| ASIAINFO HOLDINGS INC ITEM 1A Risk Factors Certain Risks That May Affect Our Operating Results and Our Common Stock In addition to the other information in this report, the following factors should be considered in evaluating our business and our future prospects: The growth of our business is dependent on government telecommunications infrastructure and budgetary policies, particularly the allocation of funds to sustain the growth of the telecommunications industry in China |
| Most of our large telecommunications customers are directly or indirectly owned or controlled by the government of China |
| Accordingly, their business strategies, capital expenditure budgets and spending plans are largely decided in accordance with government policies, which, in turn, are determined on a centralized basis at the highest level by the National Development and Reform Commission of China |
| As a result, the growth of our business is heavily dependent on government policies for telecommunications infrastructure |
| Insufficient government allocation of funds to sustain the growth of China’s telecommunications industries in the future could reduce the demand for our products and services and have a material adverse effect on our ability to grow our business |
| Historically, China’s telecommunications sector has been subject to a number of state-mandated restructurings |
| For example, in 2002 China Telecom was split geographically into a northern division (comprising ten provinces) and a southern division (comprising 21 provinces) |
| Under the restructuring, the northern division of China Telecom merged with China Netcom and was renamed China Network Communications Group 21 ______________________________________________________________________ [49]Table of Contents Corporation, or China Netcom Group, while the southern division continued to use the China Telecom name |
| As a result of the restructuring, new orders for telecommunications infrastructure expansion and improvement projects decreased, adversely affecting our revenue |
| Any similar restructurings of this nature could cause our operating results to vary unexpectedly from quarter to quarter in the future |
| Our customer base is concentrated and the loss of one or more of our customers could cause our business to suffer significantly |
| We have derived, and believe that we will continue to derive, a significant portion of our revenues from a limited number of large customers in the telecommunications industry, such as China Mobile, China Unicom, China Telecom and China Netcom Group |
| China Mobile accounted for 51prca of our revenues in 2005 |
| The loss, cancellation or deferral of any large contract by any of our large customers would have a material adverse effect on our revenues, and consequently our profits |
| Despite our business development in the security products and services market following the acquisition of Lenovo-AsiaInfo’s IT service business unit in 2004, the revenue expected to be generated by our business outside the telecommunications industry is still limited compared to our overall revenues |
| Moreover, we cannot provide any assurance that a material proportion of our revenues will be derived from other industries in the future |
| Our acquisition of Lenovo’s IT services business and any future acquisitions or investments may expose us to potential risks and have an adverse effect on our ability to manage our business |
| Selective acquisitions, such as our 2004 acquisition of Lenovo’s non-telecommunications IT service division, form part of our strategy to further expand our business |
| If we are presented with appropriate opportunities that we feel will enhance our revenue growth, operations and profitability, we may acquire additional businesses, services or products that are complementary to our core business |
| Such acquisitions could result in the use of significant amounts of cash and/or dilutive issuances of our common stock |
| Such acquisitions involve other significant risks |
| For example, our integration of such acquired entities and/or operations into our business may not be successful and may not enable us to expand into new business platforms as well as we expect |
| This would significantly affect the expected benefits of these acquisitions |
| Moreover, the integration of new businesses into our operations has required significant attention from our management |
| Future acquisitions will also likely present similar challenges |
| The security products and services business unit we acquired from Lenovo in 2004 faced strong challenges in the final months of 2005 |
| It experienced significantly lower shipment volume than we anticipated and made only a nominal contribution to our revenue for the fourth quarter |
| As a result, full year earnings for Lenovo-AsiaInfo were significantly below our expectations |
| Following the disappointing quarter, Mr |
| Yu Bing, formerly Chief Executive Officer of the Lenovo-AsiaInfo division and member of our Board, submitted his resignation |
| We also received resignations from approximately 45 other employees in our Lenovo-AsiaInfo division |
| Our management team, under the guidance of our Board, is currently conducting an inquiry into the events surrounding the revenue shortfall in the fourth quarter of 2005 and the resignations from the Lenovo-AsiaInfo division |
| Based on the progress of that inquiry to date, we believe that the shortfall was, at least in part, the result of unexcused absences on the part of employees in our security division during the quarter |
| Our inquiry into this matter is ongoing, and we intend to seek appropriate remedies if we determine such action is warranted |
| The acquisition of Lenovo’s non-telecommunications IT services division and possible future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and potential loss, or harm to, relationships with employees and clients as a result of our integration of new businesses |
| In addition, we cannot be sure that we will be able to realize the benefits we anticipate from acquiring any companies, or that we will not incur costs, including those relating to intangible assets or goodwill, in excess of our projected costs for these transactions |
| The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations |
| 22 ______________________________________________________________________ [50]Table of Contents The long and variable sales cycles for our products and services can cause our revenues and operating results to vary significantly from period to period and may adversely affect the trading price of our common stock |
| Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate |
| A customer’s decision to purchase our services and products involves a significant commitment of its resources and extended evaluation |
| We spend considerable time and expense educating and providing information to prospective customers about features and applications of our services and products |
| Because our major customers often operate large and complex networks, they usually expand their networks in large increments on a sporadic basis |
| The combination of these factors can cause our revenues and results of operations to vary significantly and unexpectedly from quarter to quarter |
| A large part of the contract amount of our projects often relates to hardware procurement |
| Since we recognize most of the revenues relating to hardware plus a portion of services and software revenues at the time of hardware delivery, the timing of hardware delivery can cause our quarterly gross revenues to fluctuate significantly |
| Due to the foregoing factors, we believe that quarter to quarter comparisons of our operating results are not a good indication of our future performance and should not be overly relied upon |
| It is likely that our operating results in some periods may be below the expectations of public market analysts and investors |
| In this event, the price of our common stock will probably decline, perhaps significantly more in percentage terms than any corresponding decline in our operating results |
| Our working capital requirements may increase significantly |
| We typically purchase hardware for our customers as part of our turn-key total solutions services |
| We generally require our customers to pay 80prca to 90prca of the invoice value of the hardware upon delivery |
| We typically place orders for hardware against back-to-back orders from customers and seek favorable payment terms from hardware vendors |
| This policy has historically minimized our working capital requirements |
| However, for certain large and strategically important projects, we have agreed to payment of less than 80prca to 90prca of the invoice value of the hardware upon delivery in order to maintain competitiveness |
| Wider adoption of less favorable payment terms or delays in hardware deliveries could cause our working capital needs to increase significantly |
| We have sustained losses in prior years and may incur slower earnings growth, earnings declines or net losses in the future |
| Although we had net income in 2001, 2002 and 2004, we sustained net losses in 2003 and 2005 |
| There are no assurances that we can sustain profitability or avoid net losses in the future |
| We continue to expect that certain of our operating expenses will increase as our business grows |
| The level of these expenses will be largely based on anticipated organizational growth and revenue trends and a high percentage of those expenses, particularly compensation expenses, will be fixed |
| As a result, any delays in expanding sales volume and generating revenue could result in substantial operating losses |
| Our high level of fixed costs, as well as increased competition in the software market, could result in reduced operating margins |
| We maintain a relatively stable work force of software and network engineers engaged in all phases of planning and executing projects on behalf of our customers |
| As a result, our operating costs are relatively fixed from quarter to quarter, regardless of fluctuations in our revenues |
| Future fluctuations in our revenues could result in decreases in our operating margins |
| In addition, enhanced competition in the software market and other markets in which we operate could result in reduced prices, which, together with our relatively fixed operating costs, could also result in reduced operating margins |
| 23 ______________________________________________________________________ [51]Table of Contents PRC laws and regulations currently prohibit foreign-invested companies from engaging in systems integration businesses involving state secrets, which is part of the IT services business we acquired from Lenovo in 2004 |
| PRC laws and regulations also restrict certain foreign invested companies from participating in the VATS business, which we are exploring the possibility of entering |
| Substantial uncertainties exist with respect to our contractual arrangements with Lenovo Computer, Lenovo Security and Star VATS, due to uncertainties regarding the interpretation and application of current and future PRC laws and regulations |
| In 2001, the State Secrecy Bureau of China promulgated the Administrative Measures for Qualification of Computer Information Systems Integration Involving State Secrets, which expressly prohibits foreign persons or foreign-invested enterprises from engaging in systems integration businesses involving state secrets, also referred to as “restricted businesses” |
| We and our PRC operating subsidiaries are considered foreign persons or foreign-invested enterprises under PRC laws |
| In addition to a number of other types of IT services, one of the businesses operated by the IT services division we acquired from Lenovo in 2004 was a restricted business |
| We currently operate the restricted business through Lenovo Computer |
| We intend to operate the restricted business through Lenovo Security, upon the receipt by Lenovo Security of all requisite business licenses and qualifications |
| Lenovo Security has obtained the Computer Information System Integration Concerning State Secrets Qualification Certificate issued by the National Administration for Protection of State Secrets |
| Lenovo Computer is owned by certain subsidiaries of Lenovo |
| Lenovo Security is owned by Legend Holdings Limited, the parent company and controlling shareholder of Lenovo, and one of our employees and one of our directors who are PRC citizens |
| Lenovo Computer currently conducts substantially all of our operations in relation to the restricted business, generates substantially all of our revenue relating to such business, and makes use of the licenses and approvals that are essential to such business |
| We do not currently have any equity interest in Lenovo Computer or Lenovo Security and instead enjoy economic benefits substantially similar to equity ownership in such companies through contractual arrangements between Lenovo-AsiaInfo Technologies, Inc, or Lenovo-AsiaInfo, our wholly-owned subsidiary, and these affiliated entities and their respective shareholders |
| Further information on these arrangements is set forth under the heading “Certain Relationships and Related Transactions” in the definitive proxy statement for our 2006 annual meeting of stockholders, to be filed with the SEC on or about the date of this report |
| At the closing of our acquisition of Lenovo’s IT services business, our Chinese legal counsel, T&C Law Office, and Chinese legal counsel to Lenovo Group, Tian Yuan Law Firm, each delivered legal opinions to the effect that our ownership structure of Lenovo Computer and Lenovo Security, and the contractual arrangements among us, Lenovo-AsiaInfo, these affiliated entities and their respective shareholders, are in compliance with all existing PRC laws and regulations |
| There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including regulations governing the validity and enforcement of such contractual arrangements |
| Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to the opinion of our and Lenovo’s Chinese counsel |
| If the PRC government finds that our contractual arrangements with Lenovo Computer and Lenovo Security do not comply with the prohibition on foreign-invested companies from engaging in systems integration businesses involving state secrets, we could be subject to severe penalties |
| In June of 2004 we entered into similar contractual arrangements with Star VATS, a domestic company owned by certain of our employees who are PRC citizens, which has been established to engage in the VATS business in China |
| Star VATS is in the process of developing VATS products and services that we hope to offer in China |
| We anticipate that if we successfully launch our VATS products and services, all of our business related to such products and services will be conducted through Star VATS Star VATS will generate any revenue relating to such business and will make use of the licenses and approvals that are essential to such business |
| We do not have any equity interest in Star VATS, but instead have the right to enjoy economic benefits similar to equity ownership through our contractual arrangements with Star VATS and its shareholders |
| In the opinion of our Chinese legal counsel, T&C Law Firm, the contractual arrangements among us, Star VATS, and the shareholders 24 ______________________________________________________________________ [52]Table of Contents of Star VATS are in compliance with all existing PRC laws and regulations |
| There are, however, substantial uncertainties regarding the interpretation and application of current and future PRC laws and regulations, including regulations governing the validity and enforcement of such contractual arrangements |
| Accordingly, we cannot assure you that PRC government authorities will not ultimately take a view contrary to the opinion of our Chinese legal counsel |
| If the PRC government finds that our contractual arrangements with Star VATS do not comply with the restrictions on certain foreign invested companies from engaging in VATS businesses, we could be subject to severe penalties |
| Our contractual arrangements with Lenovo Computer, Lenovo Security and Star VATS may not be as effective in providing operational control as direct ownership of these affiliated entities and may be difficult to enforce |
| Although we have been advised by Chinese legal counsel that our contractual arrangements with Lenovo Computer, Lenovo Security and Star VATS are valid, binding and enforceable under current PRC laws, these arrangements may not be as effective in providing control as direct ownership of these affiliated entities would be |
| For example, these affiliated entities and their respective shareholders could fail to perform or make payments as required under such contractual arrangements |
| In such event, we would have to rely on the PRC legal system to enforce these agreements |
| Any legal proceedings would be uncertain as to outcome and could result in the disruption of our business, damage to our reputation, diversion of our resources and the incurrence of substantial costs |
| We may not be able to operate the systems integration businesses involving state secrets once we acquire all of the equity interest in Lenovo Computer and Lenovo Security |
| PRC laws and regulations currently prohibit foreign persons or foreign-invested enterprises from engaging in systems integration businesses involving state secrets |
| We and our subsidiaries are considered foreign persons or foreign-invested enterprises under PRC laws |
| Unless such prohibition is lifted in the future, we will not be able to operate such business after we acquire all of the equity interest in Lenovo Computer and Lenovo Security pursuant to the terms of our contractual arrangements with Lenovo Computer and Lenovo Security and their respective shareholders |
| The loss of this line of business may materially and adversely affect our business, financial condition and results of operations |
| Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may limit our ability to acquire PRC companies and adversely affect the implementation of our acquisition strategy, and the failure by our shareholders who are PRC residents to make or obtain any required registrations pursuant to such regulations may subject us to legal sanctions |
| The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice on January 24, 2005 concerning the application of foreign exchange regulations to mergers and acquisitions involving foreign investment in China |
| Among other things, the public notice provides that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities |
| On April 21, 2005, SAFE issued another public notice clarifying the January notice, and on October 21, 2005 SAFE issued a third notice, known as “Circular 75,” which replaced the first two notices and set forth a new regulatory framework for transactions involving offshore companies |
| Under Circular 75, if an acquisition of a PRC company by an offshore company controlled by PRC residents occurred prior to the various SAFE notices, certain PRC residents may be required to submit a registration form to the local SAFE branch to register their ownership interests in the offshore company before March 31, 2006 |
| The PRC resident must also amend such registration form if there is a material event affecting the offshore company, such as, among other things, a change in share capital, a transfer of shares, or if such company is involved in a merger, acquisition or a spin-off transaction or uses its assets in China to guarantee offshore obligations |
| In the past, we have acquired a number of assets from, or equity interests in, PRC companies through issuances of our shares of common stock to 25 ______________________________________________________________________ [53]Table of Contents individuals who may be deemed to be PRC residents for the purpose of the SAFE notices |
| However, there is substantial uncertainty as to whether we would be considered an “offshore company” for purposes of Circular 75, thus giving rise to a retroactive filing obligation |
| Moreover, it is uncertain whether SAFE would impose any obligations on us in the event it determines that these PRC residents have an obligation to register under the notices |
| As it is uncertain how the SAFE notices will be interpreted or implemented, we cannot predict how these regulations will affect our future acquisition strategy and business operations |
| For example, if we decide to acquire additional PRC companies, we cannot assure you that we or the owners of such companies will be able to complete the filings and registrations, if any, required by the SAFE notices |
| This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects |
| Asset impairment reviews may result in future periodic write-downs |
| Effective January 1, 2002, we adopted SFAS Nodtta 142, which requires us, among other things, to conduct annual reviews of goodwill and intangible assets for impairment |
| In connection with our business acquisitions, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of goodwill and intangible assets |
| In assessing the related useful lives of those assets, we have to make assumptions regarding their fair value, our recoverability of those assets and our ability to successfully develop and ultimately commercialize acquired technology |
| If those assumptions change in the future when we conduct our periodic reviews in accordance with applicable accounting standards, we may be required to record impairment charges |
| We recorded a non-cash impairment charge of dlra21dtta2 million as a result of an independent valuation during the fourth quarter of 2005 of the goodwill and acquired intangible assets mainly attributable to our acquisition of Lenovo-AsiaInfo’s IT service business unit in 2004 |
| It is possible that future reviews will result in further write-downs of goodwill and other intangible assets |
| We are highly dependent on our executive officers |
| Each of our executive officers is responsible for an important segment of our operations |
| Although we believe that we have significant depth at all levels of management, the loss of any of our executive officers’ services could be detrimental to our operations |
| We do not have, and do not plan to obtain, “key man” life insurance on any of our officers |
| We face a competitive labor market in China for skilled personnel and therefore are highly dependent on the skills and services of our existing key skilled personnel and our ability to hire additional skilled employees |
| Competition for highly skilled software design, engineering and sales and marketing personnel is intense in China |
| Our failure to attract, assimilate or retain qualified personnel to fulfill our current or future needs could impair our growth |
| Competition for skilled personnel comes primarily from a wide range of foreign companies active in China, many of which have substantially greater resources than we have |
| Limitations on our ability to hire and train a sufficient number of personnel at all levels would limit our ability to undertake projects in the future and could cause us to lose market share |
| We extend warranties to our customers that expose us to potential liabilities |
| We customarily provide our customers with one to three year warranties, under which we agree to maintain installed systems at no additional cost to our customers |
| The maintenance services cover both hardware and our proprietary and third party software products |
| Although we seek to arrange back-to-back warranties with hardware and software vendors, we have the primary responsibility to maintain the installed hardware and software |
| Our contracts often do not have disclaimers or limitations on liability for special, consequential and incidental damages, nor do we typically cap the amounts our customers can recover for damages |
| In addition, we 26 ______________________________________________________________________ [54]Table of Contents do not currently maintain any insurance policy with respect to our exposure to warranty claims |
| The failure of our installed projects to operate properly could give rise to substantial liability for special, consequential or incidental damages, which in turn could materially and adversely affect us |
| We sell our services on a fixed-price, fixed-time basis, which exposes us to risks associated with cost overruns and delays |
| We sell most of our services on a fixed-price, fixed-time basis |
| In contracts with our customers, we typically agree to pay late completion fines of up to 5prca of the total contract value |
| In large scale telecommunications infrastructure projects, there are many factors beyond our control which could cause delays or cost overruns |
| In this event, we would be exposed to cost overruns and liability for late completion fines |
| We may become less competitive if we are unable to develop or acquire new products, or enhancements to our existing products, that are marketable on a timely and cost-effective basis |
| Our future operating results will depend, to a significant extent, upon our ability to enhance our existing products and services and to introduce new products and services to meet the requirements of our customers in a rapidly developing and evolving market |
| If we do not enhance our existing products and services or introduce new successful products and services in a timely manner, our products and services may become obsolete, and our revenues and operating results may suffer |
| Moreover, unexpected technical, operational, distribution or other problems could delay or prevent the introduction of any products or services that we may plan to introduce in the future |
| We cannot be sure that any of these products or services will achieve widespread market acceptance or generate incremental revenues |
| Our proprietary rights may be inadequately protected and there is a risk of poor enforcement of intellectual property rights in China |
| Our success and ability to compete depend substantially upon our intellectual property rights, which we protect through a combination of confidentiality arrangements and copyright, trademark, and patent registrations |
| We have registered some marks and filed trademark applications for other marks with the United States Patent and Trademark Office, the Trademark Bureau of the State Administration of Industry and Commerce in China and the Trade Marks Registry in Hong Kong |
| We have also registered copyrights with the State Copyright Bureau in China with respect to certain of our software products, although we have not applied for copyright protection elsewhere (including the United States) |
| We have filed some patent applications and have acquired some existing patents in the PRC for certain hardware and software products used or developed in our business |
| Despite these precautions, the legal regime protecting intellectual property rights in China is weak |
| Because the Chinese legal system in general and the intellectual property regime in particular, are relatively weak, it is often difficult to enforce intellectual property rights in China |
| In addition, there are other countries where effective copyright, trademark and trade secret protection may be unavailable or limited |
| We enter into confidentiality agreements with most of our employees and consultants, and control access to, and distribution of, our documentation and other licensed information |
| Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our licensed services or technology without authorization, or to develop similar technology independently |
| Policing unauthorized use of our licensed technology is difficult and there can be no assurance that the steps we take will prevent misappropriation or infringement of our proprietary technology |
| In addition, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of our resources |
| A portion of our business involves the development and customization of software applications for customers |
| We generally retain significant ownership or rights to use and market such software for other customer projects, where possible |
| However, our customers sometimes retain co-ownership and rights to use the applications, 27 ______________________________________________________________________ [55]Table of Contents processes, and intellectual property so developed |
| In some cases, we may have no right or only limited rights to reuse or provide these developments to projects involving other customers |
| To the extent that we are unable to negotiate contracts which permit us to reuse source-codes and methodologies, or to the extent that we have conflicts with our customers regarding our ability to do so, we may be unable to provide similar solutions to our other customers |
| We are exposed to certain business and litigation risks with respect to technology rights held by third parties |
| We currently license technology from third parties and intend to do so increasingly in the future as we introduce services that require new technology |
| There can be no assurance that these technology licenses will be available to us on commercially reasonable terms, if at all |
| Our inability to obtain any of these licenses could delay or compromise our ability to introduce new services |
| In addition, we may or may allegedly breach the technology rights of others and incur legal expenses and damages, which could be substantial |
| Investors may not be able to enforce judgments entered by United States courts against certain of our officers and directors |
| We are incorporated in the State of Delaware |
| However, a majority of our directors and executive officers, and certain of our principal shareholders, live outside of the United States, principally in Beijing and Hong Kong |
| As a result, you may not be able to: • effect service of process upon those persons within the United States; or • enforce against those persons judgments obtained in United States courts, including judgments relating to the federal securities laws of the United States |
| We do not intend to pay and may be restricted from paying dividends on our common stock |
| We have never declared or paid dividends on our capital stock and we do not intend to declare any dividends in the foreseeable future |
| We currently intend to retain future earnings to fund our growth |
| Furthermore, if we decide to pay dividends, foreign exchange and other regulations in China may restrict our ability to distribute retained earnings from China or convert those payments from Renminbi into foreign currencies |
| The fact that our business is conducted in both US dollars and Renminbi may subject us to currency exchange rate risk due to fluctuations in the exchange rate between those two currencies |
| Substantially all of our revenues, expenses and liabilities are denominated in either US dollars or Renminbi |
| As a result, we are subject to the effects of exchange rate fluctuations between those currencies |
| Because of the unitary exchange rate system introduced in China on January 1, 1994, the official bank exchange rate for conversion of Renminbi to US dollars experienced a devaluation of approximately 50prca |
| Since we report our financial results in US dollars, any future devaluation of the Renminbi against the US dollar may have an adverse effect on our reported net income |
| Substantially all our revenues and expenses relating to hardware sales are denominated in US dollars, and substantially all our revenues and expenses relating to the software and services component of our business are denominated in Renminbi |
| The value of our shares may be affected by the foreign exchange rate between the US dollar and the Renminbi because the value of our business is effectively denominated in Renminbi, while our shares are traded in US dollars |
| Furthermore, an increase in the value of the Renminbi may require us to exchange more US dollars into Renminbi to meet the working capital requirements of our subsidiaries in China |
| Depreciation of the value of the US dollar will also reduce the value of the cash we hold in US dollars, which we may use for purposes of future acquisitions or other business expansion |
| In July 2005, the People’s Bank of China, or PBOC, raised the value of the Renminbi by 2dtta1prca against the US dollar |
| Moreover, according to the PBOC, the Renminbi will no longer be pegged to the US dollar, but instead it 28 ______________________________________________________________________ [56]Table of Contents will float in a tight band against a basket of foreign currencies |
| While we do not believe that this change will have a significant impact on the results of our operations, we cannot guarantee that future changes in exchange rate policy will not affect our business |
| The markets in which we sell our services and products are competitive and we may not be able to compete effectively |
| We operate in a highly competitive environment, both in the telecommunications market and in the market for IT security services and solutions |
| In the telecommunications market, our competitors include multinational companies such as Amdocs, Digital China, Huawei, Linkage and Neusoft |
| In the security products and services market, our competitors are mainly local players such as Topsec and Netscreen and international players such as Cisco |
| Our competitors, many of whom have greater financial, technical and human resources than we have, may be able to respond more quickly to new and emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of new products or services |
| It is possible that competition in the form of new competitors or alliances, joint ventures or consolidation among existing competitors may decrease our market share |
| Increased competition could result in lower personnel utilization rates, billing rate reductions, fewer customer engagements, reduced gross margins and loss of market share, any one of which could materially and adversely affect our profits and overall financial condition |
| Political and economic policies of the Chinese government could affect our industry in general and our competitive position in particular |
| Since the establishment of the People’s Republic of China in 1949, the Communist Party has been the governing political party in China |
| The highest bodies of leadership are the Politburo of the Communist Party, the Central Committee and the National People’s Congress |
| The State Council, which is the highest institution of government administration, reports to the National People’s Congress and has under its supervision various commissions, agencies and ministries, including the MII, the telecommunications regulatory body of the Chinese government |
| Since the late 1970s, the Chinese government has been reforming the Chinese economic system |
| Although we believe that economic reform and the macroeconomic measures adopted by the Chinese government have had and will continue to have a positive effect on economic development in China, there can be no assurance that the economic reform strategy will not from time to time be modified or revised |
| Such modifications or revisions, if any, could have a material adverse effect on the overall economic growth of China |
| Such developments could reduce, perhaps significantly, the demand for our products and services |
| Furthermore, changes in political, economic and social conditions in China, adjustments in policies of the Chinese government or changes in laws and regulations could adversely affect our industry in general and our competitive position in particular |
| Recently, the Chinese government’s increased measures to control economic growth have contributed and will continue to contribute to cautious spending by our telecommunications customers |
| Such measures may also result in the delay of certain large telecommunications-related projects, which could have a material adverse effect on our business |
| High technology and emerging market shares have historically experienced extreme volatility and may subject you to losses |
| The trading price of our shares may be subject to significant market volatility due to investor perceptions of investments relating to China and Asia, as well as developments in the telecommunications industry |
| In addition, the high technology sector of the stock market frequently experiences extreme price and volume fluctuations, which have particularly affected the market prices of many software companies and which have often been unrelated to the operating performance of those companies |
| 29 ______________________________________________________________________ [57]Table of Contents If our stock price is volatile, we may become subject to securities litigation, which is expensive and could result in a diversion of resources |
| In the past, periods of volatility in the market price of a particular company’s securities, have often been followed by the institution of securities class action litigation against that company |
| Many companies in our industry have been subject to this type of litigation in the past, and we are currently involved in this type of litigation as a result of allegedly improper allocation procedures relating to the sale of our common stock in connection with our initial public offering in March of 2000 |
| For more information on that litigation, please see the discussion under the |