. Technological feasibility is established upon completeness of the product design and planning phases indicating that product can be built by existing technology and tools. Capitalized internal-use software costs include only (1) external direct costs of materials and services consumed in developing or obtaining the software, (2) payroll and payroll-related costs for employees who are directly associated with and who devote time to the project, and (3) interest costs incurred, when material, while developing the software. Capitalization of these costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose.





The Company obtained intangible assets in 2007, whose values have been estimated by the management in the absence of ready ascertainable market values.  However, because of the inherent uncertainty of the valuation, it is reasonably possible that those estimated values may differ significantly from the values that would have been used had a ready market for these intangible assets existed, and the differences could be material to the consolidated financial statements.





Software development costs include payroll, employee benefits, and other headcount-related costs associated with product development. The Company records expenditure incurred before technological feasibility is established into research and development cost and capitalizes expenditures incurred after that point into the cost of intangible assets.  Software development costs were RMB13,720,874, RMB22,204,930 and RMB18,289,465 in 2008, 2009 and 2010, respectively, among which RMB3,572,570, RMB8,376,550 and RMB7,758,848 were capitalized in 2008, 2009 and 2010.


F-18





2
Summary of significant accounting policies and practices - Continued




(h)
Intangible assets - Continued




(ii)
Amortization





The Company amortizes capitalized software development costs for marketable software on a product-by-product basis.  The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported upon.





Purchased computer software and capitalized computer software development costs for internal use are amortized on a straight-line basis over their estimated useful lives, and are monitored on a regular basis to assess that the amortization method is still appropriate and the remaining estimated useful life of the asset is reasonable.





Customer relationships and other technology are amortized on a straight-line basis over their estimated economic useful lives.





The estimated useful lives are as follows:





Estimated useful lifeSoftware development costs-  Internal-use software

3 years-  Marketable software

3 yearsCustomer relationships

3-5 yearsOther technology

3-5 yearsPurchased software

5-10 years





The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period.





(i)
Impairment of long-lived assets




The Company evaluates for impairment its long-lived assets to be held and used, including properties and equipment, intangible assets and other non-current assets, when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable in accordance with ASC Topic 360, Property, Plant and Equipment, or ASC Topic 350-30, General Intangibles Other than Goodwill,as appropriate. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to be generated by the asset.  If the carrying value of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value.





Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of carrying amount or estimated fair value less the cost to sell, and are no longer depreciated.





Judgments and assumptions are inherent in management’s estimate of undiscounted future cash flows used to determine recoverability of an asset and the estimate of an asset’s fair value used to calculate the amount of impairment to recognize. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the consolidated financial statements.


F-19





2
Summary of significant accounting policies and practices - Continued




(j)
Goodwill




Goodwill represents the excess of the purchase price over the fair value assigned to net tangible and identifiable intangible assets of business acquired and accounted for under the acquisition method.





In accordance with ASC Topic 350, Goodwill, the impairment evaluation of goodwill is conducted annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The evaluation is performed by using a two-step process. In the first step, the fair value of each reporting unit is compared with the carrying amount of the reporting unit, including goodwill. The estimated fair value of the reporting unit is generally determined on the basis of discounted future cash flows. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, then a second step must be completed in order to determine the amount of the goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets) in a manner similar to a purchase price allocation. The resulting implied fair value of the goodwill that results from the application of the second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.





The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.





(k)
Revenue recognition




The Company generates revenues primarily from Software & Solutions, Platform Services and Maintenance Services. Revenue is recognized as follows:





(i)
Software & Solutions–Software & Solutions consist of software development services that require significant production, modifications, or customization of software or software system. Due to the long-term nature of software development, contract accounting is applied in accordance with ASC Topic 605-35, Construction-Type and Production-Type Contracts, and ASC Topic 985-605, Software - Revenue Recognition. Based on our fact pattern, we apply the percentage-of-completion method of revenue recognition to account for the software development to the period from the start of the significant production, modification, or customization through to the last element delivered, which is the end of the software development contract. Labor costs and direct project expenses are used to determine the stage of completion. Revisions in estimated contract profits are made in the period in which the circumstances requiring the revision first become known. Provisions, if any, are made for anticipated losses on uncompleted contracts whenever it appears there may be a loss.


F-20





2
Summary of significant accounting policies and practices - Continued




(k)
Revenue recognition - Continued




(i)
Continued




Costs and estimated earnings in excess of billings on uncompleted contracts consist of recognized recoverable costs and accrued profits on contracts for which billings had not been presented to customers as of the balance sheet date.  Billings in excess of revenue recognized for which payments have been received are deferred until the applicable revenue recognition criteria have been met.





(ii)
Platform services–Platform services refer to system integration service. System integration services mainly consist of value added services of planning, designing, installing, integrating and testing of hardware sold to customers.  Revenue from system integration services is recognized in accordance with FASB ASC Topic 605, Revenue Recognition, when the following conditions are all met: persuasive evidence of an arrangement exists, system integration services have been rendered and products have been delivered and accepted, the price is fixed or determinable and, collectibility is reasonably assured. Customer’s acknowledgement evidences their acceptance of the system integration work being completed at which time revenue is recognized. The contract revenue and related costs are deferred if the customer’s acknowledgement is not obtained.





(iii)
Maintenance services — Maintenance Services consist of agency sales and maintenance services.  Revenue from sales of IT equipment and software to the end users, which are limited to passing the IT equipment and software from vendors to end users, is treated as agency sales. The Company records the net difference between the amount it bills to end users and the fees charged by third party vendors as revenue. The Company considers the criteria set out in ASC Topic 605-45, Principal Agent Considerations, in determining whether it should recognize such revenues at gross or net of revenue.  The Company believes that based on its arrangement with the system integrators, end users (banks) and the third party IT manufacturers, the net approach is appropriate as the Company is not the primary obligor to the end users, does not take general inventory risk, does not have latitude in establishing price and does not have discretion in supplier selection with respect to the IT equipment or software delivered to end users.





Maintenance service revenue is recognized ratably over the maintenance period.


F-21





2
Summary of significant accounting policies and practices - Continued







(l)
Pre-contract costs




Due to the business environment in which the Company operates, it is common practice that the Company commences the software development or IT consulting project for its banking clients without commercial contracts being signed. If the contracts are not obtained during the reporting period where implementation costs have been incurred, the Company defers revenue recognition for the related contracts until contracts are obtained. In accordance with ASC Tpoic 720-15, Start-Up Costs, costs that are incurred for a specific anticipated contract and that will result in no future benefits unless the contract is obtained, including cost of equipment, direct labour costs, and other ancillary costs, are deferred until receipt of the signed contract, and are then included in contract costs or inventory.  Such deferred costs, subject to their not being related to costs of start-up activities, are evaluated periodically for probability of recoverability.  If deemed unrecoverable, deferred costs are expensed to operating expenses.





Costs of start-up activities, including organization costs, are expensed as incurred.





Costs incurred in connection with anticipated contracts are deferred outside the contract cost or inventory classification if their recovery from future contract revenue or from other dispositions is considered probable.





(m)
Net earnings per common share




The Company computes net earnings per common share in accordance with ASC Topic 260, Earnings per Share.  Under the provisions of ASC Topic 260, basic earnings per common share is computed by dividing the net earnings available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period.  The calculation of diluted net earnings per share gives effect to common stock equivalents, however; potential common stock in the diluted net earnings per common share computation is excluded in net loss periods if their effect is anti-dilutive.





(n)
Retirement benefits




Pursuant to the relevant laws and regulations in the PRC, the Company participates in a defined contribution retirement plan for its employees arranged by a governmental organization. The Company makes contributions to the retirement scheme at the applicable rate based on the employees’ salaries.  The required contributions under the retirement plans are charged to the consolidated statement of operations on an accrual basis when they are due.  The Company’s contributions totaled RMB13,119,630, RMB16,453,429 and RMB12,794,943 in 2008, 2009 and 2010, respectively.





(o)
Interest




Interest costs are expensed as incurred, except for those capitalized that are directly attributable to the acquisition, construction or production of qualifying assets.  No interest costs were capitalized for each of the years in the three-year period ended December 31, 2010.


F-22





2
Summary of significant accounting policies and practices - Continued




(p)
Income taxes




Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.





(q)
Government subsidies




Government subsidies are recognized when received and when all the conditions for their receipt have been met.  Such amounts are included as a credit in the operating expense section of the consolidated statement of operations.





(r)
Tax refunds




Pursuant to the laws and regulations of the PRC, the Company is entitled to a refund of the 14.0% value-added tax (“VAT”) for certain self-developed software products. The Company recognizes the VAT refunds at the same time as the revenues from sales of the related enterprise software products are recognized. VAT refunds are included as a credit in the operating expense section of the consolidated statement of operations





(s)
Fair value measurement




The Company measures the fair values of its financial instruments in accordance with accounting guidance which defines fair value as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and requires an entity tomaximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company adopted the accounting guidancerelated to nonfinancial assets and nonfinancial liabilities that are not measured at fair value on a recurring basis on January 1, 2009. In addition, the Companycategorizes assets and liabilities measured at fair value into three-level hierarchy based on the inputs to fair value measurement. The following describes thethree-level hierarchy.





Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain securities that are highly liquid and are actively traded in over-the-counter markets.


Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities either directly or indirectly; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques based on significant unobservable inputs, as well as instruments for which the determination of fair value requires significant management judgment or estimation.





The fair value of financial instruments and the methods and assumptions used in estimating fair value amounts are detailed in Note 2(t).


F-23


2
Summary of significant accounting policies and practices - Continued




(t)
Financial instruments




Exposure to credit and interest rates arises in the normal course of the Company’s business.  Financial assets of the Company include cash and cash equivalents and trade accounts receivable, other receivables and amounts due from related parties.  Financial liabilities of the Company include trade accounts payable and other payables, short-term loans and outstanding payment in relation to business acquisitions. Adjustments are made for financial assets if their carrying amount exceeds the value realizable in the foreseeable future.  Financial liabilities are stated at their carrying amounts.





Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade and other accounts receivable. The Company’s cash is maintained with high quality financial institutions and the composition and maturities are regularly monitored by management. Generally, any cash equivalents may be redeemed upon demand and bear minimal risk.





The trade and other accounts receivable of the Company arises primarily through the provision of goods and services, and deposits and payments made for various contracts. The Company generally does not require collateral.  An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. The Company performs ongoing credit evaluations of its customers based on individual accounts receivable which show signs of uncollectibility and an aging analysis.  Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  The Company does not have any off-balance-sheet credit exposure related to its customers.





The fair values of the above noted financial assets and financial liabilities are not materially different from their carrying amounts.





The Company has no off-balance sheet concentration of credit risk such as those arising from foreign exchange contracts, option contracts or other foreign hedging arrangements.


F-24





2
Summary of significant accounting policies and practices - Continued




(u)
Investments under equity method




The investments, in which the Company has significant influence, but not control, or the Company has joint control, are accounted for using the equity method.  Investments under the equity method consist of a 40% equity interest in Yucheng Sinowise Consultancy Services Ltd, (“Sinowise”), a software and service technology company, and a 49% equity interest in Yuxin Data Technologies Co., Limited (“Yuxin Data”), a software and hardware technology company.





Where the Company’s share of losses exceeds its carrying value, the Company’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the equity method investees. As at December 31, 2009 and December 31, 2010, there was an excess of the carrying value over the Sinowise company’s share of net assets of the equity method investees.





Unrealized profits and losses resulting from transactions between the Company and its equity method investees are eliminated to the extent of its carrying value, except where unrealized losses provide evidence of an impairment of the asset transferred, in which case they are recognized immediately in the consolidated statement of operatons.  None of the investments under equity method provided products or services to the Company in 2008, 2009 and 2010.





On March 31, 2009, Yuxinyicheng established a joint-venture, Hainan Baodaotong Technologies Limited (“Baodaotong”) in Haikou city. Total registered capital of Baodaotong is RMB50 million. Haikou Gas Holding Company, Yuxinyicheng and Guangzhou Sihitech holds 45%, 35% and 20% of Baodaotong’s equity interests, respectively. On December 16, 2009, Yuxinyicheng transferred 20% of Baodaotong’s equity interests to a third party. On April 30, 2010, Yuxinyicheng sold its entire interest in Baodaotong to a third party due to business consideration. The loss resulted from the disposal was RMB14,543.





On April 3, 2009, Yuxinyicheng established a joint-venture, Yucheng Sinowise Consultancy Services Ltd. (“Sinowise”). Total registered capital of Sinowise is RMB1 million. Yuxinyicheng holds 40% equity interest of Sinowise.





On March 15, 2010, Yuxinyicheng established a joint-venture, Yuxin Data, in Tianjin city. Total register capital is RMB 60 million. NTT Data China and Yuxinyicheng hold 51% and 49% of interests, respectively.





The carrying amounts of the investments under equity method at December 31, 2009 and 2010 are as follows:





2009


2010


2010RMB


RMB


USDBaodaotong


7,570,143



-



-Sinowise


-



-



-Yuxin Data


-



24,846,083



3,751,655Total


7,570,143



24,846,083



3,751,655




F-25




2
Summary of significant accounting policies and practices - Continued




(u)
Investments under equity method-continued




Summary of the combined financial information for the affiliates as of and for the years ended December 31, 2008, 2009 and 2010 is as follows:


2008


2009


2010


2010RMB


RMB


RMB


USDFinancial positionCurrent assets


4,249,670



44,108,369



37,187,715



5,615,189Property, plant and equipment, net


2,736,155



7,967,488



3,546,066



535,441Other non-current assets


47,417



13,250



21,407,448



3,232,435Total assets


7,033,242



52,089,107



62,141,229



9,383,065Current liabilities


2,459,459



2,363,144



9,983,041



1,507,397Total liabilities


2,459,459



2,363,144



9,983,041



1,507,397Owners’ equity


4,573,783



49,725,963



52,158,188



7,875,668Total liabilities and equity


7,033,242



52,089,107



62,141,229



9,383,065Results of operationsSales


92,172



6,117,739



13,443,855



2,029,966Operating (loss) profit


(7,605,154
)


(1,294,897
)


(9,141,130
)


(1,380,272
)Net (loss) income


(5,697,554
)


(1,279,906
)


(7,100,150
)


(1,072,093
)





(v)
Share-based compensation




Yucheng has adopted ASC Topic 718, Compensation – Stock Compensation, which requires that share-based payment transactions with employees, such as share options, be measured based on the grant-date fair value of the equity instrument issued and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period.




(w)
Segment Information




Management views the business as consisting of revenue streams; however they do not produce reports for, assess the performance of, or allocate resources to these revenue streams based upon any asset-based metrics, or based upon income or expenses, operating income or net income. Therefore, the Company believes that it operates in one business segment.




(x)
Disposal of discontinued operations




The Company accounts for exit or disposal activities in accordance with ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”). In accordance with ASC 420, a business restructuring is defined as an exit activity that includes but is not limited to a program that is planned and controlled by management, and materially.


F-26





2
Summary of significant accounting policies and practices - Continued




(y)
Non-controlling interests




Effective April 1, 2009, the Company adopted ASC Topic 810-10-65 ( SFAS 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51”), which amends previously issued guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity. Among other requirements, this statement requires that the consolidated net income (loss) attributable to the parent and the non-controlling interest be clearly identified and presented on the face of the consolidated statements of operations. The presentation and disclosure requirements of the ASC Topics have been applied retrospectively for all periods presented in the accompanying consolidated balance sheets and statements of operations and comprehensive income (loss), and statements of shareholder’s equity and statements of cash flows, to conform to the provisions of ASC Topic 810.




(z)
Reclassifications




Certain items have been reclassified to conform with the current year’s presentation due to the discontinued operation as discussed in note 25.




(aa)
Recently Issued Accounting Standards




Recently Adopted Accounting Pronouncements




In February 2010, the FASB issued ASU No. 2010-08, Technical Corrections to Various Topics. This update’s purpose is to eliminate GAAP inconsistencies, update outdated provisions, and provide needed clarifications. The adoption of ASU No. 2010-08 did not have a material impact on the Company’s consolidated financial statements.




In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair Value Measurements, under ASC Topic 820, Fair value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3.  This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 new disclosures and clarification of existing disclosure is effective for interim and annual reporting periods beginning after December 15, 2009, which the Company adopted this statement as of January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for financial statements issued for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Company is currently accessing the impact, if any, of ASU No. 2010-06 disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements the Company’s consolidated financial statements.





F-27





2
Summary of significant accounting policies and practices - Continued




(ab)
Recently Issued Accounting Standards - continued




Recent Accounting Pronouncements Not Yet Adopted - continued





In October 2009, the FASB amended the Accounting Standards Codification (“ASC”) as summarized in ASU 2009-14, Software (ASC Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. As summarized in ASU 2009-14, ASC Topic 985 has been amended to remove from the scope of industry specific revenue accounting guidance for software and software related transactions, tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application.The Company is currently evaluating the impact of ASU 2009-13 and ASU 2009-14, if any, that they may have on the Company’s consolidated financial statements.


3
Trade accounts receivable, net





Trade accounts receivable at December 31, 2009 and 2010 consist of the following:





December 312009


2010


2010RMB


RMB


USDPrimary bank customer and its subsidiaries


29,259,016



54,496,752



8,228,782Other bank customers


76,759,800



108,310,654



16,354,455General contractors


41,959,888



33,435,653



5,048,644Total


147,978,704



196,243,059



29,631,881




Included in the above balance was the allowance for doubtful debt of RMB16,306,960 and RMB12,580,356 as at December 31, 2009 and 2010, respectively.  The movement in allowance for doubtful debt mainly represented written-off of  allowance for doubtful debt.




The balance billed but not paid by customers pursuant to retainage provisions in contracts will be due upon completion of the contracts and acceptance by the customers.  The retention balance as at December 31, 2010 is RMB20,642,213 equivalent to USD3,116,888 (2009: RMB21,590,389 equivalent to USD3,161,944), of which RMB213,500 equivalent to USD32,238 (2009: RMB996,300 equivalent to USD145,910) is expected to be collected after one year.


F-28




4
Costs and estimated earnings on uncompleted contracts





December 312009


2010


2010RMB


RMB


USDCosts incurred on uncompleted contracts


204,759,580



274,351,748



41,425,967Estimated earnings


162,671,693



200,766,895



30,314,961367,431,273



475,118,643



71,740,928Less: Billings to date


(275,812,512
)


(364,712,537
)


(55,070,068
)91,618,761



110,406,106



16,670,860





The amounts are included in the accompanying consolidated balance sheets under the following captions:





Costs and estimated earnings in excess of billings on uncompleted contracts


105,684,112



132,656,349



20,030,554Billings in excess of costs and estimated earnings on uncompleted contracts


(14,065,351
)


(22,250,243
)


(3,359,694
)91,618,761



110,406,106



16,670,860




Cost and estimated earnings in excess of billings comprise principally amounts of revenue recognized on contracts for which billings had not been presented to customers because the amounts were not billable at the balance sheet date. The unbilled amounts receivable at December 31, 2010 is RMB132,656,349 equivalent to USD20,030,554 (2009: RMB105,684,112 equivalent to USD15,463,101), of which RMB3,080,489 equivalent to USD465,141 (2009: RMB1,296,364 equivalent to USD189,854) is expected to be collected after one year.


F-29





5
Other current assets




December 312009


2010


2010RMB


RMB


USDPayments in advance


8,433,317



20,549,650



3,102,911Project and tendering deposits


10,144,161



13,136,973



1,983,628Other receivables


19,392,902



33,948,280



5,126,048Prepaid expenses


300,303



227,965



34,421Total


38,270,683



67,862,868



10,247,008





Payments in advance represent part of purchase contract amount for which the equipment has not been delivered from the suppliers as of the end of year.





Other receivables mainly include considerations for the disposals of a subsidiary and an equity accounted investment, deposits and staff advances for operations.





Included in other receivables was allowance for doubtful debt of RMB2,077,500 and RMB2,077,500 as at December 31, 2009 and 2010 respectively.


F-30





6
Income taxes





A reconciliation of the expected tax with the actual tax expense (benefit) for the years ended December 31, 2008, 2009 and 2010 are as follows:




2008


2009


2010


2010RMB


RMB


RMB


USDIncome (loss) before income taxes and share of results of equity method investees


87,430,181



(2,045,495
)


37,251,261



5,624,785Expected PRC income tax expense (benefits) (note (i))


21,537,496



(1,181,616
)


9,312,817



1,406,196Tax holiday benefits and preferential tax rates (note (ii))


(31,249,966
)


(5,603,066
)


(9,415,133
)


(1,421,646
)Tax effect related to foreign entities not subject to income taxes


570,147



898,695



2,223,777



335,781Tax rate difference


53,533



(34,185
)


339,718



51,297Non-taxable income


(538,568
)


(907,459
)


(114,250
)


(17,251
)Additional deductible research and development expense


(379,810
)


(1,060,680
)


(375,812
)


(56,746
)Non-deductible expenses


2,256,620



3,116,305



535,507



80,859(Over) under provision in prior years


493,203



(861,749
)


(2,865,082
)


(432,615
)Under provision of deferred tax in prior years


842,751



16,284



1,942,138



293,255Change in valuation allowance


1,383,117



103,757



3,459,341



522,346Others


(149,561
)


263,304



216,202



32,645Actual income tax expenses (benefits)


(5,181,038
)


(5,250,410
)


5,259,223



794,121Representing:Current tax expenses


398,113



3,225,295



3,316,855



500,832Deferred tax expenses (benefits)


(5,579,151
)


(8,475,705
)


1,942,368



293,289Total income tax expenses (benefits)


(5,181,038
)


(5,250,410
)


5,259,223



794,121


F-31





6
Income taxes - Continued




Notes:


(i)
Yucheng, and its subsidiaries, Port Wing and Ahead Billion are incorporated in the British Virgin Islands and are not subject to taxation under the British Virgin Islands. Yuxinyicheng and its major subsidiaries (together, the “PRC entities”) are incorporated in the PRC and governed by the PRC laws.





The normal statutory rate of the tax rate of PRC Enterprise Income tax (“EIT”) is 25% from 2008. All subsidiaries adopted this tax rate except the following subsidiaries:





EIT rates applicable to the subsidiaries of the Company, except for Fujie and Fuyi, ranged from 0% to 25% for the year ended December 31, 2010 (2009: 0% to 25%; 2008: 0% to 25%). EIT for Fujie and Fuyi are calculated at 2.5% of revenue for the year ended December 31, 2010 (2009: 2.5% of revenue; 2008: 2.5% of revenue) as they were classified small enterprise by the Local Tax Bureau in Shanghai City.





Pursuant to the approval issued by the Beijing Haidian District Local Tax Bureau, e-Channels was qualified as high-tech company, thus its applicable EIT rate was 15% from 2008.





Pursuant to the approval issued by the Local Tax Bureau in Beijing Haidian District, Beijing Software was qualified as high-tech company, thus its applicable EIT rate was 15% from 2008.





Pursuant to the New Tax Law, the applicable EIT rate of Shanghai Sihitech are 18%, 20%, 22%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012 respectively.





Pursuant to the approval issued by the Local Tax Bureau in Pudong District of Shanghai in 2006, Shanghai Software was qualified as a software development company and entitled to a tax holiday from 2006 to 2007,   and an additional 50% tax exemption of the applicable EIT rate. Pursuant to the New Tax Law, its applicable EIT rates are 12.5%, 12.5%, 12.5%, 24% and 25% in 2008, 2009, 2010, 2011 and 2012 respectively.





Pursuant to the approval issued by the Guangzhou Local Tax Bureau, Guangzhou Yuxinyicheng was qualified as a software development company and entitled to a tax holiday from 2009 and 2010 and an additional 50% tax exemption of the applicable EIT rate of 25% to 12.5% from 2011 to 2013.





Pursuant to the approval issued by the Tianjin Tax Bureau, Tianjin Yuxinyicheng was qualified as a software development company and entitled to a tax holiday from 2010 and 2011 and an additional 50% tax exemption of the applicable EIT rate of 25% to 12.5% from 2012 to 2014.





Pursuant to the approval issued by the Local Tax Bureau in Beijing Haidian District in 2007 and 2008, Yuxinyicheng was qualified as a high-tech company and entitled to a tax holiday from 2007 to 2008, and an additional 50% tax exemption to the applicable EIT rate of 15% to 7.5% from 2009 to 2011.





(ii)
Aggregate tax relief was approximately RMB31,249,966, RMB5,603,066 and RMB9,317,718 for the year ended December 31, 2008, 2009 and 2010, respectively. Aggregate basic per share effect of the tax relief amounted to RMB1.78, RMB0.30 and RMB0.50 for the year ended December 31, 2008, 2009 and 2010, respectively.


F-32




6
Income taxes - Continued




(ii)
Pre-tax income and income tax expenses are both domestic.





The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2009 and 2010 are presented below.





December 312009


2010


2010RMB


RMB


USDDeferred tax assets:Intangible assets


202,841



247,646



37,394Future benefit of tax losses


22,030,262



14,088,942



2,127,371Total deferred tax assets


22,233,103



14,336,588



2,164,765Less: valuation allowance


(269,895
)


(3,729,235
)


(563,099
)Net deferred tax assets


21,963,208



10,607,353



1,601,666Deferred tax liabilities:Deferred costs on unsigned contracts for tax purposes


(789,768
)


-



-Capitalized internal-use and marketable software


(1,108,921
)


(2,071,188
)


(312,741
)Additional intangible assets through acquisition


(960,580
)


(541,678
)


(81,791
)Total deferred tax liabilities


(2,859,269
)


(2,612,866
)


(394,532
)Net deferred tax assets


19,103,939



7,994,487



1,207,134





Movement of valuation allowance on deferred tax assets:





2009


2010


2010RMB


RMB


USDValuation allowance on deferred tax assets at the beginning of the year


1,383,117



269,895



40,753Decrease resulted from disposal of a subsidiary


(1,216,979
)


-



-Increase in valuation allowance


103,757



3,459,340



522,346Total


269,895



3,729,235



563,099


F-33




6
Income taxes - Continued




(ii)
Continued





A significant portion of the deferred tax assets recognized relates to net tax loss and credit carry forwards. The Company operates through the PRC entities and the valuation allowance is considered on each individual basis. Where no valuation allowance was recorded, the Company expects to generate sufficient taxable income in the future.





The net tax loss attributable to those PRC entities can only be carried forward for a maximum period of five years.  The expiration period of unused tax losses is as follows:





December 312009


2010


2010RMB(note)


RMB


USDYear ending December 31,2011


-



-



-2012


-



-



-2013


25,857,738



23,209,056



3,504,4702014


36,249,151



33,833,913



5,108,7792015


-



19,071,647



2,879,739Tax losses that can be carried forward indefinitely


-



-



-62,106,889



76,114,616



11,492,988





Under the New EIT Law and the implementation rules, profits of our PRC subsidiaries earned on or after January 1, 2008 and distributed by our PRC subsidiaries to Yucheng are subject to a withholding tax at a rate of 10%, unless Yucheng will be deemed as a resident enterprise for tax purposes.  Since the Company intends to reinvest the earnings of the PRC subsidiaries in business expansion in mainland China, the PRC subsidiaries do not intend to declare dividends to their immediate non-PRC established holding companies in the foreseeable future. Accordingly, no deferred taxation on undistributed earnings of the PRC subsidiaries has been recognized as of December 31, 2010. The accumulated undistributed earnings of the PRC subsidiaries amounted to approximately RMB183.1 million equivalent to USD26.8million and RMB245.6 million equivalent to USD37.1million as of December 31, 2009 and 2010, respectively.




Due to the disposition of business of POS, the expiration period of unused tax losses in 2009 was changed accordingly.





F-34




7
Properties and equipment, net




December 312009


2010


2010RMB


RMB


USDProperties


10,769,736



10,769,736



1,626,184Office equipment and furniture


29,901,879



29,437,660



4,444,964Machinery


43,877,283



-



-Motor vehicles


4,289,692



4,289,692



647,726Leasehold improvements


9,032,114



7,900,152



1,192,89097,870,704



52,397,240



7,911,764Accumulated depreciation


(33,723,621
)


(21,988,168
)


(3,320,121
)Properties and equipment, net


64,147,083



30,409,072



4,591,643





Depreciation expense on properties and equipment were RMB12,016,483, RMB16,607,137 and RMB17,227,855, which includes amortization of properties and equipment acquired under capital lease obligations of RMB2,458,969, RMB2,867,754 and RMB2,282,497 for 2008, 2009, and 2010 respectively. Gross assets remaining under capital leases were RMB8,623,510 and RMB8,623,510 at December 31, 2009 and 2010. Accumulated depreciation associated with capital leases were RMB6,026,478 and RMB8,308,975 at December 31, 2009 and 2010.





8
Intangible assets, net




Capitalized


Capitalized


CustomerPurchased


marketable


internal-use


relation-


Othersoftware


software


software


ships


technology


TotalBalance as at January 1, 2009

RMB
3,914,785



5,874,842



-



4,602,676



21,635,679



36,027,982Additions


2,390,307



6,333,129



1,990,662



-



-



10,714,098Amortization


(1,269,894
)


(2,898,002
)


(70,951
)


(3,620,476
)


(8,634,348
)


(16,493,671
)Balance as at December 31, 2009

RMB
5,035,198



9,309,969



1,919,711



982,200



13,001,331



30,248,409Additions


70,655



6,216,447



1,542,401



-



-



7,829,503Elimination from disposal of subsidiary


-



-



-



-



(3,249,986
)


(3,249,986
)Amortization


(1,422,834
)


(3,682,233
)


(576,710
)


(392,880
)


(3,845,012
)


(9,919,669
)Balance as at December 31, 2010

RMB
3,683,019



11,844,183



2,885,402



589,320



5,906,333



24,908,257USD
556,120



1,788,422



435,684



88,985



891,832



3,761,043


F-35




8
Intangible assets, net - Continued




Amortization expense was RMB15,990,445, RMB16,493,671 and RMB9,919,669 for the years ended December 31, 2008, 2009 and 2010 respectively. Estimated annual amortization expense for each of the next five years is as follows:





Year endingDecember 31

RMB2011


11,628,6072012


8,563,7882013


4,388,9642014


286,7092015


40,18924,908,257





9
Goodwill




December 312009

RMB


2010

RMB


2010

USDBalance as at January 1


187,815,784



189,009,599



28,539,659Additional considerations (Note)


1,193,815



-



-Balance as at December 31


189,009,599



189,009,599



28,539,659





No impairment has been included in the above balances.





Based on the actual earnings of Fujie and Fuyi, an additional consideration of RMB1,193,815 was recognized in 2009.


F-36





10
Short-term borrowings




December 312009


2010


2010RMB


RMB


USDShort-term borrowings from bank


80,000,000



81,000,000



12,230,661





The short-term borrowing of RMB80,000,000 as of December 31, 2009 represented the sum of three borrowings, comprising:





(i)
the borrowing of RMB50,000,000 effective from September 25, 2009 to September 24, 2010 with an annual interest rate of 5.841%; and


(ii)
the borrowing of RMB20,000,000 effective from November 19, 2009 to November 18, 2010 with an annual interest rate of 5.841%;  and


(iii)
the borrowing of RMB10,000,000 effective from December 9, 2009 to December 8, 2010 with an annual interest rate of  5.841%.





The short-term borrowing of RMB81,000,000  as of December 31, 2010 represented the sum of three borrowings, comprising:





(i)
the borrowing of RMB40,000,000 effective from March 29, 2010 to March 28, 2011 with an annual interest rate of 5.912%; and


(ii)
the borrowing of RMB20,000,000 effective from June 3, 2010 to June 2, 2011 with an annual interest rate of 5. 935%; and


(iii)
the borrowing of RMB20,000,000  effective from  September 15, 2010 to July 14, 2011 with an annual interest rate of 5.615%; and


(iv)
the borrowing of RMB1,000,000 effective from June 24, 2010 to June 23, 2011 with an annual interest rate of 5.945%.





The preceding two borrowings were guaranteed by Beijing Sihitech and Mr. Weidong Hong without bearing guarantee fee.


The third borrowing was guaranteed by Mr. Weidong Hong without bearing guarantee fee.


The last borrowing was guaranteed by Yuxinyicheng without bearing guarantee fee.


F-37





11
Capital leases





Certain of office equipment have been acquired under capital leases. Obligations under capital were as follows:





December 312009

RMB


2010

RMB


2010

USDNet minimum lease payments due:Within one year


2,373,829



320,751



48,432Later than one year


320,751



-



-Total net minimum lease payments


2,694,580



320,751



48,432Less: Amount representing interest


(97,548
)


(6,216
)


(939
)Present value of net minimum lease payments


2,597,032



314,535



47,493Less: current portion


(2,282,497
)


(314,535
)


(47,493
)Obligations under capital leases – non-current


314,535



-



-





12
Other current liabilities




December 312009


2010


2010RMB


RMB


USDAdvances from customers


14,413,697



14,737,775



2,225,342Taxes payable, excluding income tax


14,406,450



16,550,802



2,499,102Accrued expenses


2,171,390



2,380,004



359,371Others


21,818,657



11,051,530



1,668,735Total


52,810,194



44,720,111



6,752,550


F-38





13
Non-controlling interests




December 312009


2010


2010RMB


RMB


USDBalance as of January 1


12,023,643



7,869, 561



1,188,271Share of loss for the year


(3,715,244
)


(2,735,255
)


(413,012
)Decrease on additional investment in non-controlling interest of a subsidiary


(438,838
)


-



-Balance as of December 31


7,869,561



5,134,306



775,259





Non-controlling interests as of December 31, 2009 and 2010 represented the non-controlling shareholder’s equity interest in Sunrisk.





14
Reserves




During the three years ended December 31, 2010, the Company has followed the PRC Company Law to make appropriation of its profit to the statutory surplus reserve.




Statutory surplus reserve





In accordance with PRC Company Law, the Company is required to appropriate at least 10% of the profit arrived at for each year to the statutory surplus reserve. Appropriation to the statutory surplus reserve by the Company is based on profit arrived at under PRC accounting standards for business enterprises for each year.





The profit arrived at must be set off against any accumulated losses sustained by the Company in prior years, before allocation is made to the statutory surplus reserve. Appropriation to the statutory surplus reserve must be made before distribution of dividends to owners. The appropriation is required until the statutory surplus reserve reaches 50% of the registered capital. This statutory surplus reserve is not distributable in the form of cash dividends but only on liquidation. It can be used to make good of previous losses, if any, and may be utilized for business expansion or converted into capital by increasing registered capital to existing equity owners in proportion to their equity holding, provided that remaining reserve balance after such conversion is not less than 25% of the registered capital.  As of December 31, 2009 and 2010, the accumulated balance of our statutory surplus reserve amounted to RMB43.1million and 50.4 million, respectively.




In accordance with the PRC laws and regulations, our PRC subsidiary is restricted in its ability to transfer a portion of its net assets to the Company in the form of dividends, which approximated to RMB735.9 million and RMB735.1 million representing the total amount of paid in capital and accumulated balance of statutory reserve of our PRC subsidiaries attributable to the Company as of December 31, 2009 and 2010, respectively.


F-39





15
Accumulated other comprehensive loss





As of December 31, 2009 and 2010, the only component of accumulated other comprehensive loss was translation reserve.


F-40




16
Revenues
 
 2008


2009


2010


2010Revenues

RMB


RMB


RMB


USDSoftware & SolutionsChannel Solutions


99,207,955



133,683,101



123,966,653



18,718,443Management Solutions


96,092,473



72,395,869



81,812,009



12,353,271Business Solutions


74,059,990



80,813,286



134,516,509



20,311,431Platform


339,773,531



12,575,504



8,460,490



1,277,499Maintenance Services


61,251,269



62,251,487



63,576,554



9,599,794Total revenues


670,385,218



361,719,247



412,332,215



62,260,438Business taxes


(8,188,384
)


(7,249,519
)


(8,688,023
)


(1,311,855
)Net revenues


662,196,834



354,469,728



403,644,192



60,948,583




17
Other income (expenses)





2008


2009


2010


2010RMB


RMB


RMB


USDGain on disposal of affiliates


856,700



6,291,960



-



-Fair value adjustment on real estates that was received as a compensation for notes receivable


-



2,236,740



-



-Donation to relief for Wenchuanearthquake


(1,000,000
)


-



-



-N Negative goodwill written off


833,799



-



-



-Other


(180,229
)


(115,560
)


(95,519
)


(14,423
)Total


510,270



8,413,140



(95,519
)


(14,423
)




F-41





18
General and administrative expenses





General and administrative expenses are shown net of the following credits:





2008


2009


2010


2010RMB


RMB


RMB


USDValue-added tax refund for software products sold


4,317,995



3,920,346



123,750



18,686Technology subsidy


1,313,732



395,000



-



-Business tax and surcharges refund


-



59,555



1,258,067



189,963Finance subsidy


-



-



4,008,500



606,613Other


530,777



30,427



17,326



1,270Total


6,162,504



4,405,328



5,407,643



816,532





Some of the subsidiaries of the Company were granted subsidies by the local government to encourage development of high-tech enterprises. There were no unfulfilled performance obligations related with such subsidies.




19
Earnings per share





The following table sets forth the computation of basic and diluted net earnings per share for the years indicated:





2008


2009


2010


2010RMB


RMB


RMB


USDNet income (numerator) - basic and dilutedIncome from continuing operations


91,438,774



2,616,036



34,170,628



5,159,622Net income (loss)


80,995,184



(4,199,598
)


1,964,724



296,665Shares (denominator):Weighted average ordinary shares  outstanding used in computingbasic net earnings per share


17,566,898



18,541,289



18,560,014



18,560,014Incremental weighted averagecommon shares from assumed  exercise of  unit purchase  options (“UPOs”) (note 21)


172,122



42,937



-



-contingent considerations in  relation to Share Exchange  transaction (note 1)


952,832



-



-



-restricted sharesgranted (note 24)


-



-



389,345



389,345


F-42




19
Earnings per share - Continued




Weighted average common share outstanding used in computing  diluted net earnings per share for continuing operations


18,691,852



18,584,226



18,949,359



18,949,359for whole operations


18,691,852



18,584,226



18,949,359



18,949,359Earnings per share from continuing operations-basic


5.21



0.14



1.84



0.28-diluted


4.89



0.14



1.80



0.27Loss per share from discontinued operation- basic


(0.59
)


(0.37
)


(1.74
)


(0.26
)-diluted


(0.59
)


(0.37
)


(1.74
)


(0.26
)Earnings (loss) per share- basic


4.61



(0.23
)


0.11



0.02-diluted


4.33



(0.23
)


0.10



0.02





As disclosed in note 1, the Share Exchange Transactions during 2006 provides for potential purchase price reduction by return and cancellation of an aggregate of 773,045 common shares of Yucheng, the return and cancellation of which is contingent upon failure of the attainment of certain amounts of earnings. As of December 31, 2010, no adjustment was made to the number of shares, to which Sihitech BVI Shareholders and their designee are entitled. The date of the Share Exchange Transaction is made in calculating the earnings per share for each of the three years ended December 31, 2010.





No diluted loss per share for the year December 31, 2010 has been presented as the UPOs have expired.


F-43





20
Commitments and contingencies





Other than the capital leases disclosed in note 11, the Company also leases office space under operating leases. The leases typically run for one to three years with an option to renew the lease annually thereafter. Lease payments are revised annually to reflect market rentals. None of these leases includes contingent rentals.





Non-cancellable operating lease rentals at the end of each year are payable as follows:





2009


2010


2010RMB


RMB


USDPayable:Within 1 year


8,204,305



4,944,672



746,625Within 1-2 years


3,276,727



919,752



138,879Within 2-3 years


152,408



120,154



18,14311,633,440



5,984,578



903,647





The Company recognized RMB7,041,392, RMB9,482,032 and RMB9,426,142, of rental expense for the three years ended December 31, 2010, respectively.





In 2007, the Company acquired 5 entities. As of December 31, 2010, the maximum contractual obligation for the consideration in relations to the acquisitions is RMB 120,367.





Yucheng has assessed the contingent tax liabilities that may arise from the Share Exchange Transactions and consider such contingent tax liabilities to be remote. As of December 31, 2010, such contingent tax liabilities are reasonably possible to be approximately USD175,000 based on the information currently available. If these contingent tax liabilities are undertaken, an amount of USD175,000 will be recorded as income tax payable and be charged to equity because the assumption of such liabilities by Yucheng is part of the recapitalisation in connection with the Stock Exchange Transactions. However, Yucheng does not expect to incur any tax liabilities in connection to our Share Exchange Transactions.





The Company provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of the products.  Due to the nature of the indemnification provided, the Company cannot estimate the fair value, nor determine the total nominal amount of the indemnification. The Company evaluates estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company considers such factors as the degree of probability of an unfavourable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the Company has not encountered material costs as a result of such obligations and have not accrued any liabilities related to such indemnifications in the financial statements.




The product warranty accrual reflects management’s best estimate of probable liability under its product warranties. Management determines the warranty accrual based on known product failures (if any), historical experience, and other currently available evidence. As at December 31, 2009 and 2010, the warranty accrual was nil. There has been no significant activity impacting the results of operations for any period presented.




F-44





21
Warrants and unit purchase options





As part of the Share Exchange Transaction, Yucheng assumed 4,200,000 shares of common stock, 6,900,000 redeemable common stock purchase warrants (“Warrants”) and 300,000 UPOs issued by CUAC. There was no remeasurement required for these assumed Warrants and UPOs because such assumption is part of the recapitalisation in connection with the Stock Exchange Transactions set forth in note 1.





Each Warrant entitled the holder to purchase from Yucheng one share of common stock at an exercise price of USD5.00 commencing on the date of the Stock Exchange Transactions and expired on November 17, 2009 (being five years after the date of the prospectus of CUAC). The Warrants were redeemable at a price of USD0.01 per Warrant upon 30 days’ notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least USD8.50 per share for any 20 trading days within 30 trading day period ending on the third day prior to the date on which notice of redemption was given. 6,866,486 warrants were exercised before December 31, 2007, and 33,514 warrants were redeemed.





UPOs were granted and recorded in connection with the initial public offering of CUAC in 2004 to the underwriters for nominal consideration. UPOs were exercisable for cash or on a cashless basis at the holders’ option, such that the holders may use the appreciated value of the UPOs to exercise the option with the payment of any cash.  UPOs were convertible into shares and Warrants at the discretion of Yucheng and the UPOs holders. The 150,000 UPOs were converted to 216,047 common shares before December 31, 2007. The remaining 150,000 UPOs not exercised expired on November 18, 2009.





22
Disposal of subsidiaries





On December 20, 2008, Yuxinyicheng disposed of its entire interest in Hongzhi at a consideration of RMB3,600,000. The consideration has been fully settled during 2009. The entire assets and liabilities and results of Hongzhi had been excluded from the consolidated financial statements since the effective date of the disposal.





On August 30, 2009, Yuxinyicheng disposed of its entire interest in Guangzhou Sihitech at a consideration appropriate the net asset value of Guanzhou Sihitech as of the date of disposal.





On December 31, 2010, Yuxinyicheng disposed of its entire interest in Yuxinyicheng Information at a consideration of RMB21,500,000. The entire assets and liabilities and results of Yuxinyicheng Information had been excluded from the consolidated financial statements since the effective date of the disposal.




F-45





23
Significant related party transactions




(a)
Identity of related parties




Related parties identified for the years ended December 31, 2008, 2009, and 2010 are summarized as follows:





Relationship with

the Company

Shareholding in Yucheng or shareholding being

heldby the Companyfor 2008


for 2009


for 2010Mr. Weidong Hong

Shareholder and CEO


15.10
%


16.47
%


16.47
%Mr. Shuo Zeng

Shareholder and COO


4.65
%


5.19
%


5.19
%Chengdu Elegon Infotech Limited (“Elegon”)

Investment under equity method


49
%


0
%


0
%Sihitech (HK) Co., Ltd.

Controlled by Mr. Weidong Hong


N/A



N/A



N/AHainan Baodaotong Technologies Limited (“Baodaotong”)

Investment under cost method


0
%


15
%


0
%Yucheng Sinowise Consultancy Services Limited (“Sinowise”)

Investment under equity method


0
%


40
%


40
%Yuxin Data Technologies Co., Limited (“Yuxin Data”)

Investment under equity method


0
%


0
%


49
%





Note 1:
Before the Share Exchange Transaction was completed on November 24, 2006, Mr. Weidong Hong held 42% of Sihitech.


Note 2:
Before the Share Exchange Transaction was completed on November 24, 2006, Mr. Shuo Zeng held 43% of e-Channels.


F-46




23
Significant related party transactions - Continued




(b)
Related party transactions




The significant related party transactions of the Company are summarised as follows:





2008


2009


2010


2010RMB


RMB


RMB


USDAdvances to investments under equity method-Elegon


1,828,333



-



-



--Sinowise


-



1,915,718



4,635,707



699,972-Baodaotong


-



20,914,872



-



--Yuxin Data


-



-



853,428



128,864Collection of advances to investments under equity method-Hengli


(728,942
)


-



-



--Sanjian


(937,457
)


-



-



--Elegon


(1,828,190
)


-



-



--Sinowise


-



(625,391
)


-



--Baodaotong


-



(20,597,593
)


-



--Yuxin Data


-



-



670,844



101,295Advances to shareholders


173,022



116,160



138,500



20,913Collection of advances to shareholders


(173,022
)


(116,160
)


(138,500
)


(20,913
)Sales to Sihitech (HK) Co., Ltd.


57,296,777



-



-



-Collection from Sihitech (HK) Co., Ltd


(55,728,672
)


(1,568,105
)


-



-Sales to Baodaotong


-



6,770,864



-



-Collection from Baodaotong


-



6,680,579



-



-Purchase from Yuxin Data


-



-



(4,116,524
)


(621,578
)





The transactions do not have fixed terms payments.  Balances relating to the above transactions are non-interest bearing and payable on demand. Other than this matter, the Board of Directors of the Company is of the opinion that the above transactions were in the normal course of business and on normal commercial terms.


F-47




23
Significant related party transactions - Continued




(c)
Related party balances




The balances of related party receivables and payables at the year-end are summarized as follows:





December 312009


2010


2010RMB


RMB


USDDue from investments under equity method


1,697,890



5,926,033



894,806Due to investment under equity method


-



(3,933,940
)


(594,008
)1,697,890



1,992,093



300,798




24
Stock based compensation plan




On November 24, 2006, Yucheng adopted the 2006 performance equity plan (the “Plan”) which allows Yucheng to offer a variety of incentive awards to employees. Under the Plan, the Company may grant either options to purchase 1,500,000 share of common stock of Yucheng or restricted shares.





On August 3, 2010, the Company has granted 941,132 restricted shares to certain employees for the services provided by them. The share grant will be fully vested on December 31, 2012. 40% of the total share grant will be vested on January 1, 2011, and 7.5% of the total share grant on the last day of every quarter following December 31, 2010. If the holder ceases to be an employee of the Company, any unvested portion of the share grant shall revert to the Plan. Compensation expense is charged to General and Administrative expenses.




A summary of the movements of the restricted shares as during the year are presented below:





Number of restricted

shares


Weighted-Average

Grant Date Fair

ValueUnvested at January 1, 2010


-



-Granted


941,132



3.23Unvested at December 31, 2010


941,132



3.23




The total fair values at date of grant of the restricted shares was RMB20,132,057 equivalent to USD3,039,856. There was RMB8,052,823 equivalent to USD1,215,943 of recognized compensation costs related to restricted shares in the year ended December 31, 2010 and the rest of unrecognized compensation costs are expected to be recognized over a weighted-average period of 2 years.




F-48




25
Discontinued operations




As discussed in Note 1, the Company sold the business of POS (Yuxinyicheng Information) in 2010. Total revenue of POS, reported in discontinued operations, for the years ended December 31, 2008, 2009 and 2010 was RMB14,622,170, RMB25,894,740 and RMB30,876,334, respectively. Pretax loss of the discontinued operations for the years ended December 31, 2008, 2009 and 2010 was RMB17,404,084, RMB9,769,322 and RMB6,379,365, respectively.





The following table illustrates the reporting of the discontinued operations on the face of the Statements of Operations for the years ended December 31, 2008, 2009 and 2010.





2008


2009


2010


2010RMB


RMB


RMB


USDDiscontinued operationsResults from discontinued  operations


(14,800,873
)


(9,295,160
)


(6,379,364
)


(963,258
)Loss on disposal of a subsidiary, net


-



-



(25,419,348
)


(3,838,215
)Income tax loss (benefits)

4,357,283


2,479,526


(407,192
)

(61,484
)Loss from operations of discontinued subsidiaries, net of tax

(10,443,590
)

(6,815,634
)

(32,205,904
)

(4,862,957
)




26
Subsequent events




On February 17, 2011, Yuxinyicheng established a joint-venture with other investors, Yucheng Internet Technologies Limited (“Yucheng Internet”) in Beijing. The registered capital of Internet is RMB 17.5 million. Yuxinyicheng and other investors hold 30% and 70% of equity interests, respectively.


F-49




27
Parent only financial statements




As of December 31, 2010, the total restricted net assets amounted to RMB1,043.1 million, which exceeded 25% percentage of our consolidated net assets (RMB607.9 million). As a result, parent only financial statements are prepared as follows:




Yucheng Technologies Limited


Parent Only Balance Sheets
 As of December 31, 2009 and 2010


(Expressed in Chinese Renminbi)




2009


2010RMB


RMBAssetsCurrent assets:Cash and cash equivalents


14,683,916



1,975,787Trade accounts receivable, net


2,119,019



2,055,245Other current assets


280,509,280



287,025,875Total current assets


297,312,215



291,056,907Investments in subsidiaries


328,167,896



346,260,409Total assets


625,480,111



637,317,316Liabilities and stockholders’ equityCurrent liabilitiesTrade accounts payable


4,203,358



2,442,818Other current liabilities


27,958,950



32,131,632Total current liabilities


32,162,308



34,574,450EquityPreferred stock, $0.0001 par value, authorised 2,000,000 shares and none issued;


20,007,998



20,007,998Common stock, $0.0001 par value, authorised 60,000,000 shares; 18,560,014 shares and 18,560,014 shares issued and outstanding as of December 31, 2009 and 2010Additional paid-in capital


385,713,676



385,883,587Stock based compensation


-



8,052,823Reserves


43,135,361



50,428,005Retained earnings


146,691,122



141,363,202Accumulated other comprehensive loss


(2,230,354
)


(2,992,749
)Total Stockholders’ equity


593,317,803



602,742,866Total liabilities and Stockholders’ equity


625,480,111



637,317,316


F-50




Yucheng Technologies LimitedParent Only Statements of OperationsFor the year ended December 31, 2008, 2009 and 2010(Expressed in Chinese Renminbi)
  2008


2009


2010Revenues

RMB


RMB


RMBPlatform Services


42,556,878



-



-Total revenues


42,556,878



-



-Cost of revenues:Platform Services


(39,714,724
)


(215,733
)


-Maintenance Services


(74,300
)


(1,919,157
)


-Total cost of revenues


(39,789,024
)


(2,134,890
)


-Gross profit


2,767,854



(2,134,890
)


-Operating expenses:General and administrative expenses


(5,145,080
)


(1,458,349
)


(8,912,151
)Total operating expenses


(5,145,080
)


(1,458,349
)


(8,912,151
)Other income (expense)


230,307



-



1,899Share of results of subsidiaries


83,142,103



(606,359
)


10,874,976Income (loss) before income taxes


80,995,184



(4,199,598
)


1,964,724Income tax expenses


-



-



-Net income (loss)


80,995,184



(4,199,598
)


1,964,724




F-51





Yucheng Technologies LimitedPartent only Statements of Stockholders’ Equity(Expressed in Chinese Renminbi)
  AccumulatedAdditional








other


TotalCommon

shares


paid-in





Retained


comprehensive


stockholders’Shares

Amount


capital


Reserves


earnings


loss


equityRMB


RMB


RMB


RMB


RMB


RMBBalance as at January 1, 2008


16,610,853


20,006,616



361,624,414



24,868,832



88,162,065



(1,563,850
)


493,098,077Bonus shares


952,832


696



43,290,856



-



-



-



43,291,552Shares issued to independent directors


12,000


8



973,078



-



-



-



973,086Deemed distribution


-


-



(41,540,598
)


-



-



-



(41,540,598
)Decrease of interests in Sunrisk


-


-



(18,820,019
)


-



-



-



(18,820,019
)Net income


-


-



-



-



80,995,184



-



80,995,184Transfer to reserves


-


-



-



13,140,014



(13,140,014
)


-



-Foreign currency translation adjustment


-


-



-



-



-



(1,188,399
)


(1,188,399
)Reversal of stock issuance cost


-


-



1,726,728



-



-



-



1,726,728Balance as at December 31, 2008


17,575,685


20,007,320



347,254,459



38,008,846



156,017,235



(2,752,249
)


558,535,611Bonus shares


952,832


656



37,887,742



-



-



-



37,888,398Shares issued to independent directors


5,250


4



221,452



-



-



-



221,456Issuance on acquisition of a Subsidiary


26,247


18



1,411,185



-



-



-



1,411,203-Increase of interests in Yuxinyicheng Information


-


-



(1,061,162
)


-



-



-



(1,061,162
)Net loss


-


-



-



-



(4,199,598
)


-



(4,199,598
)Transfer to reserves


-


-



-



5,126,515



(5,126,515
)


-



-Foreign currency translation adjustment


-


-



-



-



-



521,895



521,895Balance as at December 31, 2009


18,560,014


20,007,998



385,713,676



43,135,361



146,691,122



(2,230,354
)


593,317,803Stock compensation expenses


-


-



8,052,823



-



-



-



8,052,823Shares issued to independent directors









169,911















169,911Net income


-


-



-



-



1,964,724



-



1,964,724Transfer to reserves


-


-



-



7,292,644



(7,292,644
)


-



-Foreign currency translation adjustment


-


-



-



-



-



(762,395
)


(762, 395
)Balance as at December 31, 2010


18,560,014


20,007,998



393,936,410



50,428,005



141,363,202



(2,992,749
)


602,742,866





F-52




Yucheng Technologies Limited


Parent Only Statements of Cash Flows
 (Expressed in Chinese Renminbi)





2008


2009


2010RMB


RMB


RMBCash flows from operating activities:Net income (loss)


80,995,184



(4,199,598
)


1,964,724(Loss) gain from equity method investees


(83,142,103
)


606,359



(10,874,976
)Shares issued to independent directors


973,086



221,456



169,911Stock based compensation to staffs


-



-



8,052,823Decrease (increase) in trade accounts receivable


-



(2,119,019
)


63,769Decrease (increase) in due from related parties


(1,568,105
)


1,568,105



-(Increase) decrease in other current assets


29,914,155



5,774,355



(14,496,522
)(Decrease) increase in trade accounts payable


1,031,589



3,171,769



(1,760,540
)(Decrease) increase in employee and payroll accruals


341,730



(341,730
)


-Increase (decrease) in other current liabilities


(13,751,789
)


19,456,971



4,172,682Net cash (used in) provided by operating activities


14,793,747



24,138,668



(12,708,129
)Cash flows used in investing activities:Payment of purchase of subsidiaries, net of cash acquired


-



(8,117,439
)


-Cash flows used in financing activities:Deemed distribution


-



(18,281,588
)


-Net (decrease) increase in cash and cash equivalents


14,793,747



(2,260,359
)


(12,708,129
)Cash and cash equivalents at beginning of year


2,150,528



16,944,275



14,683,916Cash and cash equivalents at the end of year


16,944,275



14,683,916



1,975,787





F-53