Preliminary Proxy Statement
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

x

   Preliminary Proxy Statement    ¨    Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e) (2))

¨

   Definitive Proxy Statement      

¨

   Definitive Additional Materials      

¨

   Soliciting Material Under §240.14a-12      

ASIAINFO HOLDINGS, INC.

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.

 

x Fee computed on table below per Exchange Act Rules 14a-6(i) (4) and 0-11.

 

  1) Title of each class of securities to which transaction applies:

Common Stock, par value $0.01 per share

 
  2) Aggregate number of securities to which transaction applies:

26,832,731 shares of Common Stock

 
  3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

The value of the transaction is computed by adding (A) $60 million, plus (B) 26,832,731 shares of Common Stock multiplied by $24.61 per share, representing the average of the high and low prices per share on January 25, 2009 as reported on the NASDAQ Global Market. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.0000713 by the sum of the preceding sentence.

 
  4) Proposed maximum aggregate value of transaction:

$720,353,510

 
  5) Total fee paid:

$51,362

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

  1) Amount previously paid:

  

 
  2) Form, Schedule or Registration Statement No.:

  

 
  3) Filing Party:

  

 
  4) Date Filed:

  

 


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LOGO

ASIAINFO HOLDINGS, INC.

PROPOSED BUSINESS COMBINATION—YOUR VOTE IS VERY IMPORTANT

Dear AsiaInfo Holdings, Inc. Stockholder:

On December 6, 2009, AsiaInfo Holdings, Inc. announced that it had negotiated and executed a definitive Business Combination Agreement, or the Combination Agreement, to combine our business with the business of Linkage Technologies International Holdings Limited, or Linkage Cayman, through our acquisition of 100% of the outstanding share capital of Linkage Cayman’s wholly-owned subsidiary, Linkage Technologies Investment Limited, or Linkage Technologies. Linkage Technologies operates in China through its direct and indirect subsidiaries. Like AsiaInfo, Linkage Technologies is a leading provider of software solutions and IT services for the telecom industry in China. In this letter and in the enclosed Proxy Statement, we refer to our acquisition of Linkage Technologies and its subsidiaries from Linkage Cayman as the “Combination.” We believe the proposed Combination will allow us to leverage both AsiaInfo’s and Linkage Technologies’ leading market positions and complementary customer bases to provide a robust, full-service offering to telecom operators in China.

In the proposed Combination, Linkage Cayman will receive US$60 million, or the Cash Consideration, and 26,832,731 shares of common stock of AsiaInfo, or the Stock Consideration (and together with the Cash Consideration, the “Consideration”), and will distribute the Consideration to its existing shareholders, which shareholders we refer to as the Legacy Linkage Shareholders. Upon completion of the Combination, AsiaInfo’s stockholders will continue to own their existing shares. Upon distribution of the Consideration to the Legacy Linkage Shareholders, the Legacy Linkage Shareholders will own shares representing approximately 35.8% of the outstanding common stock of the combined company, based on the fully-diluted number of shares of AsiaInfo common stock outstanding on December 6, 2009. The value of the Share Consideration to be issued in exchange for 100% of the outstanding share capital of Linkage Technologies will fluctuate with the market price of AsiaInfo’s common stock.

Your vote is very important. The Combination cannot be completed unless our stockholders approve the payment of the Consideration and the amendment to our certificate of incorporation to effect the change of our corporate name to “AsiaInfo-Linkage, Inc.” We are holding a special meeting of our stockholders to vote on the proposals necessary to complete the Combination. Information about this special meeting, the Combination and the other business to be considered by the stockholders is contained in this Proxy Statement. We urge you to read this Proxy Statement carefully. You should carefully consider the Risk Factors beginning on page [    ].

Whether or not you plan to attend the special meeting of stockholders, please submit your proxy as soon as possible to make sure that your shares are represented at the special meeting.

Our board of directors recommends that you vote FOR the proposal to approve the payment of the Consideration and FOR the proposal to amend to our certificate of incorporation to effect the change of our corporate name to “AsiaInfo-Linkage, Inc.”

 

/S/    JAMES DING        

James Ding
Chairman of the Board of Directors


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LOGO

ASIAINFO HOLDINGS, INC.

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [                    ], 2010

[                    ], 2010

TO THE STOCKHOLDERS OF ASIAINFO HOLDINGS, INC.:

You are cordially invited to attend a special meeting of stockholders of AsiaInfo Holdings, Inc., a Delaware corporation, which we refer to as “AsiaInfo,” “we,” “us” or the “Company,” to be held on [                    ], 2010 at [                    ], local time, at the our executive offices located at 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China.

At the special meeting, you will be asked to consider and vote upon the following matters related to our proposed acquisition of Linkage Technologies Investment Limited, or Linkage Technologies, and its subsidiaries from Linkage Technologies International Holdings, or Linkage Cayman, which transaction we refer to as the “Combination”:

 

  1. A proposal, which we refer to as the “Consideration Proposal,” to approve the payment of US$60 million, or the Cash Consideration, and the issuance of 26,832,731 shares of common stock of AsiaInfo, or the Stock Consideration (and together with the Cash Consideration, the Consideration), to Linkage Cayman, which Consideration will be distributed to Linkage Cayman’s existing shareholders, which shareholders we refer to as the “Legacy Linkage Shareholders,” as consideration for AsiaInfo’s purchase of 100% of the outstanding share capital of Linkage Cayman’s wholly-owned subsidiary, Linkage Technologies, pursuant to that certain Business Combination Agreement, or the Combination Agreement, by and among AsiaInfo, Linkage Cayman, certain shareholders of Linkage Cayman, and Libin Sun as agent for the shareholders of Linkage Cayman, dated December 4, 2009 a copy of which is attached as Annex A to the Proxy Statement accompanying this notice;

 

  2. A proposal, which we refer to as the “Name Change Proposal,” to approve the change of the name of AsiaInfo following the completion of the Combination to “AsiaInfo-Linkage, Inc.”;

 

  3. A proposal, which we refer to as the “Adjournment Proposal,” to adjourn or postpone the special meeting, if necessary or appropriate, including to solicit additional proxies in the event there are not sufficient votes in favor of adoption of the Consideration Proposal or the Name Change Proposal at the time of the special meeting; and

 

  4. Such other business as may properly come before the meeting or any adjournment thereof.

After careful consideration, our board of directors (i) determined that the Combination Agreement and the transactions contemplated by the Combination Agreement, including the purchase of 100% of the shares of Linkage Technologies and the change of the Company’s name to “AsiaInfo-Linkage, Inc.,” are in the best interests of AsiaInfo and our stockholders, (ii) approved and authorized the Combination Agreement, the Combination and the other transactions contemplated by the Combination Agreement, and (iii) recommends that you vote “FOR” the approval of the Consideration Proposal, “FOR” the approval of the Name Change Proposal and “FOR” the approval of the Adjournment Proposal at the special meeting. All of our directors support these determinations.

The Proxy Statement and the related materials are dated [                    ], 2010 and are first being mailed to our stockholders on or about [                    ], 2010. Only stockholders who owned shares of our common stock at the close of business on [                    ], 2010, the record date for the special meeting, will be entitled to vote at the special meeting. To vote your shares, you may use the enclosed proxy card, vote via the Internet or telephone


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or attend the special meeting and vote in person. On behalf of our board of directors, I urge you to complete, sign, date and return the enclosed proxy card, or vote via the Internet or telephone as soon as possible, even if you currently plan to attend the special meeting.

This Proxy Statement provides detailed information about the Combination Agreement and the Combination. The description of the Combination Agreement and all other agreements in this Proxy Statement are subject to the terms of the actual agreements. We encourage you to read this Proxy Statement carefully, including its annexes and the documents we refer to in this Proxy Statement.

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the Combination, passed upon the merits or fairness of the Combination or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE CONSIDERATION PROPOSAL, THE NAME CHANGE PROPOSAL AND THE ADJOURNMENT PROPOSAL MUST BE ADOPTED BY THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF OUR COMMON STOCK ENTITLED TO VOTE PRESENT (IN PERSON OR BY PROXY) AT THE SPECIAL MEETING AND CONSTITUTING A QUORUM FOR VOTING ON SUCH MATTERS.

Thank you for your support of our company. We look forward to seeing you at the special meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS

/S/    JAMES DING        

James Ding
Chairman of the Board of Directors


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TABLE OF CONTENTS

 

     Page

CERTAIN FREQUENTLY USED TERMS

   iv

SUMMARY TERM SHEET

   1

The Combination

   1

The Companies

   1

AsiaInfo

   1

Linkage Technologies

   1

AsiaInfo’s Reasons for the Combination

   2

Matters to be Considered at the Special Meeting

   2

Recommendations of the AsiaInfo Board

   3

Linkage Cayman’s Reasons for the Combination

   3

Opinion of AsiaInfo’s Financial Advisor

   4

Interests of AsiaInfo’s Directors, Executive Officers and Certain Significant Stockholders in the Combination

   4

Interests of Linkage Technologies’ Directors, Executive Officers and Certain Significant Shareholders in the Combination

   5

Directors and Executive Management Following the Combination

   5

The AsiaInfo Special Meeting

   6

No Appraisal Rights

   6

Regulatory Matters

   6

Conditions to Completion of the Combination

   6

Termination of the Combination Agreement

   8

Termination Fees

   8

Timing of the Combination

   9

Accounting Treatment of the Combination

   9

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE COMBINATION

   10

SELECTED HISTORICAL DATA OF ASIAINFO

   15

SELECTED HISTORICAL DATA OF LINKAGE TECHNOLOGIES

   17

SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

   19

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

   21

RISK FACTORS

   23

Risks Related to the Combination

   23

Risks Related to Linkage Technologies

   28

THE SPECIAL MEETING OF STOCKHOLDERS

   42

General

   42

When and Where the AsiaInfo Special Meeting Will Be Held

   42

Purpose of the Special Meeting

   42

Record Date; Stockholders Entitled to Vote

   42

Quorum and Voting Requirements

   42

Voting Procedures; Proxies

   43

Revocation of Proxies

   44

Solicitation of Proxies

   44

Delivery of Proxy Materials to Households Where Two or More Stockholders Reside

   44

THE COMBINATION

   45

The Companies

   45

AsiaInfo

   45

Linkage Technologies

   45

 

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     Page

Background of the Combination

   45

AsiaInfo’s Reasons for the Combination and Board Recommendation

   49

Linkage Cayman’s Reasons for the Combination

   50

Opinion of AsiaInfo’s Financial Advisor

   52

Interests of AsiaInfo’s Directors, Executive Officers and Certain Significant Stockholders in the Combination

   60

Interests of Linkage Technologies’ Directors, Executive Officers and Certain Significant Shareholders in the Combination

   61

Accounting Treatment of the Combination

   61

Regulatory Approvals Required for the Combination

   62

No Appraisal Rights

   63

Restrictions on Sales of Shares by Certain Affiliates of AsiaInfo and Linkage Technologies

   63

THE COMBINATION AGREEMENT

   65

The Combination

   65

Closing of the Combination

   65

Directors and Executive Management Following the Combination

   65

Consideration to be Issued in the Combination

   66

Representations and Warranties

   66

Conduct of Business Pending the Combination

   67

Stockholders’ Meeting and Duty to Recommend

   70

No Solicitations or Alternative Transactions

   70

Agreements to Take Further Action and Use Reasonable Efforts

   70

Indemnification

   70

Conditions to Completion of the Combination

   71

Termination of the Combination Agreement

   72

Termination Fees

   73

Employee Matters

   73

Amendment, Waiver and Extension of the Combination Agreement

   73

Fees and Expenses

   73

Governing Law

   73

Voting Agreements

   74

Lock-Up Agreements

   74

Registration Rights Agreement

   74

Stockholders’ Agreement

   74

Lianchuang Technology Company Limited Non-Compete and Non-Solicit Agreement

   75

INFORMATION ABOUT LINKAGE TECHNOLOGIES

   76

LINKAGE TECHNOLOGIES’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

   94

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

   118

THE PROPOSALS

   124

Proposal No. 1—The Consideration Proposal

   124

Proposal No. 2—The Name Change Proposal

   125

Proposal No. 3—The Adjournment Proposal

   126

WHERE YOU CAN FIND MORE INFORMATION

   129

MATERIAL CHANGES

   129

INCORPORATION BY REFERENCE

   129

Annex A: Business Combination Agreement

   A-1

Annex B: Form of Stockholder Voting Agreement

   B-1

Annex C: Form of Lenovo Voting Agreement

   C-1

 

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     Page

Annex D: Form of Voting Agreement

   D-1

Annex E: Form of Registration Rights Agreement

   E-1

Annex F: Form of Stockholders’ Agreement

   F-1

Annex G: Form of Lianchuang Technology Company Limited Non-Compete and Non-Solicit Agreement

   G-1

Annex H: Opinion of Merrill Lynch (Asia Pacific) Limited

   H-1

Annex I: Form of Certificate of Amendment to Certificate of Incorporation of AsiaInfo Holdings, Inc.

   I-1

 

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CERTAIN FREQUENTLY USED TERMS

Unless otherwise specified or the context so requires:

 

   

“AsiaInfo,” “we,” “us,” or the “Company” refers to AsiaInfo Holdings, Inc., a Delaware corporation, its subsidiaries and consolidated variable interest entities;

 

   

“AsiaInfo-Linkage, Inc.” refers to the new name of the combined company following the completion of the Combination;

 

   

“Cash Consideration” refers to the $60 million to be paid to Linkage Cayman in partial consideration for AsiaInfo’s purchase of 100% of the outstanding shares of Linkage Technologies;

 

   

“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this Proxy Statement, Taiwan, Hong Kong and Macau;

 

   

“closing” refers to the consummation of the Combination;

 

   

“Combination Agreement” refers to the Business Combination Agreement, dated as of December 4, 2009, by and among AsiaInfo, Linkage Technologies, and certain other parties thereto, a copy of which is attached as Annex A to this Proxy Statement;

 

   

“Combination” refers to our acquisition of Linkage Technologies and its subsidiaries from Linkage Cayman pursuant to the Combination Agreement;

 

   

“combined company” refers to our Company following the consummation of the Combination;

 

   

“Consideration” refers collectively to the Cash Consideration and the Stock Consideration;

 

   

“Legacy Linkage Shareholders” refers to the existing shareholders of Linkage Cayman;

 

   

“Linkage Cayman” refers to Linkage Technologies International Holdings Limited, a company organized under the laws of the Cayman Islands, and the holding company for Linkage Technologies;

 

   

“Linkage HK” refers to Hong Kong Linkage Technology Limited, a Hong Kong company, and a wholly-owned subsidiary of Linkage Technologies;

 

   

“Linkage Nanjing” refers to Linkage Technology (Nanjing) Co., Ltd., a company organized under the laws of the PRC, and an indirect subsidiary of Linkage Technologies;

 

   

“Linkage Suzhou” refers to Suzhou United New Science and Technology Corporation, a company organized under the laws of the PRC, and a wholly-owned subsidiary of Linkage Technologies;

 

   

“Linkage Technologies” refers to Linkage Technologies Investment Limited, a company organized under the laws of the British Virgin Islands, and the wholly-owned subsidiary of Linkage Cayman, and in the context of describing its operations, risk factors and financial results, also includes its subsidiaries;

 

   

“RMB” and “Renminbi” refers to the legal currency of China;

 

   

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

 

   

“Stock Consideration” refers to the 26,832,731 shares of common stock of AsiaInfo to be issued to Linkage Cayman in partial consideration for AsiaInfo’s purchase of 100% of the outstanding shares of Linkage Technologies; and

 

   

“$,” “dollars” and “U.S. dollars” refer to the legal currency of the United States.

 

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SUMMARY TERM SHEET

This summary highlights selected information contained in this Proxy Statement, and does not contain all the information that may be important to you. Each section of this summary is qualified in its entirety by reference to the full discussions of the related matters in the body of this Proxy Statement, and we urge you to read carefully this Proxy Statement, including the annexes, in its entirety. Additional important information is also contained in the documents incorporated by reference into this Proxy Statement—see “Where You Can Find More Information” beginning on page [    ].

 

The Combination

  

AsiaInfo and Linkage Cayman have entered into a Combination Agreement pursuant to which AsiaInfo will purchase 100% of the outstanding share capital of Linkage Technologies, a wholly-owned subsidiary of Linkage Cayman. In consideration for such purchase of shares, AsiaInfo will pay to Linkage Cayman the Cash Consideration, and issue to Linkage Cayman the Stock Consideration. The Consideration will be distributed to the Legacy Linkage Shareholders (each of whom is not a U.S. person) in a non-public offering in accordance with Regulation S promulgated under the Securities Act of 1933, as amended, or the Securities Act, on or promptly following the closing of the Combination.

 

A copy of the Combination Agreement is attached as Annex A to this Proxy Statement. We encourage you to read the entire Combination Agreement carefully because it is the principal document governing the Combination. For more information on the Combination Agreement, see “The Combination Agreement” beginning on page [    ].

The Companies

  

AsiaInfo

   AsiaInfo is a leading provider of software solutions and IT services for the telecom industry in China. In addition to providing software and customer solutions to China’s telecom carriers, the Company also offers a wide range of security products and services to small, medium and large sized Chinese enterprises across multiple vertical industries. Organized as a Delaware corporation, AsiaInfo began operations in the United States in 1993. AsiaInfo moved its major operations to China in 1995 and played a significant role in the construction of the national Internet backbones and provincial access networks for all of China’s major national telecom carriers, including China Telecom, China Mobile and China Unicom. The address of AsiaInfo’s principal executive office is 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China, and its telephone number is +8610-8216-6688.

Linkage Technologies

   Like AsiaInfo, Linkage Technologies is a leading provider of software solutions and IT services for the telecom industry in China. Linkage Technologies develops and implements core operating systems for all three telecom operators in China, namely, China Mobile, China Telecom and China Unicom. Linkage Technologies conducts its operations through its direct and indirect subsidiaries, including Linkage HK, Linkage Nanjing, and Linkage Suzhou. The address of Linkage Technologies’ principal executive office is No. 16 Building, No. 12 Dinghuaimen, Nanjing 210013, People’s Republic of China, and the telephone number is (86-25) 8375-3888. For more information on Linkage Technologies’ corporate history and structure, see “Information about Linkage Technologies—Corporate History and Structure” beginning on page [    ].

 

 

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AsiaInfo’s Reasons for

the Combination

  

In the course of determining that the Combination and the Combination Agreement are advisable and in the best interests of AsiaInfo and its stockholders, the AsiaInfo board of directors consulted with its management, as well as its financial and legal advisors. The AsiaInfo board of directors concluded that the Combination could enhance stockholder value through:

 

•      the complementary nature of the technology, products and services of AsiaInfo and Linkage Technologies, which may allow the combined company to better service its customers and accelerate the development of new technology;

 

•      the ability to broaden and integrate the companies’ products and services, which may enable the combined company to meet the needs of its customer more effectively and efficiently;

 

•      combined technological resources of AsiaInfo and Linkage Technologies, which may allow the combined company to compete more effectively by providing it with enhanced abilities to develop new products and greater functionality for existing products;

 

•      the creation of larger sales and services organizations, greater marketing resources, and financial strength, which may present improved opportunities for marketing the products and services of the combined company;

  

 

•      the combined experience, financial resources, size and breadth of product and service offerings of AsiaInfo and Linkage Technologies, which may allow the combined company to respond more quickly and effectively to technological change, increased competition and shifting market demands;

 

•      the opportunity to utilize the skills and resources of the combined management teams;

 

•      the potential for the Combination to provide an improved platform for future growth; and

 

•      scale and cost synergies, which may enhance the Company’s ability to effectively meet the demands for its products and services.

 

The AsiaInfo board of directors also considered a number of factors and risks concerning the Combination, which are described in greater detail on pages [    ] to [    ].

Matters to be Considered at the Special Meeting    The AsiaInfo stockholders will be asked to vote on a proposal, which we refer to as the “Consideration Proposal,” to approve the payment of the Cash Consideration, and the issuance of the Stock Consideration, to Linkage Cayman, which Consideration will be distributed to the Legacy Linkage Shareholders as consideration for AsiaInfo’s purchase of 100% of the outstanding share capital of Linkage Technologies pursuant to the Combination Agreement.

 

 

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The AsiaInfo stockholders will also be asked to vote on a proposal, which we refer to as the “Name Change Proposal,” to approve the change of the name of AsiaInfo following the completion of the Combination to “AsiaInfo-Linkage, Inc.”

 

Finally, the AsiaInfo stockholders will be asked to vote to approve the proposal, which we refer to as the “Adjournment Proposal,” to adjourn or postpone the special meeting, if necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes in favor of the adoption of the Consideration Proposal or the Name Change Proposal at the time of the special meeting. See “Proposal No. 1—The Consideration Proposal” beginning on page [    ], “Proposal No. 2—The Name Change” beginning on page [    ] and “Proposal No. 3—The Adjournment Proposal” beginning on page [    ].

Recommendations of the AsiaInfo Board    Our board of directors recommends that you vote “FOR” the adoption of the Consideration Proposal, “FOR” the adoption of the Name Change Proposal and “FOR” the adoption of the Adjournmenet Proposal. All of our directors concur in this recommendation. See “Proposal No. 1—The Consideration Proposal” beginning on page [    ], “Proposal No. 2—The Name Change” beginning on page [    ] and “Proposal No. 3—The Adjournment Proposal” beginning on page [    ].
Linkage Cayman’s Reasons for the Combination   

In reaching a conclusion to approve the Combination, the Linkage Cayman board of directors consulted with its management, as well as financial and legal advisors. The Linkage Cayman board of directors considered a number of factors, including, without limitation, the following:

 

•   the strategic fit between the companies, including the companies’ product portfolios and the increased operational scale and scope that the combined company will provide, which may result in a more diversified revenue base and enable the combined company to better meet its customers’ needs;

  

 

•   that the shareholders of Linkage Cayman will receive a substantial cash payment, while at the same time retaining an equity stake in the combined company, which would provide the shareholders of Linkage Cayman the opportunity, if they so choose, to participate in the future financial performance of the combined company;

 

•   the fact that following the completion of the Combination the board of directors of the combined company will include two current non-independent Linkage Cayman directors, which the Linkage Cayman board of directors believed will provide the AsiaInfo board of directors with a greater level of knowledge regarding Linkage Technologies’ operations and thereby provide a greater level of stability regarding those operations as they become part of AsiaInfo’s business;

 

•   the review by the Linkage Cayman board of directors with its legal and financial advisors of the structure of the Combination and the financial and other terms of the Combination Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination provisions, as well as the Linkage Cayman board of directors’ evaluation of the likely time period necessary to close the Combination; and

 

 

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•   the potential synergies expected to be derived from the Combination of Linkage Cayman’s and AsiaInfo’s businesses, including elimination of duplicative corporate costs, decreased research and development costs, and tax benefits.

 

The Linkage Cayman board of directors also considered a number of factors and risks concerning the Combination. See “The Combination—Linkage Cayman’s Reasons for the Combination” beginning on page [    ].

Opinion of AsiaInfo’s Financial Advisor    In connection with the Combination, Merrill Lynch (Asia Pacific) Limited, or BofA Merrill Lynch, AsiaInfo’s financial advisor, delivered to AsiaInfo’s board of directors a written opinion, dated December 4, 2009, as to the fairness, from a financial point of view and as of the date of the opinion, of the Consideration to be paid in the Combination by AsiaInfo. The full text of the written opinion dated December 4, 2009, of BofA Merrill Lynch, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken is attached as Annex H to this Proxy Statement and is incorporated by reference herein in its entirety. BofA Merrill Lynch provided its opinion to AsiaInfo’s board of directors for the benefit and use of AsiaInfo’s board of directors in connection with and for purposes of its evaluation of the Consideration, from a financial point of view. BofA Merrill Lynch’s opinion is limited to the fairness, from a financial point of view, to AsiaInfo of the Consideration to be paid in the Combination and does not address any other aspect of the Combination and does not constitute a recommendation as to how any stockholder should vote or act in connection with the Combination. See “The Combination—Opinion of AsiaInfo’s Financial Advisor” beginning on page [    ].
Interests of AsiaInfo’s Directors, Executive Officers and Certain Significant Stockholders in the Combination   

You should be aware that some of AsiaInfo’s directors and executive officers have interests in the Combination that are different from, or are in addition to, the interests of AsiaInfo stockholders generally.

 

At the closing of the Combination, Steve Zhang, the Chief Executive Officer and President of AsiaInfo, will continue to be the Chief Executive Officer and President of the combined company, Wei Li, the Chief Financial Officer of AsiaInfo, will continue to be the Chief Financial Officer of the combined company, and James Ding, the Chairman of the combined company’s board of directors of AsiaInfo, will serve as a Co-Chairman of the board of directors. Additionally, Steve Zhang, James Ding, Edward Tian, Tom Manning, Yungang Lu and Davin Mackenzie, each of whom currently serve on the AsiaInfo board of directors, are expected to continue to be members of the board of directors of the combined company.

 

Steve Zhang, Wei Li, Jie Li, the Vice President and General Manager of Human Resources and Administration of AsiaInfo, Jian Qi, the President and Chief Executive Officer of the Lenovo-AsiaInfo Division of AsiaInfo, and Feng Liu, the Vice President and General Manager of Research and Development of the AsiaInfo Technologies Division of AsiaInfo, hold 247,500, 60,000, 20,000, 35,000 and 44,500 performance stock units of AsiaInfo, respectively. These performance stock units vest based upon achievement of targeted increases in the Company’s operating profit. If this Combination is completed, the combined company’s results of operations could result in the vesting of some or all of these performance stock units.

 

 

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Interests of Linkage Technologies’ Directors, Executive Officers and Certain Significant Shareholders in the Combination   

You should be aware that Linkage Technologies’ executive officers and directors, some of whom will become executive officers and directors of the combined company following consummation of the Combination, have interests in the transaction that are different from, or in addition to, the interests of AsiaInfo stockholders generally.

 

AsiaInfo will offer employment agreements (including related change of control and severance agreements) to each of Libin Sun, Guoxiang Liu and Xiwei Huang, to be effective upon the closing of the Combination.

 

At the closing of the Combination, the initial board of directors of the combined company will consist of nine directors, of which AsiaInfo will designate six directors and Linkage Cayman will designate three directors. Libin Sun will be the Executive Co-Chairman of the board of directors of the combined company.

 

Upon the closing of the Combination, affiliates or immediate relatives of certain directors and officers of Linkage Technologies (including Mr. Sun, Mr. Liu and Dr. Huang), who currently beneficially own shares in Linkage Technologies, are expected to, in the aggregate, beneficially own 12,068,756 shares of common stock of the combined company.

  

AsiaInfo, Linkage Cayman and Mr. Sun have entered into a stockholders’ agreement as described in “Stockholders’ Agreement” beginning on page [    ]. AsiaInfo and

LT International Limited, a company incorporated in the British Virgin Islands and wholly-owned by Mr. Sun, will also enter into a registration rights agreement with respect to the shares of AsiaInfo common stock to be received by LT International Limited in connection with the Combination. See “The Combination Agreement— Registration Rights Agreements” beginning on page [    ].

Directors and Executive Management Following the Combination    Upon the consummation of the Combination, the AsiaInfo board of directors will be comprised of four non-independent directors and five independent directors. Linkage Cayman will be entitled to designate for appointment two non-independent directors who held management positions with Linkage Cayman prior to the consummation of the Combination, which directors shall initially be Libin Sun and Xiwei Huang, as well as one independent director. The two remaining non-independent directors shall be directors who served on AsiaInfo’s board of directors immediately prior to the closing of the Combination, and are expected to be Steve Zhang and Tom Manning. Additionally, the remaining four independent directors shall be appointed by the current AsiaInfo board of directors immediately prior to the closing of the Combination, and are expected to be James Ding, Edward Tian, Yungang Lu and Davin Mackenzie. Libin Sun will be appointed Executive Co-Chairman of the board of directors, and James Ding will serve as a Co-Chairman of the board of directors. Steve Zhang will continue to be the Chief Executive Officer and President of the combined company, Wei Li will continue to be the Chief Financial Officer of the combined company, and Xiwei Huang will be the Chief Operating Officer of the combined company. See “The Combination Agreement—Directors and Executive Management Following the Combination” beginning on page [    ].

 

 

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The AsiaInfo Special Meeting    The special meeting of the AsiaInfo stockholders will be held on [                    ], 2010 at [                    ], local time, at the 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China. See “The Special Meeting of Stockholders” beginning on page [    ].
No Appraisal Rights    Under Section 262 of the General Corporation Law of the State of Delaware, the holders of AsiaInfo common stock will have no appraisal rights in connection with the Combination. See “The Combination—No Appraisal Rights” beginning on page [    ].
Regulatory Matters    The parties to the Combination Agreement believe that no government regulatory approvals are necessary to complete the Combination. See “The Combination—Regulatory Matters” beginning on page [    ].
Conditions to Completion of the Combination   

As more fully described in this Proxy Statement and the Combination Agreement, the completion of the Combination depends on a number of mutual conditions being satisfied or waived, including:

 

•   the adoption by the AsiaInfo stockholders of the Consideration Proposal and the Name Change Proposal;

  

 

•   the absence of any law or order that would prohibit the Combination or otherwise make the consummation of the Combination illegal; and

 

•   the receipt of any required regulatory approvals.

  

Each of AsiaInfo’s and Linkage Cayman’s obligations to complete the Combination is also separately subject to the satisfaction or waiver of a number of conditions, including:

 

•   the other party’s representations and warranties in the Combination Agreement (including, in the case of Linkage Cayman, the representations and warranties of certain key Linkage Cayman shareholders) being true and correct as of the closing of the Combination, without any qualifications as to materiality or material adverse effects, except where the failure of such representations and warranties to be true or correct, individually or in the aggregate, has not had a material adverse effect;

 

•   material performance of and compliance by the other party of its agreements and covenants in the Combination Agreement on or prior to the closing of the Combination; and

 

•   with respect to each party’s obligations, the absence of a material adverse effect of the other party.

 

AsiaInfo’s obligations to complete the Combination are also subject to the satisfaction or waiver of a number of conditions, including:

 

•   certain agreements with respect to the voting of and sale of AsiaInfo shares held by Libin Sun will be in full force and effect at the closing of the Combination;

 

 

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•   other than those contemplated in the stockholders’ agreement between Libin Sun, Edward Tian, AsiaInfo and Linkage Cayman, there shall be no voting trusts, proxies or other agreements between Linkage Cayman or any of its subsidiaries, or to Linkage Cayman’s knowledge, any of the Legacy Linkage Shareholders, with respect to the issuance, holding, acquisition, voting or disposition of any AsiaInfo common stock;

 

•   at least 70% of the Linkage Cayman management employees, and at least 70% of the Linkage Cayman employees whose annual salary or other remuneration is at least US$30,000, shall remain employees of Linkage Technologies, in each case in substantially similar roles as such employees held prior to the execution of the Combination Agreement; and

 

•   Linkage Cayman shall have delivered to AsiaInfo reasonable proof that certain fees and expenses related to the Combination have been paid in full by Linkage Cayman and its subsidiaries, and that certain fees and expenses related to Linkage Cayman’s proposed initial public offering have been paid in full by Legacy Linkage Shareholders.

  

 

The obligations of Linkage Cayman and certain of its key shareholders to complete the Combination are also subject to the satisfaction or waiver of a number of conditions, including:

 

•   certain agreements with respect to the voting of and sale of AsiaInfo shares held by Edward Tian will be in full force and effect at the closing of the Combination;

 

•   AsiaInfo shall have offered employment agreements to each of Libin Sun, Guoxiang Liu and Xiwei Huang effective upon the closing of the Combination;

 

•   AsiaInfo shall have executed and delivered a registration rights agreement to LT International Limited or Libin Sun;

 

•   the 14-day trading volume weighted average closing price per share of AsiaInfo’s common stock ending on the date that certain of the closing conditions are satisfied must be greater than or equal to US$13.58;

 

•   the AsiaInfo common stock to be issued to Linkage Cayman as Stock Consideration shall have been authorized for listing on the NASDAQ Global Market;

 

•   one current member of the AsiaInfo board of directors shall have resigned; and

 

•   each of Libin Sun, Xiwei Huang and an additional independent director designee of Linkage Cayman shall have been duly appointed to the AsiaInfo board of directors.

 

See “The Combination Agreement—Conditions to Completion of the Combination” beginning on page [    ].

 

 

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Termination of the Combination Agreement   

AsiaInfo and Linkage Cayman can agree at any time to terminate the Combination Agreement without completing the Combination, even if the AsiaInfo stockholders have approved the Consideration Proposal. Also, either of AsiaInfo or Linkage Cayman can terminate the Combination Agreement if:

 

•   a governmental authority shall have issued a final and non-appealable order that prohibits the consummation of the Combination, or a substantially similar transaction, provided that the party seeking termination has complied in all material respects with its obligations under the Combination Agreement;

 

•   the AsiaInfo stockholders fail to approve the Consideration Proposal or the Name Change Proposal at the special meeting; or

 

•   the Combination shall not have been consummated by June 4, 2010, which time period will be automatically extended until October 4, 2010 if necessary to complete any antitrust review by any governmental authority.

 

If Linkage Cayman or certain key Linkage Cayman shareholders materially breach the representations and warranties contained in the Combination Agreement, AsiaInfo shall have the right to terminate the Combination Agreement, subject to the right of the breaching party to cure, if curable, the breach within 30 days of written notice of the breach, and provided AsiaInfo is not then in material breach of the Combination Agreement. Conversely, if AsiaInfo materially breaches the representations and warranties contained in the Combination Agreement, Linkage Cayman or the shareholders’ agent shall have the right to terminate the Combination Agreement, subject to the right of the breaching party to cure, if curable, the breach within 30 days of written notice of the breach, and provided neither Linkage Cayman nor certain key Linkage Cayman shareholders are then in material breach of the Combination Agreement. Additionally, Linkage Cayman may terminate the Combination Agreement if the AsiaInfo board of directors, or any committee thereof, shall withdraw, qualify or modify in any manner adverse to Linkage Cayman or certain of its key shareholders the recommendation to the AsiaInfo stockholders that they vote in favor of the Consideration Proposal and the Name Change Proposal. See “The Combination Agreement—Termination of the Combination Agreement” beginning on page [    ].

Termination Fees    The Combination Agreement contains certain termination rights for both AsiaInfo and Linkage Cayman. Upon a material and uncured breach of representations and warranties or covenants by Linkage Cayman and certain Linkage Cayman shareholders on the one hand, or AsiaInfo on the other hand, the non-breaching party would be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million from the other party. In addition, in the event that the AsiaInfo board of directors changes its recommendation that stockholders vote in favor of the proposals to be considered at the special meeting, Linkage Cayman would be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million from AsiaInfo, and in the event that the stockholders of AsiaInfo do not vote in favor of the Consideration Proposal and the Name Change Proposal, Linkage Cayman would be entitled to terminate the Combination Agreement and receive a termination fee of $10.0 million from AsiaInfo. See “The Combination Agreement— Termination Fees” beginning on page [    ].

 

 

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Timing of the Combination    AsiaInfo expects to complete the Combination after all of the conditions to the Combination in the Combination Agreement are satisfied or waived, including after receipt of stockholder approval at the AsiaInfo special meeting and the receipt of any required regulatory approvals. AsiaInfo currently expects to complete the Combination late in the first calendar quarter or early in the second calendar quarter of 2010. See “The Combination Agreement—Closing of the Combination” beginning on page [    ].
Accounting Treatment of the Combination    The Combination will be accounted for as an “acquisition” by AsiaInfo of Linkage Technologies, as that term is used under generally accepted accounting principles in the U.S., or US GAAP, for accounting and financial reporting purposes. See “The Combination—Accounting Treatment of the Combination” beginning on page [    ].

 

 

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QUESTIONS AND ANSWERS ABOUT THE

SPECIAL MEETING AND THE COMBINATION

The following questions and answers are intended to address commonly asked questions regarding the special meeting of AsiaInfo stockholders and the Combination. These may not address all questions that may be important to you as a stockholder. We urge you to read carefully the more detailed information contained elsewhere in this Proxy Statement, the annexes to this Proxy Statement and the documents we refer to in this Proxy Statement.

 

Q: Why am I receiving this Proxy Statement?

 

A: Our board of directors is furnishing this Proxy Statement in connection with the solicitation of proxies to be voted at a special meeting of stockholders, or at any adjournments or postponements of the special meeting.

 

Q: What am I being asked to vote on?

 

A: You are being asked to vote to approve the payment of the Cash Consideration and the issuance of the Stock Consideration to Linkage Cayman, which Consideration will be distributed to the Legacy Linkage Shareholders as consideration for AsiaInfo’s purchase of 100% of the outstanding share capital of Linkage Technologies pursuant to Combination Agreement by and among AsiaInfo, Linkage Cayman, certain shareholders of Linkage Cayman, and Libin Sun as agent for the shareholders of Linkage Cayman, dated December 4, 2009. See “Proposal No. 1—The Combination Proposal” beginning on page [    ].

In addition, you are being asked to approve the change of the name of AsiaInfo following the completion of the Combination to “AsiaInfo-Linkage, Inc.” See “Proposal No. 2—The Name Change Proposal” beginning on page [    ].

Finally, you are being asked to grant our management discretionary authority to adjourn or postpone the special meeting. If, for example, we do not receive proxies from stockholders holding a sufficient number of shares to adopt the Consideration Proposal or the Name Change Proposal, we could use the additional time to solicit proxies in favor of adoption of such proposals. See “Proposal No. 3—The Adjournment Proposal” beginning on page [    ].

 

Q: Why is AsiaInfo proposing the Combination?

 

A: The AsiaInfo board of directors, following consultation with its management, as well as its financial and legal advisors, has determined that the Combination and the Combination Agreement are advisable and in the best interests of AsiaInfo and its stockholders. See “The Combination—Reason for the Combination and Board Recommendation” beginning on page [    ].

 

Q: What effects will the Combination have on our company?

 

A: Upon completion of the Combination, Linkage Technologies will become our wholly-owned subsidiary. In partial consideration for the purchase of Linkage Technologies, Linkage Cayman will receive shares of AsiaInfo representing approximately 35.8% of the fully-diluted share capital of the combined company and will distribute these shares to the Legacy Linkage Shareholders.

 

Q: What happens if the Combination is terminated?

 

A: If the Consideration Proposal is not adopted by our stockholders, Linkage Cayman would be entitled to terminate the Combination Agreement and receive a termination fee of $10.0 million from AsiaInfo. Additionally, if our board of directors changes its recommendation that our stockholders vote in favor of the Combination, Linkage Cayman will be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million from AsiaInfo.

 

 

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The Combination Agreement also provides that upon a material and uncured breach of representations and warranties or covenants by Linkage Cayman and certain Linkage Cayman shareholders on the one hand, or AsiaInfo on the other hand, the non-breaching party would be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million. See “The Combination Agreement—Termination Fees” beginning on page [    ].

 

Q: What do I need to do now?

 

A: We urge you to read this Proxy Statement, the annexes to this Proxy Statement and the documents we refer to in this Proxy Statement carefully and consider how the Combination affects you. Then mail your completed, dated and signed proxy card in the enclosed return envelope as soon as possible, or vote via the Internet or telephone, so that your shares can be voted at the special meeting of our stockholders.

 

Q: How does AsiaInfo’s board of directors recommend that I vote?

 

A: Our board of directors recommends that you vote “FOR” the adoption of the Consideration Proposal, “FOR” the adoption of the Name Change Proposal and “FOR” the adoption of the Adjournment Proposal. All of our directors concur in this recommendation. See “The Combination—AsiaInfo’s Reasons for the Combination and Board Recommendation” beginning on page [    ], “Proposal No. 1—The Consideration Proposal” beginning on page [    ], “Proposal No. 2—The Name Change Proposal” beginning on page [    ] and “Proposal No. 3—The Adjournment Proposal” beginning on page [    ].

 

Q: What vote is required to adopt the Consideration Proposal?

 

A: Adoption of the Consideration Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock present (in person or by proxy) at the special meeting and constituting a quorum for the purpose of voting on such matters. As of [                    ], 2010, the record date for determining who is entitled to vote at the special meeting, there were [            ] shares of our common stock issued and outstanding.

 

Q: What vote is required to adopt the Name Change Proposal?

 

A: Adoption of the Name Change Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock present (in person or by proxy) at the special meeting and constituting a quorum for the purpose of voting on such matters. As of [                    ], 2010, the record date for determining who is entitled to vote at the special meeting, there were [            ] shares of our common stock issued and outstanding.

 

Q: What vote is required to adopt the Adjournment Proposal?

 

A: Adoption of the Adjournment Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock present (in person or by proxy) at the special meeting and constituting a quorum for the purpose of voting on such matters. As of [                    ], 2010, the record date for determining who is entitled to vote at the special meeting, there were [            ] shares of our common stock issued and outstanding.

 

Q: Where and when is the special meeting of stockholders?

 

A: The special meeting will be held on [                    ], 2010 at [            ], local time, at our offices at 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China.

 

 

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Q: Who is entitled to vote at the special meeting?

 

A: Only stockholders of record as of the close of business on [                    ], 2010 are entitled to receive notice of the special meeting and to vote at the special meeting, or at any adjournments or postponements thereof, the shares of our common stock that they held as of the record date.

 

Q: May I vote in person?

 

A: Yes. If your shares are registered in your name, you may attend the special meeting and vote your shares in person, rather than signing and returning your proxy card or voting via the Internet or telephone. If your shares are held in “street name” and you wish to attend and vote in person at the special meeting, then you must obtain a legal proxy issued in your name from the broker, bank or other nominee that holds your shares of record. Even if you plan to attend the special meeting in person, we urge you to complete, sign, date and return the enclosed proxy or vote via the Internet or telephone to ensure that your shares will be represented at the special meeting.

 

Q: May I vote via the Internet or telephone?

 

A: If your shares are registered in your name, you may vote by returning a signed proxy card or voting in person at the special meeting. Additionally, you may submit a proxy authorizing the voting of your shares over the Internet at http://www.eproxy.com/asias or telephonically by calling the toll-free number (in the United States only) 1-866-540-5760. Proxies submitted over the Internet or by telephone must be received by 11:59 p.m. (Eastern time) on [                    ], 2010. You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy via the Internet or telephone.

If your shares are held in “street name” through a broker, bank or other nominee, you may vote by completing and returning the voting form provided by your broker, bank or other nominee, or via the Internet or telephone through your broker, bank or other nominee if such a service is provided. To vote via the Internet or telephone through your broker, bank or other nominee, you should follow the instructions on the voting form provided by your broker, bank or other nominee. You cannot vote shares held in “street name” by returning a proxy card directly to our company or by voting in person at the special meeting. If you hold your shares in “street name” and wish to vote in person at the special meeting, then you must obtain a legal proxy issued in your name from the broker, bank or other nominee that holds your shares of record.

 

Q: What happens if I do not return my proxy card, vote via the Internet or telephone or attend the special meeting and vote in person?

 

A: The adoption of each of the Consideration Proposal, the Name Change Proposal and the Adjournment Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock present (in person or by proxy) at the special meeting and constituting a quorum for the purpose of voting on such matters. If you do not return your proxy card, vote via the Internet or telephone or attend the special meeting and vote in person, your shares will not be counted for purposes of constituting a quorum or for the purposes of voting on such matters.

 

Q: May I change my vote after I have mailed my signed proxy card?

 

A: Yes. You may change your vote at any time before your proxy is voted at the special meeting. You can do this in one of three ways:

 

   

You can deliver a written notice to AsiaInfo’s Legal Department, at our principal executive offices, bearing a date later than the proxy you delivered to us stating that you would like to revoke your proxy, provided the notice is received before the vote is taken at the special meeting.

 

 

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You can complete, execute and deliver to AsiaInfo’s Legal Department a later-dated proxy for the same shares. If you originally submitted via the Internet or telephone the proxy you are seeking to revoke, you may submit this later-dated new proxy using the same method of transmission (Internet or telephone) as the proxy being revoked, provided the new proxy is received by 11:59 p.m. (Eastern time in the U.S.) on [                    ], 2010.

 

   

You can attend the meeting and vote in person. Your attendance at the special meeting alone will not revoke your proxy.

Any written notice of revocation or subsequent proxy should be delivered to AsiaInfo’s Legal Department, at our principal executive offices, at or before the taking of the vote at the special meeting.

If you have instructed a broker, bank or other nominee to vote your shares, you must follow directions received from your broker, bank or other nominee to change those instructions.

 

Q: If my broker holds my shares in “street name,” will my broker vote my shares for me?

 

A: Your broker will not be able to vote your shares without instructions from you. You should instruct your broker to vote your shares following the procedure provided by your broker. Without instructions, your shares will not be voted.

 

Q: What should I do if I receive more than one set of voting materials?

 

A: You may receive more than one set of voting materials, including multiple copies of this Proxy Statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return (or vote via the Internet or telephone with respect to) each proxy card and voting instruction card that you receive.

 

Q: What happens if I sell my shares of common stock before the special meeting?

 

A: The record date for the special meeting is earlier than the date of the special meeting and the date the Combination is expected to be completed. If you transfer your shares of our common stock after the record date but before the special meeting, you will retain your right to vote at the special meeting.

 

Q: What regulatory approvals and filings are needed to complete the Combination?

 

A: The parties to the Combination Agreement believe that no government regulatory approvals are necessary to complete the Combination. See “The Combination—Regulatory Matters” beginning on page [    .]

 

Q: When do you expect the Combination to be completed?

 

A: We are working toward completing the Combination as quickly as possible and currently expect to consummate the Combination at the end of the first quarter or beginning of the second quarter of calendar 2010. In addition to obtaining stockholder approval, we must satisfy all other closing conditions.

 

Q: Do I have appraisal rights?

 

A: The holders of AsiaInfo common stock will not be entitled to exercise any appraisal rights in connection with the Combination.

 

 

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Q: Should I send in my stock certificates?

 

A: No. AsiaInfo stockholders will not be exchanging their stock certificates in connection with the Combination. Accordingly, AsiaInfo stockholders holding stock certificates should keep their stock certificates both now and after the Combination is completed.

 

Q: Who can help answer my questions?

 

A: If you have questions about the Combination, including the procedures for voting your shares, you should contact:

Legal Department

AsiaInfo Holdings, Inc.

4/F, Zhongdian Information Tower

No. 6 Zhongguancun South Street

Haidian District

Beijing 100086, PRC

Tel: +010-82166023

Fax: +010-82166655

E-mail: shanhua@asiainfo.com

Investor Relations

AsiaInfo Holdings, Inc.

5201 Great America Pkwy, #429

Santa Clara, CA 95054, USA

Toll Free: +1-800-618-0588

Tel: +1-408-970-9788

Fax: +1-408-970-9366

E-mail: ir@asiainfo.com

Morrow & Co., LLC

470 West Avenue

Stamford, CT 06902

Bankers and Brokers call:

+1-203-658-9400

Stockholders Call Toll-Free:

+1-800-607-0088

 

 

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SELECTED HISTORICAL DATA OF ASIAINFO

The following selected consolidated statements of operations data for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 and consolidated balance sheet data as of December 31, 2004, 2005, 2006, 2007 and 2008 have been derived from AsiaInfo’s audited consolidated financial statements incorporated by reference into this Proxy Statement or filed with the SEC. AsiaInfo’s selected consolidated statements of operations data for the nine months ended September 30, 2008 and 2009 and selected consolidated balance sheet data as of September 30, 2009 have been derived from AsiaInfo’s unaudited condensed consolidated financial statements incorporated by reference into this Proxy Statement. AsiaInfo has prepared the unaudited condensed consolidated financial statements on the same basis as its audited consolidated financial statements. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that AsiaInfo considers necessary for a fair presentation of its financial results for the periods presented. You should read the following information together with AsiaInfo’s consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operation in the Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the periods presented, and the Current Report on Form 8-K dated January 27, 2010. The historical results are not necessarily indicative of results to be expected in any future period. In addition, AsiaInfo’s unaudited results for the nine months ended September 30, 2009 may not be indicative of its results for the full year ended December 31, 2009.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2008     2007(1)   2006(2)   2005     2004     2009   2008  
    (Amounts in thousands of US dollars except share and per share data)  

Selected Consolidated Statements of Operations Data:

             

Total revenues

  $ 175,543      $ 132,761   $ 109,583   $ 90,284      $ 100,279      $ 173,077   $ 121,859   

Total cost of revenues

    86,730        69,705     65,387     53,705        64,259        82,086     61,783   

Gross profit

    88,813        63,056     44,196     36,579        36,020        90,991     60,076   

Total operating expenses

    69,521        52,983     42,327     63,720        30,760        68,187     48,544   

Income (loss) from continuing operations

    17,795        20,334     4,996     (23,806     10,597        22,066     15,595   

Income (loss) on discontinued operations, net of taxes

    980        3,293     835     (13,363     (806     —       980   

Net income (loss)

    18,775        23,627     5,831     (37,169     9,791        22,066     16,575   

Less: Net loss attributable to noncontrolling interest(3)

    (15     —       —       —          —          6     (4

Net income (loss) attributable to AsiaInfo Holdings, Inc.

    18,790        23,627     5,831     (37,169     9,791        22,060     16,579   

Earnings per share:

             

Net income (loss) from continuing operations attributable to AsiaInfo Holdings, Inc. common stockholders:

             

Basic

  $ 0.40      $ 0.47   $ 0.11   $ (0.53   $ 0.23        0.49     0.35   

Diluted

  $ 0.38      $ 0.45   $ 0.11   $ (0.53   $ 0.20        0.48     0.33   

Net income (loss) from discontinued operations attributable to AsiaInfo Holdings, Inc. common stockholders:

             

Basic

  $ 0.02      $ 0.07   $ 0.02   $ (0.30   $ (0.02     —       0.02   

Diluted

  $ 0.02      $ 0.07   $ 0.02   $ (0.30   $ (0.02     —       0.02   

Net income (loss) attributable to AsiaInfo Holdings, Inc. common stockholders:

             

Basic

  $ 0.42      $ 0.54   $ 0.13   $ (0.83   $ 0.21        0.49     0.37   

Diluted

  $ 0.40      $ 0.52   $ 0.13   $ (0.83   $ 0.19        0.48     0.35   

 

 

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    As of December 31,   As of
September 30,
    2008   2007   2006   2005   2004   2009
    (amounts in thousands of US dollars)

Selected Consolidated Balance Sheet Data:

           

Cash and cash equivalents

  $ 172,119   $ 148,834   $ 104,575   $ 92,176   $ 94,156   $ 184,219

Total assets

    323,154     308,469     244,162     228,226     297,364     392,596

Total equity

    208,460     207,788     162,461     167,624     201,792     253,282

 

(1) We adopted authoritative accounting guidance regarding accounting for uncertainty in income taxes on January 1, 2007, prospectively.
(2) We adopted authoritative accounting guidance regarding share-based payment on January 1, 2006, prospectively.
(3) We adopted authoritative accounting guidance regarding noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively.

 

 

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SELECTED HISTORICAL DATA OF LINKAGE TECHNOLOGIES

The following selected consolidated statements of operations data for the years ended December 31, 2006, 2007 and 2008 and selected consolidated balance sheet data as of December 31, 2007 and 2008 have been derived from Linkage Technologies’ audited consolidated financial statements included elsewhere in this Proxy Statement. The consolidated balance sheet data as of December 31, 2006 have been derived from unaudited management accounts. Linkage Technologies’ selected consolidated statements of operations data for the nine months ended September 30, 2008 and 2009 and the selected consolidated balance sheet data as of September 30, 2009 have been derived from its unaudited condensed consolidated financial statements included elsewhere in this Proxy Statement. Linkage Technologies has prepared the unaudited condensed consolidated financial statements and management accounts on the same basis as its audited consolidated financial statements. The unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, that Linkage Technologies considers necessary for a fair presentation of its financial results for the periods presented. You should read the following information in conjunction with Linkage Technologies’ consolidated financial statements and related notes and “Linkage Technologies’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page [    ]. Linkage Technologies’ consolidated financial statements are prepared and presented in accordance with US GAAP. The historical results are not necessarily indicative of results to be expected in any future period. In addition, Linkage Technologies’ unaudited results for the nine months ended September 30, 2009 may not be indicative of its results for the full year ended December 31, 2009. Linkage Technologies has not included financial information for the years ended December 31, 2004 and 2005, as such information is not available on a basis that is consistent with the consolidated financial information for the years ended December 31, 2006, 2007 and 2008 and cannot be provided on a US GAAP basis without unreasonable effort or expense.

 

     For the Year Ended
December 31,
    For the Nine Months Ended
September 30,
 
     2006     2007     2008           2008                 2009        
     ($ in thousands, except share and per share data)  

Selected Consolidated Statements of Operations Data

          

Revenues:

          

Software development

   32,751      44,729      77,961      47,205      100,883   

IT services

   6,358      4,703      5,192      2,734      2,319   

Third-party hardware and software

   7,659      4,348      5,176      2,753      9,277   
                              

Total revenues

   46,768      53,780      88,329      52,692      112,479   
                              

Cost of revenues:

          

Software development(1)

   (16,233   (19,319   (35,587   (22,599   (46,475

IT services

   (953   (519   (942   (646   (1,188

Third-party hardware and software

   (6,827   (3,852   (4,626   (2,455   (8,259
                              

Total cost of revenues

   (24,013   (23,690   (41,155   (25,700   (55,922
                              

Gross profit:

   22,755      30,090      47,174      26,992      56,557   
                              

Operating expenses:

          

Sales and marketing expenses(1)

   (4,332   (5,651   (7,384   (4,999   (6,679

General and administrative expenses(1)

   (7,186   (9,661   (15,607   (6,496   (14,614

Research and development expenses

   (704   (1,098   (2,522   (1,635   (5,421
                              

Total operating expenses

   (12,222   (16,410   (25,513   (13,130   (26,714
                              

Income from operations

   10,533      13,680      21,661      13,862      29,843   
                              

Other income (expense):

          

Interest income

   141      231      165      134      85   

Interest expense

   (614   (683   (489   (405   (568

Other income (expense), net

   54      165      245      235      1,473   
                              

Total other income (expense), net

   (419   (287   (79   (36   990   
                              

Income before income taxes

   10,114      13,393      21,582      13,826      30,833   

Income tax expense

   (943   (810   (4,477   (3,776   (5,486
                              

Net income

   9,171      12,583      17,105      10,050      25,347   
                              

 

 

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     As of
December 31,
2006
   As of
December 31,
2007
   As of
December 31,
2008
   As of
September 30,
2009
     ($ in thousands)

Selected Consolidated Balance Sheet Data:

           

Cash and cash equivalents

   11,901    17,696    17,976    9,654

Trade accounts receivable, net

   28,566    35,979    52,393    84,792

Total current assets

   52,803    79,001    90,729    123,572

Total assets

   54,653    81,105    92,970    126,637

Deferred revenue

   7,835    14,373    17,085    13,853

Total liabilities

   37,834    52,883    59,286    80,413

Total shareholders’ equity

   16,819    28,222    33,684    46,224

 

(1) Includes share-based compensation expenses as follows:

 

     For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
     2006    2007    2008        2008            2009    
     ($ in thousands)

Share-based compensation expenses included in:

              

Cost of revenues software development

   —      —      1,820    1,820    —  

Sales and marketing expenses

   —      —      232    232    —  

General and administrative expenses

   —      577    231    231    1,882

 

 

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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

The following summary unaudited pro forma condensed combined financial data is designed to show how the Combination might have affected certain historical financial statement information of AsiaInfo if the Combination had been completed at an earlier time and was prepared based on the historical consolidated financial statements of AsiaInfo and Linkage Technologies. The following should be read in connection with the “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page [    ], the historical consolidated financial statements of Linkage Technologies included elsewhere in this Proxy Statement, and the historical consolidated financial statements of AsiaInfo incorporated by reference into this Proxy Statement.

The unaudited pro forma balance sheet data at September 30, 2009 combines the historical consolidated balance sheets of AsiaInfo and Linkage Technologies as of September 30, 2009, giving effect to the Combination as if it had been completed on September 30, 2009. The unaudited pro forma statements of operations data for the year ended December 31, 2008 and the nine months ended September 30, 2009 combines the historical consolidated statements of operations of AsiaInfo and Linkage Technologies for such periods, giving effect to the Combination as if it had been completed on January 1, 2008.

The unaudited pro forma balance sheet data does not allocate the Consideration to be paid by AsiaInfo to complete the Combination to Linkage Technologies assets and liabilities based upon their estimated fair values as of the date of completion of the Combination, because such an allocation depends upon certain valuations and other studies that have not progressed to a stage where there is sufficient information to make meaningful estimations. Additionally, a final determination of the fair value of Linkage Technologies’ assets and liabilities, which cannot be made prior to the completion of the Combination, will be based upon their actual fair values as of the date of completion of the Combination. AsiaInfo expects that a completed purchase price allocation would likely result in recognizing intangible assets in addition to those reflected in the historical consolidated balance sheets of Linkage Technologies, the amortization of which would result in expense in future periods after the consummation of the Combination. AsiaInfo also expects that a completed purchase price allocation would likely increase the carrying value of certain recorded assets and liabilities of Linkage Technologies from their historical book value to their fair value, which would reduce net income in periods following the Combination from those reflected in the historical financial statements of Linkage Technologies.

In addition to the potential adjustments discussed above, AsiaInfo believes there are certain differences in the accounting policies applied by AsiaInfo and Linkage Technologies, including differences in the application of the percentage of completion method to account for certain contracts for software development, the recognition of hardware revenue in bundled products, whether to record certain revenues on a gross or net basis, whether to defer pre-contract costs, and how PRC business tax is recorded. The unaudited pro forma condensed combined financial information makes no adjustments to reflect the effect of such differences in accounting policies, which would require an extensive review of individual Linkage Technologies contracts that is impracticable to complete without unreasonable effort and expense prior to completing the Combination.

 

 

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The unaudited pro forma condensed combined financial information is for informational purposes only and should not be considered indicative of the operating results or financial position that would have occurred if the Combination had been completed on the dates indicated or that may occur as of any future date or for any future period.

 

     Year Ended
December 31,
2008
   Nine Months Ended
September 30,

2009
     (In thousands, except per share data)

Statements of Operations Data:

     

Total revenues

   $ 268,872    $ 285,556

Cost of revenues

     127,885      138,008

Total operating expenses

     95,034      94,901

Income from operations

     40,953      52,647

Net income

     35,880      47,413

Net income attributable to common stockholders

     35,895      47,407

Earnings per share:

     

Net income attributable to common stockholders

     

Basic

   $ 0.50    $ 0.66

Diluted

   $ 0.49    $ 0.65

 

     As of
September 30,
2009

Balance Sheet Data:

  

Cash and cash equivalents

   $ 133,873

Total current assets

     422,395

Goodwill

     689,636

Total assets

     1,127,728

Total liability

     219,727

Total equity

     907,937

 

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

AsiaInfo makes forward-looking statements in this Proxy Statement and in the documents that are incorporated by reference. These forward-looking statements relate to outlooks or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on business, results of operations or financial condition. Specifically, forward looking statements may include:

 

   

statements relating to the benefits of the Combination, including anticipated synergies and cost savings estimated to result from the Combination;

 

   

statements relating to future business prospects, cross-selling opportunities, revenue, income and financial condition; and

 

   

statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.

These statements reflect management judgments based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:

 

   

the anticipated timing of filings and approvals relating to the proposed Combination;

 

   

the expected timing of the completion of the Combination;

 

   

the risk that the products, services and employees of AsiaInfo and Linkage Technologies will not be integrated successfully;

 

   

the risk that expected cost savings from the Combination may not be fully realized within the expected time frames or at all;

 

   

the risk that the combined company’s revenues following the Combination may be lower than expected;

 

   

the ability to successfully develop and market new products and services, and the uncertainty of whether our products and services will achieve market acceptance or result in revenue growth;

 

   

the continued performance or market growth of the combined company’s products and services;

 

   

the effects of vigorous competition in the markets in which AsiaInfo and Linkage Technologies operate;

 

   

the possibility of one or more of the markets in which AsiaInfo and Linkage Technologies compete being impacted by changes in political or other factors such as monetary policy, legal and regulatory changes or other external factors over which they have no control;

 

   

dilution to stockholders of the combined company as a result of any financing that involves equity or equity-linked securities;

 

   

changes in general economic and market conditions; and

 

   

other risks referenced from time to time in our filings with the SEC and those factors listed or incorporated by reference into this Proxy Statement under “Risk Factors” beginning on page [    ].

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Proxy Statement, or in the case of a document incorporated by reference, as of the date of that

 

 

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document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in our reports filed with the SEC. See “Where You Can Find More Information” beginning on page [    ] for a list of the documents incorporated by reference.

 

 

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RISK FACTORS

In addition to the other information contained or incorporated by reference into this Proxy Statement, you should carefully consider the following risk factors in deciding how to vote on the proposals to be considered at the AsiaInfo special meeting. In addition, you should read and consider the risks associated with the business of AsiaInfo because these risks will also relate to AsiaInfo following completion of the Combination. Certain of these risks can be found in the documents incorporated by reference into this Proxy Statement.

Risks Related to the Combination

The issuance of shares of AsiaInfo common stock to Linkage Cayman in the Combination will substantially dilute the interest in AsiaInfo held by AsiaInfo stockholders prior to the Combination.

If the Combination is completed, AsiaInfo will issue 26,832,731 shares of AsiaInfo common stock in the Combination. Based on the number of shares of AsiaInfo common stock outstanding on December 6, 2009, Linkage Cayman and the Legacy Linkage Shareholders will own approximately 35.8%, on a fully-diluted basis, of the outstanding common stock of the combined company following the closing of the Combination. The issuance of shares of AsiaInfo common stock to Linkage Cayman in connection with the Combination will cause a significant reduction in the relative percentage interest of current AsiaInfo stockholders in the combined company’s earnings, voting, liquidation value and book and market value.

The principal stockholders, officers and directors of the combined company will own a large percentage of the combined company’s voting stock and could exert significant influence over matters requiring stockholder approval.

It is anticipated that following the closing of the Combination, certain of the combined company’s officers and directors, including Libin Sun, Edward Tian, James Ding and Steve Zhang, will together beneficially own more than 30% of the combined company’s common stock. Of that amount, it is anticipated that Mr. Sun will beneficially own 16.6% and Mr. Tian will beneficially own 9.8% of the combined company’s common stock. Accordingly, these stockholders will be able to exert significant influence over matters requiring approval by the combined company’s stockholders, including the election of directors and the approval of mergers or other business combinations. This concentration could have the effect of delaying or preventing a change in control of the combined company.

Uncertainty about the completion of the Combination and diversion of management attention before the completion of the Combination could harm AsiaInfo or Linkage Technologies, whether or not the Combination is completed.

In response to the announcement of the Combination, existing or prospective customers of AsiaInfo or Linkage Technologies may delay or defer their purchasing or other decisions concerning AsiaInfo or Linkage Technologies, or they may seek to change their existing business relationship. In addition, as a result of the announcement, current and prospective employees could experience uncertainty about their future with the combined company, and either AsiaInfo or Linkage Technologies could lose key employees as a result. In addition to retention, these uncertainties may also impair each company’s ability to recruit or motivate key personnel. Completing the Combination will also require a significant amount of time and attention from management. The diversion of management attention away from ongoing operations could adversely affect ongoing operations and business relationships.

Failure to complete the Combination could adversely affect AsiaInfo’s stock price and its future business and financial results.

Completion of the Combination is conditioned upon, among other things, the receipt of any required regulatory approvals and approval of AsiaInfo’s stockholders of the Consideration Proposal and the Name Change Proposal. The parties may not receive the necessary approvals or satisfy the other conditions to the

 

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completion of the Combination. Failure to complete the proposed Combination would prevent AsiaInfo from realizing the anticipated benefits of the Combination. AsiaInfo will also remain liable for significant transaction costs, including legal, accounting and financial advisory fees. In addition, the market price of AsiaInfo’s common stock may reflect various market assumptions as to whether the Combination will occur. Consequently, the completion of, or failure to complete, the Combination could result in a significant change in the market price of AsiaInfo’s common stock.

Any delay in completion of the Combination may significantly reduce the benefits expected to be obtained from the Combination.

In addition to any required regulatory approvals, the Combination is subject to a number of other conditions beyond the control of AsiaInfo and Linkage Cayman that may prevent, delay or otherwise materially adversely affect completion of the Combination. These conditions may not be satisfied on a timely basis, if at all. Further, obtaining any required clearances or approvals could delay the completion of the Combination for a significant period of time or prevent it from occurring. Any delay in completing the Combination may significantly reduce the benefits that AsiaInfo expects to achieve if it successfully completes the Combination with Linkage Technologies within the expected timeframe and integrates the businesses of AsiaInfo and Linkage Technologies.

Integrating the combined company will divert management’s attention and resources, and the anticipated benefits of the Combination, including anticipated cost savings, may not be realized fully or at all or may take longer to realize than expected.

The Combination involves the integration of two companies that have previously operated independently with principal offices in two distinct locations. AsiaInfo will be required to devote significant management attention and resources to integrating the two companies. In the process of integration, the combined company may face difficulties in retaining customers and personnel. If AsiaInfo fails to successfully integrate Linkage Technologies, its revenues growth and business could be negatively affected.

Moreover, even if AsiaInfo is able to integrate Linkage Technologies’ business operations successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration. Moreover, these benefits may not be achieved within a reasonable period of time, if at all.

Additionally, as a condition to their approval of the Combination, regulatory agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of the combined company’s business. If AsiaInfo and Linkage Cayman were to agree to these requirements, limitations, costs, divestitures or restrictions, the ability to realize the anticipated benefits of the Combination may be impaired.

If AsiaInfo is unable to maintain an effective system of internal controls in light of Linkage Technologies’ material weaknesses in internal controls, AsiaInfo may be unable to accurately report its financial results or prevent fraud.

Linkage Technologies has been a private company with limited numbers of accounting personnel and other resources with which to address internal controls and procedures. In connection with the audit of Linkage Technologies’ consolidated financial statements for 2006, 2007 and 2008, Linkage Technologies’ auditors, an independent registered public accounting firm, identified and communicated to Linkage Technologies a number of material weaknesses for the periods and a number of significant deficiencies in its internal controls over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, that could result in more than a remote likelihood that a material misstatement of its consolidated financial statement that is more than inconsequential will not be prevented or detected. The material weaknesses identified by Linkage Technologies’ auditors related to (i) insufficient resources with an appropriate level of accounting knowledge, experience and training in the application of SEC and US GAAP reporting

 

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requirements and the rules and regulations promulgated by the PCAOB, (ii) inadequate documentation of formal accounting policies and procedures, including processes to ensure that all relevant agreements are provided on a timely basis to those responsible for financial reporting and maintenance of the books and records, and (iii) insufficient corporate governance procedures, including the lack of internal audit function, audit committee and independent directors. Neither Linkage Technologies nor its independent registered public accounting firm undertook a comprehensive assessment for purposes of identifying and reporting material weakness and other control deficiencies in the internal control over financial reporting of Linkage Technologies.

AsiaInfo has not assessed the impact that Linkage Technologies’ material weaknesses will have on the combined company’s disclosure controls and procedures or internal control over financial reporting. The process of integrating the accounting systems, records and procedures of Linkage Technologies and designing and implementing an effective financial reporting system for the combined company may entail significant time and expense and may not be effective in preventing material weaknesses or significant deficiencies in internal control over financial reporting. If the combined company or its independent registered public accounting firm identify a material weakness in the combined company’s internal controls in the future, the combined company may experience a loss of public confidence, which could have an adverse effect on its business and stock price.

Approvals may be required in connection with the Combination under certain PRC M&A regulations, and, if required, AsiaInfo may not be able to obtain such approvals.

On August 8, 2006, six PRC regulatory agencies, including the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and were subsequently amended on June 22, 2009 by MOFCOM. Among other things, the M&A Rules require offshore special purpose vehicles, or SPVs, that are controlled by PRC companies or residents and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that SPVs are required to submit when seeking CSRC approval for their listings outside of China. To date, the CSRC has not issued any definitive rule or interpretation concerning whether the transactions contemplated by this Proxy Statement are subject to this new procedure.

In the opinion of Linkage Technologies’ PRC counsel, Global Law Office, and AsiaInfo’s PRC counsel, Han Kun Law Office, based on their informal advice from MOFCOM, unless there are new PRC laws and regulations or clear requirements from the CSRC in any form providing otherwise, CSRC approval is not required for the Combination. In addition, according to Global Law Office and Han Kun Law Office, the acquisition by foreign investors of PRC domestic companies under the M&A Rules only refer to the acquisition by foreign companies of equity interests or assets of domestic PRC companies that are defined as non-foreign-invested enterprises, whereas the transactions involved in the Combination are between offshore companies; therefore, the Combination does not require approval by MOFCOM or any local commerce authority under the M&A Rules. Accordingly, the parties to the Combination Agreement have not taken steps to obtain approval from MOFCOM or any local commerce authority, the CSRC or any other regulatory agency in the PRC, for the Combination. However, the interpretation and application of the M&A Rules remain unclear, and PRC government authorities have the sole discretion to determine whether the Combination is subject to the approval of MOFCOM, the CSRC or other PRC regulatory agencies. If PRC government authorities subsequently determine that MOFCOM, the CSRC or other regulatory agency approval is required for the Combination, or if implementing rules or guidance are issued prior to the completion of the Combination which consequently conclude approval is required for the Combination, such approval may not be obtained on a timely basis, if at all. Additionally, if governmental approval is required for the Combination, AsiaInfo’s and Linkage Technologies’ failure to obtain or delay in obtaining approval for the Combination could subject AsiaInfo and/or Linkage Technologies to sanctions imposed by PRC regulatory agencies, which could include fines and penalties on AsiaInfo’s and/or Linkage Technologies’ operations in China, preventing the completion of the Combination,

 

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requiring that the Combination be unwound, and other forms of sanctions that may materially and adversely affect the business, results of operations and financial condition of AsiaInfo and/or Linkage Technologies.

The M&A Rules also established additional regulatory procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exist: (i) the transaction involves an important industry in China; (ii) the transaction may affect national “economic security”; or (iii) the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China. In addition, the M&A Rules require that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the above regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit the completion of the Combination. See “The Combination—Regulatory Approvals Required for the Combination” beginning on page [    ] and “The Combination Agreement—Conditions to Completion of the Combination” beginning on page [    ].

The Combination may require approval of the PRC government under the PRC Anti-Monopoly Law, and, if required, AsiaInfo cannot currently predict whether it will be able to obtain such approval.

China’s Anti-Monopoly Law, or the AML, was approved by the National People’s Congress on August 30, 2007, and became effective on August 1, 2008. While certain aspects of the AML are unclear and are subject to subsequent interpretation by China’s State Council, Anti-Monopoly Commission and Anti-Monopoly Enforcement Agency, the AML prohibits certain conduct, referred to as “monopolistic acts,” and requires checks on mergers and acquisitions of foreign and Chinese enterprises to ascertain whether they will have the effect of eliminating or restricting competition on the domestic market of China and whether they affect national security in China. The law also provides the Anti-Monopoly Commission with authority to make competition policy, publish guidelines, coordinate anti-monopoly enforcement work and conduct investigations and impose penalties on “business operators” that commit certain monopolistic acts within or outside of China that have the effect of eliminating or restricting competition in the China market.

In the opinion of Linkage Technologies’ PRC counsel, Global Law Office, and AsiaInfo’s PRC counsel, Han Kun Law Offices, unless there are new PRC laws and regulations or clear requirements in any form that require the approval under the AML for the Combination, PRC government approval under the AML is not required for the Combination because the historical revenues of AsiaInfo and Linkage Technologies fall below certain thresholds set forth in the AML. Accordingly, the parties to the Combination Agreement have not taken steps to obtain approval under the AML for the Combination. However, there are still many ambiguities under the AML and uncertainty as to the scope of the regulations. If the PRC government authorities subsequently determine that AML approval is required for the Combination, or if implementing rules or guidance are issued prior to the completion of the Combination which conclude that AML approval is required for the Combination, the parties to the Combination Agreement cannot predict how long it would take to obtain such approval.

The Combination Agreement contains provisions that could discourage a potential acquirer that may otherwise wish to acquire AsiaInfo, as well as discouraging AsiaInfo’s entry into other merger or similar transactions with another party.

The Combination Agreement contains “no shop” provisions that restrict AsiaInfo’s ability to solicit or facilitate proposals regarding a merger or similar transaction with another party, with limited exceptions for certain small acquisitions by AsiaInfo. Although AsiaInfo’s board of directors could terminate the Combination Agreement in response to such a merger proposal, doing so would entitle Linkage Cayman to collect a $17.6 million termination fee. See “The Combination Agreement—Termination of the Combination Agreement” beginning on page [    ] and “The Combination Agreement—Termination Fees” beginning on page [    ].

 

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Resales of shares of AsiaInfo common stock by Legacy Linkage Shareholders following the expiration of the lock-up periods after the Combination may cause the market price of AsiaInfo common stock to fluctuate.

As of                     , 2010, AsiaInfo had approximately [            ] million shares of common stock outstanding. AsiaInfo expects to issue 26,832,731 shares of its common stock to Linkage Cayman, which shares will be distributed to the Legacy Linkage Shareholders in connection with the Combination. Legacy Linkage Shareholders holding at least 95% of Linkage Cayman’s shares will be required to enter into lock-up agreements at the closing of the Combination, which agreements will prohibit such Legacy Linkage Shareholders from transferring the AsiaInfo shares issued in connection with the Combination for specified periods of time. The sale of these shares of AsiaInfo common stock from time to time following the termination of the relevant lock-up periods could have the effect of depressing the market price for shares of AsiaInfo common stock.

We expect the integration of AsiaInfo and Linkage will result in significant expenditures and accounting charges that may have an adverse effect on the results and financial condition of the combined company, which are not reflected in the pro forma condensed combined financial information contained in this Proxy Statement.

The financial results of the combined company may be adversely affected by cash expenditures and non-cash charges incurred in connection with the Combination. The cash expenditures include the payment of professional service fees in connection with the Combination incurred after September 30, 2009, as well as costs expected to be incurred following the completion of the Combination, such as restructuring and integration activities and, possibly, retention bonuses or other changes in employee compensation. In addition to cash expenditures, we expect significant non-cash charges, including those associated with the amortization of intangible assets and stock-based compensation. We anticipate that a disproportionate amount of these cash expenditures will occur in the 12 months following the completion of the Combination. These expenditures and charges are not reflected in the unaudited pro forma condensed combined financial information contained in this Proxy Statement, which may not be indicative of the actual results of the combined company following the Combination. In addition, the unaudited pro forma condensed combined financial information does not allocate the purchase price to the fair value of the assets to be acquired and liabilities to be assumed from Linkage Technologies, which is expected to reduce net income in periods following the Combination from the amounts reflected in the historical financial statements of Linkage Technologies. The unaudited pro forma condensed combined financial information also do not make adjustments to certain revenue recognition practices of Linkage Technologies to conform to the practices of AsiaInfo, including differences in the application of the percentage of completion method to account for certain contracts for software development, the recognition of hardware revenue in bundled products, whether to record certain revenues on a gross or net basis, whether to defer pre-contract costs, and how PRC business tax is recorded. These differences may result in materially different revenues than those presented in the unaudited pro forma condensed combined financial information, which may result in timing differences in the recognition of revenues or expenses, inaccurate period to period comparisons, or distorted trends regarding operating results. As a result of these expenditures, charges, and revenue recognition practices, the operating results and financial condition of the combined company may be adversely affected after the completion of the Combination, particularly in the first year following the Combination.

The opinion obtained by AsiaInfo from its financial advisor does not and will not reflect changes in circumstances subsequent to the date of the Combination Agreement.

On December 4, 2009, BofA Merrill Lynch issued its written opinion to the AsiaInfo board of directors regarding the fairness, from a financial point of view and as of the date of the opinion, of the Consideration to be paid in the Combination by AsiaInfo. AsiaInfo has not obtained, and will not obtain, an updated opinion.

Changes in the operations and prospects of AsiaInfo or Linkage Technologies, general market and economic conditions and other factors that may be beyond the control of AsiaInfo and Linkage Technologies, and on which the opinion was based, may alter the value of Linkage Technologies by the time the Combination is completed.

 

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The opinion rendered by BofA Merrill Lynch does not speak to the time when the Combination will be completed or to any other date other than the date of such opinion. As a result, the opinion rendered by BofA Merrill Lynch does not and will not address the fairness, from a financial point of view of the Consideration to be paid in the Combination by AsiaInfo at the time the Combination is completed. For a more complete description of the opinion rendered by BofA Merrill Lynch, see “The Combination—Opinion of AsiaInfo’s Financial Advisor” beginning on page [    ] and the full text of the opinion contained in Annex H to this Proxy Statement.

Certain directors and executive officers of AsiaInfo and Linkage Technologies may have potential conflicts of interest in recommending that you vote in favor of the Combination.

The directors and executive officers of each of AsiaInfo and Linkage Cayman may have interests in the Combination as individuals that may be in addition to, or different from, the interests of AsiaInfo’s stockholders. See “The Combination—Interests of AsiaInfo’s Directors, Executive Officers and Certain Significant Stockholders in the Combination” beginning on page [    ] and “The Combination—Interests of Linkage Technologies’ Directors, Executive Officers and Certain Significant Stockholders in the Combination” beginning on page [    ].

Risks Related to Linkage Technologies

Linkage Technologies’ current business, like AsiaInfo’s business, depends almost entirely on demand for IT solutions and services from customers in China’s telecom industry. If the growth of China’s telecom industry or the demand for IT solutions and services does not continue, the combined company’s results of operation could suffer.

Linkage Technologies focuses exclusively on the telecom industry in China and depends almost entirely on demand from the telecom industry in China for its solutions and services. Most of AsiaInfo’s revenues are also derived from China’s telecom industry. Linkage Technologies’ past growth, like AsiaInfo’s past growth, has been driven by substantial growth in the telecom industry in China and related growth in IT spending by telecom operators. This growth may not continue at the same rate or at all. Any economic downturn, inflation, contraction in subscriber base, decline in the stock price of telecom operators or any other adverse changes in market conditions could adversely affect the telecom operators. Other developments in the telecom industry, such as industry consolidation, entry of new market participants, competition from the Internet or any other changes that affect the overall competition in the telecom market could also have a material adverse effect on telecom operators. As external factors favor less growth in the telecom industry or for individual operators, telecom operators may reduce their IT expenditures. They may also delay purchases or put downward pressure on pricing. Linkage Technologies’ results of operation, and the combined company’s results of operation, could be adversely affected as a result.

As the telecom industry in China is heavily regulated by the Chinese government, the business strategies, capital expenditure budgets and spending plans of the telecom operators are significantly affected by government policies. As a result, the growth of Linkage Technologies’ business, like the growth of AsiaInfo’s business, is heavily dependent on these government policies. Insufficient future funding allocated to China’s telecom industry by the government could directly reduce the demand for Linkage Technologies’ solutions and services. Government initiatives directed at the market could also significantly affect the market conditions for telecom operators and influence the level of spending on IT solutions and services. While some of these initiatives, such as the convergence of mobile and fixed-line markets in the telecom industry, may increase market competition and generate more demand for Linkage Technologies’ solutions and services, the anticipated increase in demand may not materialize. Some operators may not adapt well to the market conditions under the new regulatory environment and may reduce their demand for Linkage Technologies’ solutions and services as a result. The telecom industry may also become less competitive over time, either as a result of market propelled consolidations or as a result of government efforts to curtail competition. A less competitive market may create fewer incentives for IT spending on innovations and upgrades, which may directly affect Linkage Technologies’ and the combined company’s results of operation.

 

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The global financial and economic crisis, particularly the slowdown in the Chinese economy, may adversely affect Linkage Technologies’ results of operations.

The global financial markets have experienced significant disruptions recently, and most of the world’s major economies have entered into recession. The Chinese economy has also slowed down significantly since the second half of 2008 and this trend may continue for the rest of 2010 and beyond. Linkage Technologies’ operations, like AsiaInfo’s operations, are located in China and, like AsiaInfo, Linkage Technologies derives most of its revenues from the telecom industry in China. Any prolonged slowdown in the Chinese economy, in particular the telecom industry, could have a negative impact on Linkage Technologies’ business, operating results and financial condition in a number of ways. For example, Linkage Technologies’ customers may decrease or delay spending on Linkage Technologies’ solutions and services, while it may have difficulty expanding its customer base fast enough, or at all, to offset the impact of decreased spending by its existing customers.

Linkage Technologies depends on a few customers for a significant portion of its revenues and this dependence is likely to continue. If Linkage Technologies fails to obtain business from these key existing customers, its revenues will decline.

Like AsiaInfo, Linkage Technologies markets its telecom-related solutions to, and signs contracts with, individual provincial subsidiaries of the three telecom operators as well as the headquarters of these three telecom operators. Of the 97 provincial subsidiaries and headquarters of these three telecom operators within China, Linkage Technologies had contracts with 69 of them as of September 30, 2009. For the years ended December 31, 2006, 2007 and 2008, and in the nine months ended September 30, 2009, three, one, one and one, respectively, of these provincial subsidiaries accounted for more than 10% of Linkage Technologies’ revenues, although no single contract accounted for more than 10% of Linkage Technologies’ revenues during any of those periods. However, in aggregate, China Mobile, China Telecom and China Unicom (including results from China Netcom that merged with China Unicom on October 15, 2008) accounted for 98.6%, 98.2%, 98.9% and 99.8% of Linkage Technologies’ software development revenues in 2006, 2007 and 2008, and in the nine months ended September 30, 2009, respectively. Linkage Technologies expects revenues from these operators will continue to account for the majority of its revenues, in particular, for its software development revenues.

Linkage Technologies does not have long-term contracts with its customers. It believes that its revenue growth will depend to a significant extent on its ability to develop and maintain long-term relationships with these operators at the headquarter and provincial levels. The decision to purchase Linkage Technologies’ products and services is in some cases made by operators at the headquarter level and in most cases at the provincial levels. Linkage Technologies has dedicated significant resources over the past few years to maintaining its relationships with these operators at both the provincial and the headquarter levels. However, IT spending authority may become more centralized. For instance, China Unicom recently adopted the practice of requiring contracts to be entered into with the headquarters for solutions provided to its provincial subsidiaries, although the provincial subsidiaries will remain as the main decision-makers of the purchases. If telecom operators begin to centralize purchasing decisions or otherwise change the level within the telecom operator at which the purchase decision is made or replace a key decision-maker at any decision-making level, Linkage Technologies’ customer relationship may be disrupted and Linkage Technologies may be unable to effectively and timely restore these relationships. Any failure to maintain close relationships with customers, due to unsuccessful sales and marketing efforts, lack of suitable solutions, unsatisfactory customer support and services or any other reason, could result in its losing customers and their businesses. If Linkage Technologies loses a key customer, if a key customer significantly reduces its purchasing levels or delays a major purchase or if Linkage Technologies fails to attract additional major customers, its results of operations could be materially and adversely affected.

 

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Linkage Technologies has transferred intellectual property rights to a number of its customized software solutions to its customers in the past and may not own all these intellectual property rights. Linkage Technologies may be subject to intellectual property infringement claims from these customers and others, which may force it to incur substantial legal expenses and, if determined adversely against us, may disrupt its business and materially and adversely affect its results of operation.

Linkage Technologies’ business involves the development and customization of software solutions for customers. While Linkage Technologies’ retains ownership in the intellectual property rights underlying the core technologies required to develop its customized finished software solutions, in most cases, its contracts for custom-designed projects provided that Linkage Technologies’ customers own, or share with it, intellectual property rights to the finished software solutions developed under such contracts. Under these circumstances, Linkage Technologies may not have the right to reuse the related finished software in projects involving other customers, nor can Linkage Technologies unilaterally apply for copyright registrations, patents or other intellectual property rights for these software solutions. To the extent that Linkage Technologies is unable to reuse the software and to the extent that the use of such software is important to the growth of its business with other customers, the inability to reuse such software could hinder the growth of its business. Furthermore, a portion of these contracts provide that its customers have ownership rights to any substantial improvements Linkage Technologies subsequently makes to the software solutions developed under these contracts. As a result, Linkage Technologies may be subject to intellectual property infringement or profit sharing claims in the future from these customers. Any such claims could subject Linkage Technologies to costly litigation and may require it to pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement. These could harm its reputation and materially and adversely affect its results of operation.

Failure to obtain the required assignment registration for patents and patent applications or failure to renew the trademark license from Lianchuang Technology Company Limited, or Lianchuang, and/or complications arising from the assignment or license could disrupt Linkage Technologies’ operations and materially and adversely affect Linkage Technologies’ operating results.

Linkage Technologies currently licenses certain core technologies it uses in its solutions from an affiliate, Lianchuang, controlled by Libin Sun, Linkage Technologies’ chairman and chief executive officer, and certain other members of Linkage Technologies’ senior management. Linkage Nanjing has entered into an assignment agreement with Lianchuang whereby Lianchuang has assigned to Linkage Nanjing the rights in the patents or patent applications underlying these technologies. However, the transfer of ownership of the patents and patent applications is conditioned on the successful registration of the assignment agreement with the China State Patent Office. Linkage Nanjing has submitted a request for the registration of the assignment agreement, but it does not know when it will successfully obtain such registration, if at all. Prior to the effective transfer of the patents and patent applications, Linkage Technologies will continue to rely on its license arrangement with Lianchuang. Linkage Nanjing does not pay license fees under the license arrangement, and the arrangement will be in effect until approval has been obtained for the transfer of all of the patents and patent applications or, alternatively, their expiration. Although Lianchuang has issued a non-competition commitment letter to Linkage Nanjing and Linkage Suzhou, the enforcement of the non-competition commitment letter is uncertain under U.S. and PRC laws.

Linkage Technologies also licenses its trademarks from Lianchuang. Under the recently executed supplemental agreement, the license is extended for a term of 20 years. However, this is not automatically renewable and further extension will be subject to negotiation at the end of the current term, which negotiation may not be successful. Additionally, Linkage Technologies currently shares the same trademark with Lianchuang for its offshore operating entity and, in the past, shared the same website as Lianchuang. Any allegations of misconduct worded ambiguously against Lianchuang could be confused or misinterpreted by Linkage Technologies’ competitors, customers, suppliers, governmental authorities and/or the general public as allegations of misconduct against Linkage Technologies, which could materially and adversely affect Linkage Technologies’ reputation, share price and results of operations. Furthermore, Linkage Technologies’ usage of a

 

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common name and Linkage Technologies’ past sharing of website with Lianchuang could be confusing to its customers and potential investors, which would lead to unwanted brand dilution and cause its brand awareness and reputation to be tied to those of Lianchuang, and vice-versa.

Any act of infringement, whether alleged or committed by or against Lianchuang, or any other defect, with respect to either the technologies or the trademarks licensed from Lianchuang, would be materially adverse to Linkage Technologies’ interests, and Linkage Technologies would have no control over any acts committed or omitted by Lianchuang or claims, actions, lawsuits or other proceedings by or against Lianchuang. Changes to or transactions involving Lianchuang’s corporate or capital structure may require the amendment or termination of Linkage Technologies’ licenses from Lianchuang, which could be time-consuming and costly. If Linkage Technologies is unable to retain intellectual property rights to certain of Linkage Technologies’ technologies and trademarks or if it suffers from the adverse consequences from the lack of the ownership to the technologies or the sharing of the trademarks, its business and results of operations could be materially and adversely affected.

If Linkage Technologies does not continually enhance its solution and service offerings, it may have difficulty in retaining existing customers and attracting new customers.

Linkage Technologies believes that its future success will depend, to a significant extent, upon its ability to enhance its existing solutions and to introduce new solutions and features to meet the requirements of its customers in a rapidly developing and evolving market. Linkage Technologies currently devotes significant resources to refining and expanding its base software modules and to developing solutions that operate in accordance with its customers’ networks and systems. Unexpected technical, operational, distribution or other problems could delay or prevent the introduction of one or more of these products or services or any products or services that Linkage Technologies may plan to introduce in the future. Linkage Technologies’ present or future products may not satisfy the evolving needs of the telecom industry, and these solutions and services may not achieve anticipated market acceptance or generate incremental revenue. If Linkage Technologies is unable to anticipate or respond adequately to the need for solutions and services enhancements due to resource, technological or other constraints, its results of operations could be materially and adversely affected.

Linkage Technologies may lose its customers and its financial results would suffer if its customers merge with or are acquired by other telecom operators as a result of the recent and any future restructuring in the telecom industry or otherwise, or if they develop their own in-house capabilities.

Linkage Technologies’ business may be negatively impacted if its business with a significant number of Linkage Technologies’ customers is reduced. This may occur if its customers are consolidated or if a customer is acquired by, or merges with, another operator that has a more established relationship with other IT solutions providers. Specifically, pursuant to the restructuring plan of China’s telecom industry announced in May 2008, the number of operators has been reduced from six to three through mergers and acquisitions. As a result of the recent and any future restructuring, Linkage Technologies may lose customers. Furthermore, as China’s telecom industry grows larger in size and smaller in the number of operators, more IT solutions providers will be competing for projects and operators may be able to exact lower prices for Linkage Technologies’ solutions and services. If Linkage Technologies cannot effectively compete with its competitors, Linkage Technologies may lose business and its results of operations may be materially and adversely affected. Furthermore, telecom operators may also find it more cost-effective to set up their own IT divisions to meet their IT needs, instead of outsourcing to third-party providers. If the current trend favoring the outsourcing of such services is reduced or reversed, Linkage Technologies’ results of operations may be materially and adversely affected.

In addition, as restrictions against foreign ownership in the telecom industry ease, more foreign investors may acquire stakes in, or form strategic alliances with, Chinese telecom operators, and may direct or influence management to use IT solutions providers they recommend or favor, which may lead to lost or reduced business and revenues with these existing customers.

 

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Changes in technology could adversely affect Linkage Technologies’ business by increasing its costs, reducing its profit margins and causing a decline in its competitiveness.

China’s telecom industry, in which Linkage Technologies operates, is characterized by rapidly changing technology, evolving industry standards, frequent new services and solutions introductions and enhancements as well as changing customer demands. New solutions and new technologies often render existing solutions and services obsolete, excessively costly or otherwise unmarketable. As a result, Linkage Technologies’ success depends on its ability to adapt to the latest technological progress, such as the 3G standard and technologies, and to develop or acquire and integrate new technologies into its software solutions and IT-related services. Advances in technology also require Linkage Technologies to commit substantial resources to developing or acquiring and then deploying new technologies for use in its operations. Linkage Technologies must continuously train personnel in new technologies and in how to integrate existing hardware and software systems with these new technologies. Linkage Technologies may not be able to adapt quickly to new technologies or commit sufficient resources to compete successfully against existing or new competitors in bringing to market solutions and services that incorporate these new technologies. If Linkage Technologies fails to adapt to changes in technologies and compete successfully against established or new competitors, its results of operations could be adversely affected.

Returns on Linkage Technologies’ investment in new technologies, such as 3G technology, and new solutions may not materialize as expected.

Linkage Technologies has invested and will invest in the future substantial amount of capital, manpower and other resources to develop new solutions and acquire technologies in preparation for the adoption by the telecom industry in China of new standards and technologies, such as the 3G standard and technologies. However, Linkage Technologies’ abilities to successfully develop and commercialize these new solutions and technologies are subject to a number of risks and uncertainties, including uncertainty surrounding the timing of the adoption of these new standards and technologies by China’s telecom industry and the receptiveness to these new technologies by their customer base, as well as Linkage Technologies’ abilities to develop and market these new solutions cost-effectively and to deliver these solutions ahead of its competitors. Any of the above risks and uncertainties could jeopardize Linkage Technologies’ ability to successfully realize a significant return on its investment in the 3G and other new technologies and solutions, if at all.

The markets in which Linkage Technologies sells its solutions and services are highly competitive and it may not be able to compete effectively.

The market for telecom IT solutions is highly competitive, and Linkage Technologies expects competition to continue to intensify in the future. Linkage Technologies faces competition from international telecom software solutions providers such as Amdocs, Convergys, HP and IBM, domestic companies such as Boco, Neusoft and Digital China, and if the Combination is not consummated, AsiaInfo. It also faces competition from the software development divisions of some telecom equipment manufacturers such as Huawei and ZTE. Some of these competitors have long operating histories, large customer bases, substantial financial, technical, sales, marketing and other resources, and strong name recognition. In addition, Linkage Technologies’ competitors have acquired, and may continue to acquire in the future, companies that may enhance their market offerings. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. As a result, Linkage Technologies’ competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, and may be able to devote greater resources to the promotion and sale of their solutions and services. Linkage Technologies may not be able to compete successfully against existing or new competitors, and it may face challenges in maintaining and expanding its customer base and in pricing of its solutions and services, which could have a material adverse effect on its results of operations.

 

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Problems with the quality or performance of Linkage Technologies’ solutions may cause delays in the introduction of new solutions or result in the loss of customers and revenues, which could have a material and adverse effect on Linkage Technologies’ business and results of operations.

Linkage Technologies’ software solutions are complex and may contain defects, errors or bugs when first introduced to the market or to a particular customer, or as new versions are released. Because Linkage Technologies cannot test for all possible scenarios, its solutions may contain errors which are not discovered until after they have been installed, and it may not be able to timely correct these problems. These defects, errors or bugs could interrupt or delay completion of projects or sales to its customers. In addition, Linkage Technologies’ reputation may be damaged and Linkage Technologies may fail to acquire new projects from existing customers or new customers. Errors may occur when Linkage Technologies provides systems integration and maintenance services. Some of the contracts with its customers do not have provisions setting forth limitations on liability for consequential damages. Even in cases where Linkage Technologies has agreements with its customers that contain provisions designed to limit its exposure to potential claims and liabilities arising from customer problems, these provisions may not effectively protect it against such claims in all cases and in all jurisdictions. In addition, as a result of business and other considerations, Linkage Technologies may undertake to compensate its customers for damages arising from the use of its solutions, even if its liability is limited by these provisions. Moreover, claims and liabilities arising from customer problems could also result in adverse publicity and materially and adversely affect its business, results of operations and financial condition. Linkage Technologies currently does not carry any product or service liability insurance and any imposition of liability on it may materially and adversely affect its business and results of operations.

Linkage Technologies may be subject to infringement, misappropriation and indemnity claims in the future, which may cause Linkage Technologies to incur significant expenses, pay substantial damages and be prevented from providing its services or technologies.

Linkage Technologies’ continued growth depends, in part, on its ability to carry out its business without infringing the intellectual property rights of third parties. Patent and copyright law covering software-related technologies and IT marketing is evolving rapidly and is subject to a great deal of uncertainty. Linkage Technologies’ self-developed or licensed technologies, processes or methods may be covered by third-party patents or copyrights, either now existing or to be issued in the future. Any potential litigation may cause Linkage Technologies to incur significant expenses. Third-party claims, if successfully asserted against it or its licensor, may cause it to pay substantial damages, seek licenses from third parties, pay ongoing royalties, redesign its services or technologies, or prevent it from providing services or technologies subject to these claims. Even if Linkage Technologies was to prevail, any litigation would likely be costly and time-consuming and divert the attention of its management and key personnel from its business operations.

Additionally, most of Linkage Technologies’ software development contracts signed with its customers contain indemnity clauses whereby Linkage Technologies will indemnify its customers for any loss or damages suffered as a result of any third-party claims against them for any infringement of intellectual property rights in connection with the installation and use of the customized software solutions Linkage Technologies develops for them. Although Linkage Technologies has obtained similar indemnities from Lianchuang under the license agreement and the assignment agreement, it may still be exposed to significant liabilities under these indemnity clauses agreed with its customers.

Linkage Technologies’ failure to protect its intellectual property rights may subject Linkage Technologies to costly litigation to protect its intellectual property rights.

Any misappropriation of Linkage Technologies’ technology or the development of competitive technology could seriously harm its business. Linkage Technologies regards a substantial portion of its software solutions and systems as proprietary and relies on statutory copyright, trademark, patent, trade secret laws, customer license agreements, employee and third-party non-disclosure agreements and other methods to protect its proprietary rights. Nevertheless, these resources afford only limited protection and the actions Linkage

 

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Technologies takes to protect its intellectual property rights may not be adequate. In particular, third parties may infringe or misappropriate Linkage Technologies’ proprietary technologies or other intellectual property rights, which could have a material adverse effect on the business and results of operations of Linkage Technologies. In addition, intellectual property rights and confidentiality protection in China may not be as effective as in the United States, and policing unauthorized use of proprietary technology can be difficult and expensive. In addition, litigation may be necessary to enforce its intellectual property rights, protect its trade secrets or determine the validity and scope of the proprietary rights of others. The outcome of any such litigation may not be in Linkage Technologies’ favor. Furthermore, any such litigation may be costly and may divert management attention as well as Linkage Technologies’ other resources away from its business. An adverse determination in any such litigation will impair Linkage Technologies’ intellectual property rights and may harm the business, prospects and reputation of Linkage Technologies.

Linkage Technologies may be liable to its customers for damages caused by unauthorized disclosure of sensitive and confidential information, whether through its employees or otherwise.

Linkage Technologies has access to confidential customer data in connection with the solutions and services it provides. Under the terms of contracts with its customers, Linkage Technologies is required to keep such information strictly confidential. Linkage Technologies seeks to implement specific measures to protect sensitive and confidential customer data. Linkage Technologies requires its employees and subcontractors to enter into non-disclosure arrangements to limit access to and distribution of its customers’ sensitive and confidential information as well as Linkage Technologies’ own trade secrets. The steps taken by Linkage Technologies in this regard may not be adequate to protect its customers’ confidential information. Linkage Technologies has in the past experienced unauthorized disclosure by an employee of confidential information on the systems of one of its customers. If its customers’ proprietary rights are misappropriated by Linkage Technologies’ employees or Linkage Technologies’ subcontractors or their employees, in violation of any applicable confidentiality agreements or otherwise, Linkage Technologies’ customers may consider Linkage Technologies liable for that act and seek damages and compensation from Linkage Technologies. However, Linkage Technologies currently does not have any insurance coverage for mismanagement or misappropriation of such information by its subcontractors or employees. Any litigation with respect to unauthorized disclosure of sensitive and confidential information might result in substantial costs and diversion of resources and management attention.

Linkage Technologies’ business depends substantially on the continuing efforts of its management and other key personnel. If Linkage Technologies loses their services, it could incur significant costs in finding suitable replacements and its business may be severely disrupted.

Linkage Technologies’ revenue growth heavily depends upon the continued services of its management and other key personnel. If one or more of Linkage Technologies’ senior management or key personnel were unable or unwilling to continue in their present positions, Linkage Technologies might not be able to replace them easily or at all. Linkage Technologies’ business may be severely disrupted, its financial condition and results of operations may be materially and adversely affected, and Linkage Technologies may incur additional expenses to recruit, train and retain personnel.

Linkage Technologies’ business could suffer if its key personnel compete against Linkage Technologies and Linkage Technologies’ non-competition agreements with them cannot be enforced.

If any of Linkage Technologies’ key personnel joins a competitor or forms a competing company, Linkage Technologies may lose customers, suppliers, know-how and key professionals and staff members. Each of Linkage Technologies’ key personnel has entered into employment agreements and confidentiality and non-competition agreements with Linkage Technologies. However, if any dispute arises between its key personnel and Linkage Technologies, the non-competition provisions contained in their confidentiality and non-competition agreements may not be enforceable, especially in China, where most of these key employees reside, on the ground that Linkage Technologies has not provided adequate compensation to these key employees

 

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for their non-competition obligations, which is required under the relevant PRC regulations. See “Risk Factors—Risks Related to Linkage TechnologiesUncertainties with respect to the PRC legal system could adversely affect Linkage Technologies.”

The beneficial owners of Lianchuang may have potential conflicts of interest with Linkage Technologies and they may not act in Linkage Technologies’ best interest.

Libin Sun, Linkage Technologies’ chairman and chief executive officer, Guoxiang Liu, Linkage Technologies’ president, and Xiwei Huang, Linkage Technologies’ chief operating officer and chief accounting officer, who are expected to become executive officers and directors of the combined company following consummation of the Combination, currently hold majority equity interests in Lianchuang. In addition, Mr. Sun serves as the chairman of the board of Lianchuang and is involved in the operations of Lianchuang. Conflicts of interests between their dual roles as beneficial owners/management of both Lianchuang Technologies and Linkage Technologies may arise. If conflicts of interest arise, these individuals may not act in the best interests of Linkage Technologies and may not resolve any conflict of interest in Linkage Technologies’ favor. Linkage Technologies also licenses its technologies from Lianchuang and has entered into other agreements with Lianchuang. See “Information about Linkage Technologies—Related Party Transactions” on page [    ] and “Risk Factors—Risks Related to Linkage TechnologiesFailure to obtain the required assignment registration for patents and patent applications or failure to renew the trademark license from Lianchuang, and/or complications arising from the assignment or license could disrupt Linkage Technologies’ operations and materially and adversely affect Linkage Technologies’ operating results” on page [    ]. Mr. Sun, as the chairman of Lianchuang, may have interests adverse to, or not aligned with, Linkage Technologies’ interests.

A significant portion of the software development, ongoing system support and enhancement service revenues Linkage Technologies generates are fixed amounts according to its sales contracts. If Linkage Technologies fails to accurately estimate costs and determine resource requirements in relation to its projects, its margins and profitability could be materially and adversely affected.

A significant portion of the software development, ongoing system support and enhancement service revenues Linkage Technologies generates are fixed amounts according to its sales contracts or bids it submits. Linkage Technologies’ projects often involve complex technologies and must often be completed within compressed timeframes and meet increasingly sophisticated customer requirements. Linkage Technologies may be unable to accurately assess the time and resources required for completing projects and price its projects accordingly. If Linkage Technologies underestimates the time or resources required, it may experience cost overruns and mismatches in project staffing. Conversely, if Linkage Technologies over-estimates requirements, its bids may become uncompetitive and it may lose business as a result. Furthermore, any failure to complete a project within the stipulated timeframe could expose Linkage Technologies to contractual and other liabilities and damage its reputation.

Linkage Technologies extends warranties to its customers, which exposes Linkage Technologies to potential liabilities.

For third-party hardware and software products, Linkage Technologies typically provides its customers with one to three years of warranties, under which Linkage Technologies agrees to maintain third-party hardware and software products for a fee or at no additional cost to its customers. Although Linkage Technologies seeks to arrange back-to-back warranties with hardware and software vendors, it is nevertheless obligated to perform the terms of warranties issued by it regardless of whether its back-to-back warranties are honored. In addition, Linkage Technologies does not currently maintain any insurance policies with respect to its exposure to warranty claims.

Linkage Technologies’ customized software contracts typically provide for a six-month warranty period starting from when preliminary acceptance is received from the customer. Linkage Technologies is contractually obligated to fix bugs and defects in the software during the warranty period. Linkage Technologies’ assumptions

 

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regarding the durability and reliability of its solutions may not be accurate, and the amount of accrued warranty expenses that it has allowed for its solutions may not be sufficient to meet its actual warranty costs. If Linkage Technologies experiences a significant increase in warranty claims, particularly from its large telecom operator customers, it may incur significant repair and replacement costs associated with such claims, which could have a material adverse effect on its financial condition and results of operations. Furthermore, widespread product failure will damage its reputation and customer relationships and may cause its sales to decline, which in turn could have a material adverse effect on its results of operations. Under a small portion of Linkage Technologies’ software development contracts involving its solutions and services and those of other service providers, Linkage Technologies is also held jointly and severally liable to the customers for defects relating to solutions or services provided by other service providers.

Linkage Technologies’ computer networks may be vulnerable to security risks that could disrupt its services and adversely affect its results of operations.

Linkage Technologies’ 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. Computer attacks or disruptions may jeopardize the security of information stored in and transmitted through computer systems of its customers. Actual or perceived concerns that Linkage Technologies’ systems may be vulnerable to such attacks or disruptions may deter telecom operators and consumers from using Linkage Technologies’ solutions or services. As a result, Linkage Technologies may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches, which could adversely affect its results of operations.

Linkage Technologies’ solutions incorporate a portion of and work in conjunction with third-party hardware and software solutions. If these third-party hardware or software solutions are not available to Linkage Technologies at reasonable costs or at all, its results of operations could be adversely impacted.

Although Linkage Technologies’ solutions primarily rely on core technologies licensed and assigned to it by its affiliate, some of Linkage Technologies’ solutions incorporate a small portion of third-party hardware and software solutions. In addition, Linkage Technologies’ solutions are designed to work in conjunction with the third-party hardware and software in its customers’ existing systems. If any third party were to discontinue making their solutions available to Linkage Technologies or Linkage Technologies’ customers on a timely basis, or increase materially the cost of their solutions, or if Linkage Technologies’ solutions failed to properly function or interoperate with replacement hardware or software solutions, Linkage Technologies may need to incur costs in finding replacement third-party solutions and/or redesigning its solutions to replace or function with or on replacement third-party solutions. Replacement solutions may not be available on terms acceptable to Linkage Technologies or at all, and it may be unable to develop alternative solutions or redesign its solutions on a timely basis or at a reasonable cost. If any of these were to occur, Linkage Technologies’ results of operations could be adversely impacted.

Linkage Technologies has very limited insurance coverage which could expose it to significant costs and business disruption.

Linkage Technologies does not maintain any insurance coverage for its leased properties. Should any natural catastrophes such as earthquakes, floods, typhoons or any acts of terrorism occur in Nanjing, where its head office is located and most of its employees are based, or elsewhere in China, Linkage Technologies might suffer not only significant property damages, but also loss of revenues due to interruptions in its business operations, which could have a material adverse effect on its business, operating results or financial condition.

 

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The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to Linkage Technologies’ knowledge, offer business liability insurance. As a result, Linkage Technologies does not have any business liability insurance coverage for its operations. Moreover, while business disruption insurance is available, Linkage Technologies has determined that the risks of disruption and cost of the insurance are such that Linkage Technologies does not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources, particularly if it affects Linkage Technologies’ technology platforms which Linkage Technologies depends on for delivery of its software and services, and could have a material adverse effect on its results of operations.

Linkage Technologies’ cash flow and results of operations would be negatively impacted if Linkage Technologies continues to maintain a high accounts receivable balance.

As of December 31, 2007 and 2008 and September 30, 2009, Linkage Technologies’ accounts receivable balance was $36.0 million, $52.4 million and $84.8 million, respectively. The number of customers with accounts receivable due representing more than 10% of its total outstanding accounts receivable balance for the years ended 2007 and 2008 and for the nine months ended September 30, 2009 was three, nil and one, respectively. Although two-thirds of its billed accounts receivables were collected within the three month credit terms Linkage Technologies extends under its contracts, the remaining were collected over a longer period of time. Linkage Technologies believes this is a result of industry practice and contract negotiations. Linkage Technologies does not expect the age of its receivables to significantly improve in the foreseeable future. As its business expands and current industry payment and collection practices as well as its own billing practices continue, Linkage Technologies may continue to maintain high accounts receivable balances, which could negatively affect its cash flows, and in particular its short-term cash flows. As the age of its receivables increases, its exposure to the credit risk of its customers increases as well. If Linkage Technologies incurs bad debt expenses as a result, its results of operations would be negatively impacted.

Seasonality and fluctuations in customers’ annual IT budget and spending cycle and other factors can cause Linkage Technologies’ revenues and operating results to vary significantly from quarter to quarter and from year to year.

Linkage Technologies’ revenues and operating results will vary significantly from quarter to quarter and from year to year due to a number of factors, many of which are outside of its control. A large number of Linkage Technologies’ engineers take leave around the Chinese New Year holiday, which typically falls between late January and February of each year. The lack of man-hours during this holiday period usually leads to relatively lower revenues during the first calendar quarter. Linkage Technologies typically experiences higher revenues during the fourth quarter of the year as more of its software solutions are delivered and installed close to the year-end, the timing of which delivery and installation is influenced by the calendar-year-based IT budget and spending cycle of many of its customers. Due to the annual budget cycles of most of its customers, Linkage Technologies also may be unable to accurately estimate the demand for its solutions and services beyond the immediate calendar year, which could adversely affect its business planning. Moreover, Linkage Technologies’ results will vary depending on its customers’ business needs from year to year. Due to these and other factors, Linkage Technologies’ operating results have fluctuated significantly from quarter to quarter and from year to year. These fluctuations are likely to continue in the future, and operating results for any period may not be indicative of its future performance in any future period.

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect Linkage Technologies’ business.

Substantially all of Linkage Technologies’ business operations are conducted in China. Accordingly, its business, results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. Although the Chinese economy is no longer a planned economy, the

 

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PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between RMB and foreign currencies, and regulate the growth of the general or specific market. These government involvements have been instrumental in China’s significant growth in the past 30 years. The reorganization of the telecommunications industry encouraged by the PRC government has directly affected Linkage Technologies’ industry and its growth prospects. If the PRC government’s current or future policies fail to help the Chinese economy achieve further growth or if any aspect of the PRC government’s policies limits the growth of the telecommunications industry in China or Linkage Technologies’ industry or otherwise negatively affects its business, its growth rate, Linkage Technologies’ results of operations could be adversely affected as a result.

Linkage Technologies’ business benefits from certain government tax incentives. Expiration, reduction or discontinuation of, or changes to, these incentives will increase its tax burden and reduce its net income.

Under the PRC Corporate Income Tax Law passed in 2007, or the New CIT Law, a unified enterprise income tax rate of 25% and unified tax deduction standard is applied equally to both domestic-invested enterprises and foreign-invested enterprises, or FIEs. Enterprises established prior to March 16, 2007 eligible for preferential tax treatment in accordance with the then tax laws and administrative regulations shall gradually become subject to the New CIT Law rate over a five-year transition period starting from the date of effectiveness of the New CIT Law. However, certain qualifying high-technology enterprises may still benefit from a preferential tax rate of 15% if they own their core intellectual properties and they are enterprises in certain State-supported high-tech industries to be later specified by the government. As a result, if Linkage Technologies’ PRC subsidiaries qualify as “high-technology enterprises,” they will continue to benefit from the preferential tax rate of 15%, subject to transitional rules implemented from January 1, 2008. Furthermore, if its PRC subsidiaries qualify as “key software enterprises,” they will enjoy a further reduction to their preferential tax rate to 10%. Otherwise, the applicable tax rate of its PRC subsidiaries may gradually increase to the unified tax rate of 25% by January 1, 2013 under the New CIT Law and the Implementing Rules. Currently, the value-added taxes Linkage Technologies pays on its software products are refunded to it by the tax authorities as part of the PRC state policies to encourage the development of the PRC software industry. If its PRC subsidiaries cease to qualify as “high-technology enterprises” or “key software enterprises,” or if the refund of the value-added taxes ceases to apply, Linkage Technologies’ financial condition and results of operations could be materially and adversely affected.

If Linkage Technologies were deemed a “resident enterprise” by PRC tax authorities, it could be subject to tax on its global income at the rate of 25% under the New CIT Law and its non-PRC shareholders could be subject to certain PRC taxes.

Under the New CIT Law, effective January 1, 2008, an enterprise established outside of the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” and will be subject to the CIT at the rate of 25% on its global income. The implementing rules of the New CIT Law define “de facto management” as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise. If Linkage Technologies were to be considered a “resident enterprise” by the PRC tax authorities, its global income would be subject to tax under the New CIT Law at the rate of 25% and, to the extent Linkage Technologies were to generate substantial amount of income outside of PRC in the future, Linkage Technologies would be subject to additional taxes. In addition, if Linkage Technologies were to be considered a “resident enterprise,” the dividends it pays to its non-PRC enterprise shareholders would be subject to withholding tax and its non-PRC enterprise shareholders would be subject to a 10% income tax on any gains they would realize from the transfer of their shares, if such income were sourced from within the PRC. A substantial majority of the members of Linkage Technologies’ management team as well as properties are located in the PRC. However, according to Linkage Technologies’ PRC counsel, as of the date of this Proxy Statement, no final interpretations on the implementation of the “resident enterprise” designation are available. Moreover, any such designation, when made by PRC tax authorities, will be determined based on

 

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the facts and circumstances of individual cases. As a result, Linkage Technologies, after consulting its PRC counsel, cannot determine the likelihood of Linkage Technologies being designated a “resident enterprise” as of the date of this Proxy Statement.

Uncertainties with respect to the PRC legal system could adversely affect Linkage Technologies.

Linkage Technologies conducts its business primarily through its subsidiaries in China. Linkage Technologies’ operations in China are governed by PRC laws and regulations. Linkage Technologies’ PRC subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. 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. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, Linkage Technologies may not be aware of its violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent Linkage Technologies from making loans or additional capital contributions to its PRC operating subsidiaries, which could materially and adversely affect its liquidity and its ability to fund and expand its business.

As an offshore holding company of its PRC operating subsidiaries, Linkage Technologies may make loans to its PRC subsidiaries, or Linkage Technologies may make additional capital contributions to its PRC subsidiaries. Any loans to its PRC subsidiaries are subject to PRC regulations. For example, loans by Linkage Technologies to its subsidiaries in China, which are FIEs, to finance their activities cannot exceed statutory limits and must be registered with the SAFE. On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-invested company of foreign currency into RMB by restricting how the converted RMB may be used. The notice requires that RMB converted from the foreign currency-denominated capital of a foreign-invested company may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC unless specifically provided for otherwise. The foreign currency-denominated capital shall be verified by accounting firm before converting into RMB. In addition, SAFE strengthened its oversight over the flow and use of RMB funds converted from the foreign currency-denominated capital of a foreign-invested company. To convert such capital into RMB, the foreign-invested company must report the use of such RMB to the bank, and the RMB must be used to the reported purposes. According to Circular 142, change of the use of such RMB without approval is prohibited. In addition, such RMB may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Rules.

Linkage Technologies may also decide to finance its subsidiaries by means of capital contributions. These capital contributions must be approved by the MOFCOM, or its local counterpart. Linkage Technologies may not be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by it to its PRC subsidiaries. If Linkage Technologies fails to receive such approvals, its ability to capitalize its PRC operations may be negatively affected, which could adversely affect its liquidity and its ability to expand its business.

 

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Governmental control of currency conversion may affect Linkage Technologies’ ability to pay dividends in foreign currencies.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Linkage Technologies receives substantially all of its revenues in RMB. Under its current corporate structure, its income is primarily derived from dividend payments from its PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of its PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to Linkage Technologies, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents Linkage Technologies from obtaining sufficient foreign currency to satisfy its currency demands, it may not be able to pay dividends in foreign currencies to shareholders.

PRC regulations relating to the establishment of offshore special purpose vehicles by PRC residents may subject Linkage Technologies’ PRC resident shareholders or Linkage Technologies to penalties and limit its ability to inject capital into its PRC subsidiaries, limit its PRC subsidiaries’ ability to distribute profits to Linkage Technologies, or otherwise adversely affect Linkage Technologies.

SAFE issued a public notice in October 2005 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose vehicle.” PRC residents that are shareholders and/or beneficial owners of offshore special purpose companies established before November 1, 2005 are required to register with the local SAFE branch. In addition, any PRC resident that is a shareholder of an offshore special purpose vehicle is required to amend its SAFE registration with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in China or other material changes in share capital. In May 2007, SAFE issued relevant guidance to its local branches with respect to the operational process for SAFE registration, which standardized more specific and stringent supervision on the registration relating to the SAFE notice. Linkage Technologies has requested its current shareholders and/or beneficial owners to disclose whether they or their shareholders or beneficial owners fall within the ambit of the SAFE notice and urge those who are PRC residents to register with the local SAFE branch as required under the SAFE notice. As of the date of this Proxy Statement, Messrs. Libin Sun, Guoxiang Liu, Dr. Xiwei Huang and Haidong Pang, Linkage Technologies’ directors, executive officers and/or principal shareholders that are PRC residents, have complied with the registration requirements under the SAFE notice with respect to their interests in us. Linkage Technologies has not kept record, however, of the extent of compliance with the requirements under the SAFE notice by other shareholders and/or beneficial owners of its ordinary shares. The failure of these shareholders and/or beneficial owners to timely amend their SAFE registrations pursuant to the SAFE notice or the failure of future shareholders and/or beneficial owners of Linkage Technologies who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such shareholders, beneficial owners and/or its PRC subsidiaries to fines and legal sanctions and may also limit its ability to contribute additional capital into its PRC subsidiaries, limit its PRC subsidiaries’ ability to distribute dividends to Linkage Technologies or otherwise adversely affect its business.

 

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Linkage Technologies may be subject to currency exchange rate risk due to fluctuations in the exchange rate between the U.S. dollars and the RMB.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 21.2% appreciation of the RMB against the U.S. dollar between July 21, 2005 and January 21, 2010. Provisions on Administration of Foreign Exchange, as amended in August 2008, further changed China’s exchange regime to a managed floating exchange rate regime based on market supply and demand. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. It is difficult to predict how long the current situation may continue and when and how it may change again. Substantially all of Linkage Technologies’ revenues and costs are denominated in the RMB, and a significant portion of its financial assets are also denominated in RMB. Linkage Technologies principally relies on dividends and other distributions paid to it by its subsidiaries in China. Any significant revaluation of the RMB may materially and adversely affect Linkage Technologies’ cash flows, revenues, earnings and financial position. Any fluctuations of the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

Any health epidemics and other outbreaks, war, acts of terrorism or other man-made or natural disasters could severely disrupt Linkage Technologies’ business operations.

Linkage Technologies’ business could be materially and adversely affected by the outbreak of H1N1 Flu, avian influenza, severe acute respiratory syndrome, or SARS, or another epidemic. A recent outbreak of swine influenza in Mexico could widely spread to China and there have been hundreds of confirmed cases of H1N1 Flu in China. In 2006 and 2007, there were reports on the occurrences of avian influenza in various parts of China, including a few confirmed human cases and deaths. Any prolonged recurrence of H1N1 Flu, avian influenza, SARS or other adverse public health developments in China could require the temporary closure of Linkage Technologies’ offices or prevent its staff from traveling to its customers’ offices to sell its services or provide on-site services. Such closures could severely disrupt its business operations and adversely affect its results of operations.

Linkage Technologies’ operations are vulnerable to interruption and damage from man-made or natural disasters, including wars, acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents, power loss, communications failures and similar events. In January and February of 2008, large portions of Southern and Central China were hit with a series of snowstorms, which caused extensive damage and transportation disruption. On May 12, 2008, a severe earthquake measuring approximately 8.0 on the Richter scale occurred in Sichuan province of China, resulting in huge casualties and property damage. If any similar man-made or natural disaster were to occur in the future, Linkage Technologies’ ability to operate its business could be seriously impaired.

 

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THE SPECIAL MEETING OF STOCKHOLDERS

General

This document is being furnished to holders of AsiaInfo common shares in connection with the solicitation of proxies on behalf of AsiaInfo’s board of directors for use at a special meeting of AsiaInfo stockholders and any adjournments or postponements of the meeting.

When and Where the AsiaInfo Special Meeting Will Be Held

The special meeting of stockholders will be held on [                    ], 2010, at [            ], local time, at our offices located at 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, PRC.

Purpose of the Special Meeting

The purpose of the AsiaInfo special meeting of stockholders is to consider and vote upon the following proposals:

 

   

the Consideration Proposal

 

   

the Name Change Proposal;

 

   

the Adjournment Proposal; and

The AsiaInfo stockholders will also be asked to transact such other business as may properly come before the meeting or any adjournment thereof.

The AsiaInfo stockholders must vote to approve the Consideration Proposal and the Name Change Proposal in order for the Combination to occur. If the AsiaInfo stockholders fail to vote to approve the Consideration Proposal or the Name Change Proposal, the Combination will not occur.

Record Date; Stockholders Entitled to Vote

All persons who are AsiaInfo stockholders of record at the close of business on [                    ], 2010, which date is referred to herein as the Record Date, are entitled to notice of and to vote at the special meeting. As of the Record Date, [            ] shares of AsiaInfo’s common stock were issued and outstanding and held of record by approximately [            ] registered stockholders.

Quorum and Voting Requirements

The required quorum for the transaction of business at the special meeting is a majority of the votes eligible to be cast by holders of shares of common stock issued and outstanding on the Record Date, present in person or represented by proxy. A quorum is necessary to hold the special meeting. Once a share is represented at the special meeting, such share will be counted for purposes of establishing a quorum at any postponement or adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established.

The affirmative vote of a majority of all the votes cast by holders of common shares represented in person or by proxy at the special meeting is necessary to approve each of Proposal No. 1, Proposal No. 2 and Proposal No. 3.

 

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At the special meeting, each AsiaInfo common share is entitled to one vote on all matters properly submitted to the AsiaInfo stockholders.

As of the record date, directors and executive officers of AsiaInfo and their affiliates beneficially owned and were entitled to vote [            ] AsiaInfo common shares, or approximately [    ]% of the outstanding AsiaInfo common shares entitled to vote at the special meeting. Linkage Cayman, Edward Tian, a director of the Company, and James Ding, Chairman of the board of the Company, have entered into a Voting Agreement pursuant to which each of Mr. Tian and Mr. Ding agreed to vote all of their respective shares of the Company’s common stock in favor of approval of the proposals being considered at the special meeting. Additionally, Lenovo IT Alliance Limited and Linkage Cayman entered into a Voting Agreement pursuant to which Lenovo IT Alliance Limited agreed to vote all of the shares of the Company’s common stock it beneficially owns in favor of the proposals being considered at the special meeting. As of the record date, Lenovo IT Alliance Limited beneficially owned [            ] AsiaInfo common shares representing approximately [    %] of the outstanding AsiaInfo common shares.

Voting Procedures; Proxies; Revocation

Registered stockholders can vote by mail, telephone, the Internet or in person. Telephone voting can be accessed by calling the toll-free number (in the United States only) 1-866-540-5760. Internet voting can be accessed by logging on to the following Internet address: http://www.eproxy.com/asias. Telephone and Internet voting information is provided on the proxy card. A control number located on the proxy card is designed to verify each stockholder’s identity and allow stockholders to vote their shares and confirm that their voting instructions have been properly recorded.

If you do not choose to vote by telephone or the Internet, you may still return your proxy card, properly signed, and the shares represented will be voted in accordance with your directions. You can specify your choices by marking the appropriate boxes on the proxy card. If you vote by telephone or the Internet, it is not necessary to return your proxy card.

Your vote is important. Accordingly, regardless of whether you plan to attend the special meeting, you are urged to vote by telephone, by the Internet, or by signing and returning the accompanying proxy card. If you do attend, you may vote by ballot at the special meeting, thereby canceling any proxy previously given. However, attendance at the special meeting will not revoke a proxy unless you actually vote in person at the meeting. All AsiaInfo common shares represented by properly executed proxies received before or at the special meeting, and not revoked, will be voted in accordance with the instructions indicated in the proxies. Proxies that are properly signed and dated but that do not contain voting instructions will be voted FOR Proposal No. 1, Proposal No. 2 and Proposal No. 3. In addition, if other matters properly come before the special meeting, or at any adjournment or postponement of the special meeting, AsiaInfo intends that shares represented by properly submitted proxies will be voted, or not voted, by and at the discretion of the persons named as proxies on the proxy card unless you withhold authority to do so on the proxy card. Our board of directors is currently unaware of any other matters that may be presented for action at the special meeting.

If your shares are held in “street name” by your broker or bank, you should instruct your broker or bank how to vote your shares using the instructions provided by your broker or bank. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker or bank and they can give you instructions on how to vote your shares. If an executed proxy card returned by a broker or bank indicates that the broker or bank does not have discretionary authority to vote on a particular matter, the shares will be considered present at the meeting for purposes of determining the presence of a quorum, but will not be voted. This is called a “broker non-vote.” Your broker or bank will vote your shares over which it does not have discretionary authority only if you provide instructions on how to vote by following the instructions provided to you by your broker or bank. AsiaInfo common shares held by persons attending the special meeting but not voting, or shares for which AsiaInfo has received proxies with respect to which holders have abstained from

 

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voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists.

Revocation of Proxies

You may revoke your proxy at any time before it is voted at the special meeting by casting a different vote by telephone or the Internet, by executing a later-voted proxy by mail, by voting by ballot at the special meeting, or by providing written notice of the revocation to AsiaInfo’s Legal Department, at our principal executive offices.

Solicitation of Proxies

The cost of soliciting proxies will be borne by AsiaInfo. Proxies may be solicited by certain of AsiaInfo’s directors, officers and employees, without additional compensation, in person or by telephone, email or facsimile. In addition, AsiaInfo has retained Morrow & Co. to assist in such solicitation. The fee to be paid to such firm is not expected to exceed US$7,500 plus reasonable out-of-pocket costs and expenses. AsiaInfo may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation materials to such beneficial owners.

Delivery of Proxy Materials to Households Where Two or More Stockholders Reside

As permitted by the Securities Exchange Act of 1934, as amended, or the Exchange Act, only one copy of this Proxy Statement is being delivered to stockholders residing at the same address, unless stockholders have notified us of their desire to receive multiple copies of the Proxy Statement. This is known as householding. If any stockholder at such an address wishes to discontinue householding and receive a separate copy of the Proxy Statement, they should notify their broker, bank or other nominee. Stockholders sharing an address to which a single copy of the Proxy Statement was delivered can also request prompt delivery of a separate copy of the Proxy Statement by contacting us at AsiaInfo Holdings, Inc., Attn: Legal Department, 4th Floor, Zhongdian Information Tower, 6 Zhongguancun South Street, Haidian District, Beijing, People’s Republic of China, +8610-8216-6688.

We will promptly deliver, upon oral or written request, a separate copy of this Proxy Statement to any stockholder residing at an address to which only one copy was mailed. Requests for additional copies for this Proxy Statement should be directed to AsiaInfo’s Legal Department, at our principal executive offices.

 

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THE COMBINATION

The following is a discussion of the Combination and the material terms of the Combination Agreement between AsiaInfo and Linkage Cayman. You are urged to read carefully the Combination Agreement in its entirety, a copy of which is attached as Annex A to this Proxy Statement and is incorporated by reference herein.

The Companies

AsiaInfo

AsiaInfo is a leading provider of software solutions and IT services for the telecom industry in China. In the telecommunications market, our software and services enable our customers to build, maintain, operate, manage and continuously improve their communications infrastructure. Our largest customers are the major telecommunications carriers in China and their provincial subsidiaries. In addition to providing customized software solutions to China’s telecommunications carriers, we also offer sophisticated IT security products and services to many small- and medium-sized companies and government agencies in China.

We commenced our operations in the United States in 1993 and moved our major operations from the United States to China in 1995. We conduct the bulk of our business through our operating subsidiaries, most of which are Chinese companies.

Linkage Technologies

Like AsiaInfo, Linkage Technologies is a leading provider of software solutions and IT services for the telecom industry in China. Linkage Technologies develops and implements core operating systems for all three telecom operators in China, namely, China Mobile, China Telecom and China Unicom.

Linkage Technologies was organized under the laws of the British Virgin Islands in July 2003. Linkage Technologies conducts its operations through its direct and indirect subsidiaries, including Linkage HK, Linkage Nanjing and Linkage Suzhou. For more information on Linkage Technologies’ corporate history and structure, see “Information about Linkage Technologies—Corporate History and Structure” on page [    ].

Background of the Combination

AsiaInfo has periodically reviewed and assessed trends and conditions impacting AsiaInfo, including those in the information technology industries generally, and in China’s telecommunications software industry in particular. From time to time, AsiaInfo’s board of directors has reviewed the strategic options potentially available to achieve AsiaInfo’s desired scale, including internal growth through customer and product initiatives, investing in its business, and acquisitions of other businesses. As a result of increased competition in AsiaInfo’s industry and ongoing consolidation within the global software and telecommunications industries generally, AsiaInfo has considered the possibility of various strategic combinations and commercial arrangements and, in the past, has had discussions from time to time with potential strategic partners.

Discussions regarding a business combination transaction between AsiaInfo and Linkage Technologies began in April 2009, when representatives of AsiaInfo engaged in discussions with representatives of Linkage Technologies and its parent company, Linkage Cayman. The parties discussed the synergies that could potentially be realized as a result of a combination of the two companies. While AsiaInfo continued to evaluate Linkage Technologies and Linkage Cayman internally at this time, the discussions between AsiaInfo and Linkage Technologies did not lead to a firm proposal by AsiaInfo or otherwise progress to more advanced negotiations at this time.

 

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From April to September 2009, representatives of AsiaInfo and Linkage Cayman, with their respective financial advisors, continued their discussions from time to time regarding the merits of a business combination.

On September 17, 2009, AsiaInfo and Linkage Cayman entered into a confidentiality agreement in furtherance of a potential business combination transaction. The respective parties commenced limited due diligence on each other with respect to a business combination in the last week of September 2009.

On September 29, 2009, the AsiaInfo board of directors held a special meeting, which was attended by representatives of management, DLA Piper, outside legal counsel to AsiaInfo, and BofA Merrill Lynch and The Hina Group Holdings, or Hina, together with BofA Merrill Lynch, the financial advisors to AsiaInfo. The AsiaInfo board of directors considered AsiaInfo’s strategic alternatives, the business of Linkage Technologies, the strategic rationale for AsiaInfo’s proposed acquisition of Linkage Technologies, the valuation of Linkage Technologies, and certain legal issues. The AsiaInfo board of directors also considered the key provisions of a preliminary terms sheet prepared by AsiaInfo management upon consultation with its legal and financial advisors and the status of discussions with Linkage Cayman. The AsiaInfo board of directors determined that a business combination with Linkage Technologies would present strategic advantages to AsiaInfo, that AsiaInfo should enter into further negotiations with Linkage Cayman, and that AsiaInfo should present a preliminary term sheet to Linkage Cayman.

On September 29, 2009, AsiaInfo delivered a preliminary non-binding term sheet to Linkage Cayman proposing the acquisition of all of the share capital of Linkage Technologies in exchange for a combination of cash and AsiaInfo common stock. The term sheet proposed that the parties agree to exclusive negotiations with respect to the proposed transaction, subject to certain exceptions.

On September 30, 2009, in response to the term sheet AsiaInfo had provided, AsiaInfo received a counterproposal in the form of a non-binding term sheet from Linkage Cayman. In addition to proposing an increased purchase price for Linkage Technologies, Linkage Cayman proposed that the combined company change its Chinese name to “Linkage-AsiaInfo.” The term sheet proposed that the parties agree to exclusive negotiations with respect to the proposed transaction, subject to certain exceptions.

During October 2009, representatives of AsiaInfo, Linkage Cayman, and their respective legal and financial advisors continued their discussions regarding the structure of transaction, the valuation of Linkage Technologies, the consideration, and other material terms regarding a proposed transaction. Representatives of Linkage Cayman indicated that the aggregate consideration would need to be increased above the amount AsiaInfo had initially offered in its proposed term sheet in order to be acceptable to Linkage Cayman. The parties also discussed the synergies that could potentially be realized as a result of a combination of the two companies. In addition, during October 2009, management and the board of directors of AsiaInfo conferred with BofA Merrill Lynch and Hina regarding the valuation of Linkage Technologies.

On November 11, 2009, the AsiaInfo board of directors held a special meeting, which was attended by representatives of management, DLA Piper and BofA Merrill Lynch, to consider the combination transaction with Linkage Technologies. The AsiaInfo board of directors considered the status of the negotiations, the structure of the transaction, the strategic rationale for the transaction, the proposed valuation, the recent increase in the trading price of AsiaInfo’s common stock and its valuation implications, the impact of the transaction on AsiaInfo’s customers, and other key business and legal issues. Representatives of AsiaInfo’s management, DLA Piper, and BofA Merrill Lynch responded to questions regarding the transaction and the proposed terms. The AsiaInfo board of directors authorized and directed management to negotiate, finalize and execute a term sheet for the acquisition of Linkage Technologies. The AsiaInfo board of directors authorized and directed management to work with AsiaInfo’s legal counsel to prepare and negotiate a definitive agreement and related ancillary agreements for final approval by the AsiaInfo board of directors.

 

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On November 12, 2009, AsiaInfo delivered a new term sheet to Linkage Cayman for the acquisition of all of the share capital of Linkage Technologies for US$50 million in cash and shares of AsiaInfo common stock equal to 37.5% of the outstanding equity of the combined company on a fully diluted basis. Under the new term sheet, the English and Chinese names of the combined company would be “AsiaInfo-Linkage,” although Linkage Technologies’ indirect wholly-owned subsidiary, Linkage Nanjing, would be named “Linkage-AsiaInfo” in Chinese. The term sheet also proposed that the parties agree to exclusive negotiations with respect to the proposed transaction, subject to certain exceptions, including that Linkage Cayman would be permitted to pursue its initial public offering in the U.S. pursuant to its registration statement on Form F-1. AsiaInfo and Linkage Cayman both signed the term sheet.

On November 12, 2009, AsiaInfo sent Linkage Cayman a supplemental due diligence request list requesting various information and documents relating to Linkage Cayman and its subsidiaries. Upon execution of the term sheet and until the execution of the Combination Agreement, representatives of AsiaInfo, with the assistance of representatives from BofA Merrill Lynch, Hina, DLA Piper, and Han Kun Law Offices, PRC counsel to AsiaInfo, conducted extensive due diligence on Linkage Cayman and its subsidiaries covering a broad range of topics, including corporate, commercial, intellectual property, financial, accounting, legal and business matters.

From November 12, 2009 until the execution of the Combination Agreement, representatives of AsiaInfo, BofA Merrill Lynch, Hina, DLA Piper, Linkage Cayman, and Linkage Cayman’s financial and legal advisors continued to discuss, in Beijing and via conference calls, drafting of definitive agreements, due diligence, and the terms of the transaction. During this timeframe, the parties also held extensive discussions regarding the Linkage Cayman representations and warranties, restrictions on Linkage Cayman’s and AsiaInfo’s conduct during the period between the signing of the Combination Agreement and the closing of the Combination, regulatory reviews of the Combination, post-Combination governance matters, termination fees, the ability of AsiaInfo’s board of directors to change its recommendations to AsiaInfo’s stockholders and the balancing of restrictions against fiduciary obligations to stockholders, adjustments to the purchase price, indemnification and the size, duration and recourse to an escrow account to secure indemnification and other obligations to AsiaInfo.

From November 16, 2009 until the execution of the Combination Agreement, AsiaInfo, Linkage Cayman, and their respective legal and financial advisors exchanged drafts of the Combination Agreement and held extensive negotiations relating to its terms and conditions.

On November 18, 2009, Linkage Cayman publicly filed its registration statement on Form F-1 with the SEC, which sought to register an unspecified number of American Depository Shares, or ADSs. On November 19, 2009, Linkage Cayman publicly filed its registration statement on Form F-6 in connection with its proposed offering of ADSs. On November 20, 2009, Linkage Cayman publicly filed its Form 8-A registration statement in connection with its ordinary shares underlying its ADSs, which the New York Stock Exchange certified on November 25, 2009.

On November 25, 2009, Linkage Cayman filed Amendment No. 1 to its registration statement on Form F-1 with the SEC, which sought to register 10,200,000 ADSs, each representing the right to receive ten Linkage Cayman ordinary shares, with an estimated price range of between $13.00 and $15.00 per ADS. AsiaInfo was informed that Linkage Cayman would commence a road show in Asia for its proposed public offering on November 26, 2009, which would then move to Europe and the U.S.

On November 28, 2009, the AsiaInfo board of directors held a special meeting, which was attended by representatives of management, DLA Piper, BofA Merrill Lynch, and Hina. The AsiaInfo board of directors considered the status of AsiaInfo’s negotiations with Linkage Cayman. Management of AsiaInfo reviewed with BofA Merrill Lynch and DLA Piper open business issues in the Combination Agreement, the status of negotiations, the revised transaction terms, the business integration outlook and management issues for the combined company. Management and representatives of BofA Merrill Lynch and DLA Piper updated the AsiaInfo board of directors regarding financial and legal due diligence that had been conducted on Linkage

 

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Cayman and its subsidiaries. Thereafter, the AsiaInfo board of directors directed management and AsiaInfo’s advisors to proceed with negotiations regarding the Combination, with a view toward finalizing a definitive agreement for the further consideration of the AsiaInfo board of directors. The AsiaInfo board of directors also proposed to hold an informal teleconference with Mr. Libin Sun, Chairman and Chief Executive Officer of Linkage Cayman.

On November 29, 2009, certain members of AsiaInfo’s board of directors and management held an informal teleconference with Libin Sun. The parties discussed several open business issues and transaction terms, focusing on business integration and post-Combination management issues.

On December 4, 2009, the AsiaInfo board of directors again convened a special meeting to review the status of AsiaInfo’s negotiations with Linkage Cayman and the definitive agreements. Management of AsiaInfo and representatives of DLA Piper, BofA Merrill Lynch and Hina were present at the meeting. Management of AsiaInfo reviewed and summarized the status of the Combination Agreement. Representatives of BofA Merrill Lynch and DLA Piper summarized the structure and terms of the transaction, including changes from the terms discussed at the prior meeting and changes from the terms reflected in the non-binding term sheet. Also at this meeting, BofA Merrill Lynch reviewed with AsiaInfo’s board of directors its financial analysis of the Consideration and delivered to AsiaInfo’s board of directors an oral opinion which was confirmed by delivery of a written opinion dated December 4, 2009, to the effect that, as of that date, and based on and subject to various assumptions and limitations described in its opinion, the Consideration to be paid in the Combination by AsiaInfo is fair, from a financial point of view, to AsiaInfo. The full text of BofA Merrill Lynch’s written opinion dated December 4, 2009, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached to this Proxy Statement as Annex H. DLA Piper then presented a due diligence report regarding various legal, financial and business issues that had been analyzed during due diligence of Linkage Cayman and its subsidiaries. The AsiaInfo board of directors posed numerous questions of management regarding business terms, integration issues, the timetable for closing the transaction, and regulatory matters relating to the transaction. Following the discussion, the AsiaInfo board of directors unanimously approved the Combination and the related transactions, approved the Combination Agreement and the ancillary agreements, and recommended that the stockholders of AsiaInfo approve the Combination and the related transactions.

On December 4, 2009, representatives of AsiaInfo and Linkage Cayman finalized the Combination Agreement. As of that date, AsiaInfo and Linkage Cayman entered into the Combination Agreement. Under the Combination Agreement, AsiaInfo would acquire all of the share capital of Linkage Technologies for US$60 million in cash and 26,832,731 shares of AsiaInfo common stock which is expected to represent approximately 35.8% of the outstanding equity of the combined company on a fully diluted basis. The name of the combined company will be, and the combined company will be referred to and branded in Chinese as, “AsiaInfo-Linkage,” although the Linkage Technologies subsidiary in Nanjing would be referred to and branded as “Linkage-AsiaInfo.” Following signing, certain restrictions would apply to the parties regarding alternative transactions, including a restriction on Linkage Cayman from selling securities under or related to its registration statement on Form F-1 or in any similar public offering or private placement. The terms of the Combination Agreement are summarized under “The Combination Agreement” beginning on page [    ].

Concurrently with entering into the Combination Agreement, Edward Tian and James Ding, AsiaInfo directors and significant stockholders, executed a voting agreement with Linkage Cayman; AsiaInfo, Linkage Cayman and Messrs. Tian and Mr. Sun entered into a stockholders’ agreement; and LT International and Messrs. Sun, Guoxiang Liu, Haidong Pang, Xiwei Huang and Edward Tian entered into lock-up agreements.

On December 6, 2009, AsiaInfo and Linkage Cayman issued a joint press release announcing the Combination, the execution of the Combination Agreement, and related matters.

 

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AsiaInfo’s Reasons for the Combination

In the course of determining that the Combination and the Combination Agreement are advisable and in the best interests of AsiaInfo and its stockholders, the AsiaInfo board of directors consulted with its management, as well as its financial and legal advisors. The AsiaInfo board of directors concluded that the Combination could enhance stockholder value through:

 

   

the complementary nature of the technology, products and services of AsiaInfo and Linkage Technologies, which may allow the combined company to better service its customers and accelerate the development of new technology;

 

   

the ability to broaden and integrate the companies’ products and services, which may enable the combined company to meet the needs of its customer more effectively and efficiently;

 

   

combined technological resources of AsiaInfo and Linkage Technologies, which may allow the combined company to compete more effectively by providing it with enhanced abilities to develop new products and greater functionality for existing products;

 

   

the creation of larger sales and services organizations, greater marketing resources, and financial strength, which may present improved opportunities for marketing the products and services of the combined company;

 

   

the combined experience, financial resources, size and breadth of product and service offerings of AsiaInfo and Linkage Technologies, which may allow the combined company to respond more quickly and effectively to technological change, increased competition and shifting market demands;

 

   

the opportunity to utilize the skills and resources of the combined management teams;

 

   

the potential for the Combination to provide an improved platform for future growth; and

 

   

scale and cost synergies, which may enhance AsiaInfo’s ability to effectively meet the demands for its products and services.

The AsiaInfo board of directors considered a number of factors and risks relating to the Combination, including the following:

 

   

its strategic benefits;

 

   

historical information regarding AsiaInfo’s and Linkage Technologies’ respective businesses, prospects, financial performance and condition, operations, technology, management and competitive position;

 

   

management’s view of the financial condition, results of operations and businesses of AsiaInfo and Linkage Technologies before and after giving effect to the Combination;

 

   

current financial and market conditions;

 

   

the relationship between the market value of AsiaInfo’s common stock and the consideration to be paid to the shareholders of Linkage Technologies;

 

   

management’s view of the prospects of AsiaInfo and Linkage Cayman as separate, independent entities should the Combination not occur;

 

   

other strategic alternatives of AsiaInfo;

 

   

the opinion of BofA Merrill Lynch dated December 4, 2009, to Asiainfo’s board of directors as to the fairness, from a financial point of view and as of the date of the opinion, of the Consideration to be paid in the Combination by AsiaInfo as more fully discussed in the section entitled “The Combination—Opinion of AsiaInfo’s Financial Advisor” beginning on page [    ];

 

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reports from management and AsiaInfo’s legal, accounting and financial advisors regarding the results of the due diligence investigation of Linkage Cayman and its subsidiaries;

 

   

the risk that the potential benefits of the Combination may not be fully realized;

 

   

the possibility that the Combination may not be consummated or may be unduly delayed;

 

   

the effect that the Combination may have on sales, operating results, and key personnel;

 

   

the ability to attract and retain management and key personnel;

 

   

the potential for diversion of management and employee attention from other strategic priorities;

 

   

the substantial challenges and costs to be incurred in connection with the Combination, including integration costs and transaction expenses;

 

   

the risks associated with a fixed number of shares payable to the shareholders of Linkage Cayman under the Combination Agreement, which subjects the parties to market risk if AsiaInfo’s stock price fluctuates significantly prior to the Combination;

 

   

the $17.6 million termination fee payable to Linkage Cayman if the Combination Agreement is terminated as a result of a material and uncured breach of the representations and warranties or covenants of AsiaInfo, or a change by the board of directors of AsiaInfo of its recommendation that the stockholders vote in favor of the proposals to be considered at the special meeting; and

 

   

the $10.0 million termination fee payable to Linkage Cayman if the Combination Agreement is terminated due to the failure of the AsiaInfo stockholders to approve the Consideration Proposal or the Name Change Proposal.

The foregoing discussion of the factors considered by AsiaInfo’s board of directors is not intended to be exhaustive but summarizes the material factors and risks considered in making its recommendation. In view of the wide variety of factors considered in connection with its evaluation of the Combination and the complexity of these matters, the AsiaInfo board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the AsiaInfo board of directors may have given different weight to different factors.

In addition, the AsiaInfo board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, AsiaInfo’s management team and AsiaInfo’s legal and financial advisors. Based on the totality of the information presented, AsiaInfo’s board of directors determined that AsiaInfo should proceed with the Combination and the Combination Agreement, and recommends that AsiaInfo’s stockholders approve the Consideration Proposal, the Name Change Proposal and the Adjournment Proposal.

Linkage Cayman’s Reasons for the Combination

In reaching a conclusion to approve the Combination, the Linkage Cayman board of directors consulted with its management, as well as its financial and legal advisors. The board of directors considered a number of factors, including, without limitation, the following:

 

   

The strategic fit between the companies, including the companies’ product portfolios and the increased operational scale and scope that the combined company will provide, which may result in a more diversified revenue base and enable the combined company to better meet its customers’ needs;

 

   

The potential synergies expected to be derived from the Combination of Linkage Technologies’ and AsiaInfo’s businesses, including elimination of duplicative corporate costs, decreased research and development costs, and tax benefits;

 

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Linkage Cayman’s and Linkage Technologies’ management’s support of the proposed Combination;

 

   

That the shareholders of Linkage Cayman will receive a substantial cash payment, while at the same time retaining an equity stake in the combined company, which would provide the shareholders of Linkage Cayman the opportunity, if they so choose, to participate in the future financial performance of the combined company. In that regard, Linkage Cayman’s board of directors understood that general stock market conditions and other factors will cause the value of the portion of the Combination consideration payable in AsiaInfo’s common stock to fluctuate, perhaps significantly, but was of the view that on a long-term basis it would be desirable for shareholders to have an opportunity, if they so choose, to retain a continuing investment in the combined company;

 

   

The fact that following the completion of the Combination the board of directors of the combined company would include two current non-independent Linkage Cayman directors, which the Linkage Cayman board of directors believed would provide the AsiaInfo board of directors with a greater level of knowledge regarding Linkage Technologies’ operations and thereby provide a greater level of stability regarding those operations as they become part of AsiaInfo’s business;

 

   

The review by the Linkage Cayman board of directors with its legal and financial advisors of the structure of the Combination and the financial and other terms of the Combination Agreement, including the parties’ representations, warranties and covenants, the conditions to their respective obligations and the termination provisions, as well as the Linkage Cayman board of directors’ evaluation of the likely time period necessary to close the Combination;

 

   

The fact that the Combination Agreement provides for a fixed number of shares of AsiaInfo common stock to be issued in the Combination regardless of any change in the value of Linkage Technologies ordinary shares or AsiaInfo common stock between the execution of the Combination Agreement and closing of the Combination. The Linkage Cayman board of directors understood that the shareholders of Linkage Cayman will not receive additional consideration if the value per share of AsiaInfo common stock is lower at the time of closing than prior to the execution of the Combination Agreement, but was of the view that it is desirable for the shareholders of Linkage Cayman to receive the benefit of any increase in value of AsiaInfo common stock during that time period;

 

   

the $17.6 million termination fee payable to Linkage Cayman if the Combination Agreement is terminated as a result of a material and uncured breach of the representations and warranties or covenants of AsiaInfo, or a change by the board of directors of AsiaInfo of its recommendation that the stockholders vote in favor of the proposals to be considered at the special meeting; and

 

   

the $10.0 million termination fee payable to Linkage Cayman if the Combination Agreement is terminated due to the failure of the AsiaInfo stockholders to approve the Consideration Proposal or the Name Change Proposal.

In the course of its deliberations, the Linkage Cayman board of directors also considered the following factors and risks concerning the Combination:

 

   

the possibility that the Combination might not be completed in a timely manner or at all;

 

   

the possibility that the expected cost savings and synergies will not be achieved. Achieving the expected cost savings and synergies is subject to a number of risks and uncertainties and may not occur in full or at all. For more information, see the discussion provided under the section titled “Risk Factors—Risks Relating to the Combination—Integrating the combined company will divert management’s attention and resources, and the anticipated benefits of the Combination, including anticipated cost savings, may not be realized fully or at all or may take longer to realize than expected.” beginning on page [    ].

 

   

the risk that AsiaInfo may terminate the Combination Agreement;

 

   

the risks associated with obtaining the AsiaInfo stockholder votes; and

 

   

the cost of foregoing Linkage Cayman’s initial public offering and other strategic alternatives.

 

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The foregoing information and factors considered by Linkage Cayman’s board of directors are not intended to be exhaustive but are believed to summarize the material factors and risks considered by Linkage Cayman’s board of directors. In view of the wide variety of factors considered in connection with its evaluation of the Combination and the complexity of these matters, Linkage Cayman’s board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of Linkage Cayman’s board of directors may have given different weight to different factors. Linkage Cayman’s board of directors conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, Linkage Cayman’s management and Linkage Cayman’s legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination.

Linkage Cayman’s board of directors determined that the Combination Agreement and the Combination are advisable, fair to and in the best interest of the shareholders of Linkage Cayman and approved the Combination. Linkage Cayman is incorporated as an exempted limited company under the laws of the Cayman Islands. In the opinion of Linkage Cayman’s Cayman Islands legal counsel, Conyers Dill & Pearman, under Cayman Islands law, and under Linkage Cayman’s articles of association, no vote of Linkage Cayman shareholders is necessary for the completion of the Combination.

Opinion of AsiaInfo’s Financial Advisor

AsiaInfo has retained BofA Merrill Lynch to act as AsiaInfo’s financial advisor in connection with the Combination. BofA Merrill Lynch is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. AsiaInfo selected BofA Merrill Lynch to act as AsiaInfo’s financial advisor in connection with the Combination on the basis of BofA Merrill Lynch’s experience in transactions similar to the Combination and its reputation in the investment community.

On December 4, 2009, at a meeting of AsiaInfo’s board of directors held to evaluate the Combination, BofA Merrill Lynch delivered to AsiaInfo’s board of directors an oral opinion, which was confirmed by delivery of a written opinion dated December 4, 2009, to the effect that, as of the date of the opinion and based on and subject to various assumptions and limitations described in its opinion, the Consideration to be paid in the Combination by AsiaInfo is fair, from a financial point of view, to AsiaInfo.

The full text of BofA Merrill Lynch’s written opinion to AsiaInfo’s board of directors, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex H to this document and is incorporated by reference herein in its entirety. The following summary of BofA Merrill Lynch’s opinion is qualified in its entirety by reference to the full text of the opinion. BofA Merrill Lynch delivered its opinion to AsiaInfo’s board of directors for the benefit and use of AsiaInfo’s board of directors in connection with and for purposes of its evaluation of the Consideration to be paid in the Combination by AsiaInfo from a financial point of view. BofA Merrill Lynch’s opinion does not address any other aspect of the Combination and does not constitute a recommendation to any stockholder as to how to vote or act in connection with the proposed Combination.

In connection with rendering its opinion, BofA Merrill Lynch, among other things:

 

   

reviewed certain publicly available business and financial information relating to Linkage Technologies and AsiaInfo;

 

   

reviewed certain financial forecasts relating to Linkage Technologies prepared by the management of AsiaInfo, referred to herein as the AsiaInfo-Target forecasts, and discussed with the management of AsiaInfo its assessments as to the relative likelihood of achieving the future financial results reflected in the AsiaInfo-Target forecasts;

 

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reviewed certain internal financial and operating information with respect to the business, operations and prospects of AsiaInfo furnished to or discussed with BofA Merrill Lynch by the management of AsiaInfo, including certain financial forecasts relating to AsiaInfo prepared by the management of AsiaInfo, referred to herein as the AsiaInfo forecasts;

 

   

reviewed certain estimates as to the amount and timing of cost savings and revenue enhancements, which are referred to herein as the expected synergies, anticipated by the management of AsiaInfo to result from the Combination;

 

   

discussed the past and current business, operations, financial condition and prospects of Linkage Technologies with members of senior managements of Linkage Technologies and AsiaInfo, and discussed the past and current business, operations, financial condition and prospects of AsiaInfo with members of senior management of AsiaInfo;

 

   

reviewed the potential pro forma financial impact of the Combination on the future financial performance of AsiaInfo, including the potential effect on AsiaInfo’s estimated earnings per share;

 

   

reviewed the trading history for the common stock of AsiaInfo;

 

   

compared certain financial information of Linkage Technologies and financial and stock market information of AsiaInfo with similar information of other companies BofA Merrill Lynch deemed relevant;

 

   

compared certain financial terms of the Combination to financial terms, to the extent publicly available, of other transactions BofA Merrill Lynch deemed relevant;

 

   

reviewed the relative financial contributions of Linkage Technologies and AsiaInfo to the future financial performance of the combined company on a pro forma basis;

 

   

reviewed a draft, dated December 4, 2009, of the Combination Agreement; and

 

   

performed such other analyses and studies and considered such other information and factors as BofA Merrill Lynch deemed appropriate.

In arriving at its opinion, BofA Merrill Lynch assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with it and relied upon the assurances of the managements of AsiaInfo and Linkage Technologies that they were not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the AsiaInfo-Target forecasts, AsiaInfo forecasts and the expected synergies, BofA Merrill Lynch was advised by AsiaInfo, and assumed, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of AsiaInfo as to the future financial performance of Linkage Technologies and AsiaInfo and the other matters covered thereby. BofA Merrill Lynch did not make or was not provided with any independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of Linkage Technologies or AsiaInfo, nor did it make any physical inspection of the properties or assets of Linkage Technologies or AsiaInfo. BofA Merrill Lynch did not evaluate the solvency or fair value of Linkage Technologies or AsiaInfo under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. BofA Merrill Lynch assumed, at the direction of AsiaInfo, that the Combination would be completed in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Combination, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, would be imposed that would have an adverse effect on AsiaInfo or the contemplated benefits of the Combination. BofA Merrill Lynch also assumed that the final form of the Combination Agreement would be substantially similar to the last draft reviewed by it in all respects material to its opinion.

BofA Merrill Lynch expressed no view or opinion as to any terms or other aspects of the Combination (other than the Consideration to be paid in the Combination by AsiaInfo to the extent expressly specified in its

 

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opinion), including, without limitation, the form or structure of the Combination. BofA Merrill Lynch’s opinion was limited to the fairness, from a financial point of view, to AsiaInfo of the Consideration to be paid in the Combination by AsiaInfo and no opinion or view was expressed with respect to any consideration received in connection with the Combination by the holders of any other class of securities, creditors or other constituencies of any party. In addition, no opinion or view was expressed with respect to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to any of the officers, directors or employees of any party to the Combination, or class of such persons, relative to the Consideration to be paid in the Combination by AsiaInfo. Furthermore, no opinion or view was expressed as to the relative merits of the Combination in comparison to other strategies or transactions that might be available to AsiaInfo or in which AsiaInfo might engage or as to the underlying business decision of AsiaInfo to proceed with or effect the Combination. BofA Merrill Lynch did not express any opinion as to the prices at which AsiaInfo common stock would trade at any time, including following announcement or consummation of the Combination. In addition, BofA Merrill Lynch expressed no opinion or recommendation as to how any stockholder should vote or act in connection with the Combination or any related matter. Except as described above, AsiaInfo imposed no other limitations on the investigations made or procedures followed by BofA Merrill Lynch in rendering its opinion.

BofA Merrill Lynch’s opinion was necessarily based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and the information made available to BofA Merrill Lynch as of the date of its opinion. It should be understood that subsequent developments may affect its opinion, and BofA Merrill Lynch does not have any obligation to update, revise or reaffirm its opinion. The issuance of BofA Merrill Lynch’s opinion was approved by BofA Merrill Lynch’s Americas Fairness Opinion Committee.

The following represents a brief summary of the material financial analyses presented by BofA Merrill Lynch to AsiaInfo’s board of directors in connection with its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by BofA Merrill Lynch, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses performed by BofA Merrill Lynch. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by BofA Merrill Lynch.

Linkage Technologies Financial Analyses

Selected Publicly Traded Companies Analysis. Using publicly available securities research analyst estimates and other publicly available financial and stock market information, BofA Merrill Lynch compared selected financial data of Linkage Technologies with financial and trading data for selected publicly traded companies engaged in businesses that BofA Merrill Lynch judged to be reasonably comparable to those of Linkage Technologies:

 

   

AsiaInfo Holdings, Inc.

 

   

Neusoft Corporation

 

   

Longtop Financial Technologies Limited

 

   

VanceInfo Technologies Inc.

 

   

BOCO Inter-Telecom Corporation

For each of the companies identified above, BofA Merrill Lynch calculated various valuation multiples, including:

 

   

the ratio of enterprise value to the estimated earnings before interest, taxes, depreciation and amortization, or EBITDA, for calendar years 2009 and 2010;

 

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the ratio of enterprise value to the estimated earnings before interest and taxes, or EBIT, for calendar years 2009 and 2010; and

 

   

the ratio of share price to the estimated cash earnings per share, or cash EPS, for calendar years 2009 and 2010.

Based upon its analysis of the full ranges of multiples calculated for the companies identified above and its consideration of various factors and judgments about current market conditions and the characteristics of such companies (including qualitative factors and judgments involving non-mathematical considerations), BofA Merrill Lynch determined relevant ranges of multiples for such companies (which relevant ranges were narrower than the full ranges of such multiples). The relevant ranges of such multiples, as determined by BofA Merrill Lynch, are set forth in the tables below.

For the purpose of its analysis, BofA Merrill Lynch calculated the enterprise value as the market capitalization plus total debt, minority interests and preferred stock, less cash and cash equivalents, and BofA Merrill Lynch calculated the estimated cash EPS as estimated EPS under generally accepted accounting principles excluding amortization of intangible property, excluding stock based compensation expenses and excluding one-time charges. To calculate these valuation multiples, BofA Merrill Lynch used EBITDA, EBIT and cash EPS projections reported by independent research analyst reports and closing trading prices of equity securities of each identified company on December 3, 2009.

The following table summarizes the derived relevant ranges of multiples for the companies identified above and the ranges of equity values per Linkage Technologies share implied by such multiples, rounded to the nearest $1.00, and based on the 9,288 total ordinary shares of Linkage Technologies outstanding from which the relevant ranges of equity value of Linkage Technologies can also be derived:

 

     Multiple Range    Implied Equity Value
per Linkage
Technologies Share

Enterprise Value/Calendar Year 2009 Estimated EBITDA

   21.0x-26.0x    $ 59,555-$73,417

Enterprise Value/Calendar Year 2010 Estimated EBITDA

   17.0x-21.0x    $ 62,508-$76,902

Enterprise Value/Calendar Year 2009 Estimated EBIT

   26.0x-31.0x    $ 70,315-$83,581

Enterprise Value/Calendar Year 2010 Estimated EBIT

   19.0x-24.0x    $ 66,866-$84,111

Price/Calendar Year 2009 Estimated Cash EPS

   26.0x-34.0x    $ 65,699-$85,914

Price/Calendar Year 2010 Estimated Cash EPS

   21.0x-27.0x    $ 72,011-$92,585

No company used in this analysis is identical or directly comparable to Linkage Technologies. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which Linkage Technologies was compared.

Selected Precedent Transactions Analysis. Using publicly available information, BofA Merrill Lynch examined certain multiples paid in certain transactions that BofA Merrill Lynch deemed to be relevant. The precedent transactions that BofA Merrill Lynch identified were:

 

Acquirer

  

Target

Syniverse Technologies Inc.

   Billing Services Group Luxembourg S.a.r.l

Oracle Corporation

   Metasolv Inc.

Amdocs Limited

   Cramer Systems Group Ltd.

Amdocs Limited

   Qpass Inc.

IBM Corporation

   Micromuse Inc.

Oracle Corporation

   i-Flex Solutions Limited

 

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For each of the transactions identified above, BofA Merrill Lynch calculated various valuation multiples after excluding one-time charges, including:

 

   

the ratio of enterprise value implied by the transaction to the historical revenue for the identified company for the latest twelve months before the quarter in which the relevant transaction was announced; and

 

   

the ratio of enterprise value implied by the transaction to the historical EBITDA for the identified company for the latest twelve months before the quarter in which the relevant transaction was announced.

Based upon its analysis of the full ranges of multiples calculated for the transactions identified above and its consideration of various factors and judgments about current market conditions and the characteristics of such transactions and the companies involved in such transactions (including qualitative factors and judgments involving non-mathematical considerations), BofA Merrill Lynch determined relevant ranges of multiples for such transactions (which relevant ranges were narrower than the full ranges of such multiples). The relevant ranges of such multiples, as determined by BofA Merrill Lynch, are set forth in the table below.

All calculations of multiples paid in the transactions identified above were based on public information available at the time of public announcement of such transactions. BofA Merrill Lynch’s analysis did not take into account different market and other conditions during the period in which the transactions identified above occurred.

The following table summarizes the derived relevant ranges of multiples for the transactions identified above and the ranges of equity values per Linkage Technologies share implied by such multiples, rounded to the nearest $1.00, and based on the 9,288 total ordinary shares of Linkage Technologies outstanding from which the relevant ranges of equity value of Linkage Technologies can also be derived:

 

     Multiple Range    Implied Equity Value
per Linkage
Technologies Share

Enterprise Value/Latest Twelve Months Revenue

   4.0x-6.0x    $65,123-$97,017

Enterprise Value/Latest Twelve Months EBITDA

   30.0x-40.0x    $84,507-$112,231

No company, business or transaction used in this analysis is identical or directly comparable to Linkage Technologies, AsiaInfo or the Combination. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which Linkage Technologies, AsiaInfo and the Combination were compared.

Discounted Cash Flow Analysis. BofA Merrill Lynch performed a discounted cash flow analysis of Linkage Technologies, without giving effect to the proposed Combination, for the period from January 1, 2010 through December 31, 2014. BofA Merrill Lynch calculated ranges of equity values per Linkage Technologies share based upon the sum of the discounted net present value of Linkage Technologies’ five year stream of projected unlevered free cash flows plus the discounted net present value of the terminal value based on a range of multiples applied to projected EBITDA for the Linkage Technologies fiscal year ending December 31, 2014. The projected unlevered free cash flows were based on AsiaInfo management’s projections for the entire period.

Using discount rates ranging from 10.5% to 13.5% and terminal value multiples of estimated EBITDA for the Linkage Technologies fiscal year ended December 31, 2014 ranging from 12.0x to 18.0x, BofA Merrill Lynch calculated the following range of implied equity values per Linkage Technologies share rounded to the

 

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nearest $1.00, and based on the 9,288 total ordinary shares of Linkage Technologies outstanding from which the relevant range of equity value of Linkage Technologies can also be derived:

 

     Low    High

Implied equity value per Linkage Technologies share

   $ 69,995    $ 109,891

AsiaInfo Financial Analyses

Analyst Stock Price Targets. Using publicly available securities research analyst estimates, BofA Merrill Lynch noted that the range of the analyst stock price targets for AsiaInfo was $24.00-$28.00 as of October 29, 2009.

Selected Publicly Traded Companies Analysis. Using publicly available securities research analyst estimates and other publicly available financial and stock market information, BofA Merrill Lynch compared selected financial and trading data of AsiaInfo with similar data for selected publicly traded companies engaged in businesses that BofA Merrill Lynch judged to be reasonably comparable to those of AsiaInfo. These companies were:

 

   

Neusoft Corporation

 

   

Longtop Financial Technologies Limited

 

   

VanceInfo Technologies Inc.

 

   

BOCO Inter-Telecom Corporation

For each of the companies identified above, BofA Merrill Lynch calculated various valuation multiples after excluding one-time charges and stock-based compensation expense, including:

 

   

the ratio of enterprise value to the estimated earnings before interest, taxes, depreciation and amortization, or EBITDA, for calendar years 2009 and 2010;

 

   

the ratio of enterprise value to the estimated earnings before interest and taxes, or EBIT, for calendar years 2009 and 2010; and

 

   

the ratio of share price to the estimated cash earnings per share, or cash EPS, for calendar years 2009 and 2010.

Based upon its analysis of the full ranges of multiples calculated for the companies identified above and its consideration of various factors and judgments about current market conditions and the characteristics of such companies (including qualitative factors and judgments involving non-mathematical considerations), BofA Merrill Lynch determined relevant ranges of multiples for such companies (which relevant ranges were narrower than the full ranges of such multiples). The relevant ranges of such multiples, as determined by BofA Merrill Lynch, are set forth in the tables below and were identical to those used for purposes of its analysis for Linkage Technologies, as described above.

For the purpose of its analysis, BofA Merrill Lynch calculated the enterprise value as the market capitalization plus total debt, minority interests and preferred stock, less cash and cash equivalents, and BofA Merrill Lynch calculated the estimated cash EPS as estimated EPS under generally accepted accounting principles excluding amortization of intangible property, excluding stock based compensation expenses and excluding one-time charges. To calculate these valuation multiples, BofA Merrill Lynch used EBITDA, EBIT and cash EPS projections reported by independent research analyst reports and closing trading prices of equity securities of each identified company on December 3, 2009.

 

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The following table summarizes the derived relevant ranges of multiples for the companies identified above and the ranges of stock prices per AsiaInfo common stock implied by such multiples, rounded to the nearest $0.01:

 

     Multiple Range    Implied Price Per
Share of AsiaInfo
Common Stock

Enterprise Value/Calendar Year 2009 Estimated EBITDA

   21.0x-26.0x    $ 23.02-$27.33

Enterprise Value/Calendar Year 2010 Estimated EBITDA

   17.0x-21.0x    $ 23.94-$28.42

Enterprise Value/Calendar Year 2009 Estimated EBIT

   26.0x-31.0x    $ 24.36-$28.10

Enterprise Value/Calendar Year 2010 Estimated EBIT

   19.0x-24.0x    $ 24.47-$29.62

Price/Calendar Year 2009 Estimated Cash EPS

   26.0x-34.0x    $ 24.82-$32.45

Price/Calendar Year 2010 Estimated Cash EPS

   21.0x-27.0x    $ 24.18-$31.09

No company used in this analysis is identical or directly comparable to AsiaInfo. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which AsiaInfo was compared.

Discounted Cash Flow Analysis. BofA Merrill Lynch performed a discounted cash flow analysis of AsiaInfo, without giving effect to the proposed Combination, for the period from January 1, 2010 through December 31, 2014. BofA Merrill Lynch calculated ranges of equity values per share of AsiaInfo’s common stock based upon the sum of the discounted net present value of AsiaInfo’s five year stream of projected unlevered free cash flows plus the discounted net present value of the terminal value based on a range of multiples applied to AsiaInfo’s projected EBITDA for the fiscal year ending December 31, 2014. The projected unlevered free cash flows were based on AsiaInfo management’s guidance for the entire period of the analysis.

Using discount rates ranging from 10.5% to 13.5% and terminal value multiples of estimated EBITDA for the AsiaInfo fiscal year ended December 31, 2014, ranging from 12.0x to 18.0x, BofA Merrill Lynch calculated the following range of implied equity values per share of AsiaInfo common stock, rounded to the nearest $0.01:

 

     Low    High

Implied equity value per share of AsiaInfo common stock

   $ 30.90    $ 45.48

Relative Valuation Analyses

For comparative purposes for the following analyses, BofA Merrill Lynch noted that the implied exchange ratio for the Consideration to be paid in the Combination was 3,147.0x, which accounts for the $60 million cash portion of the Consideration to be paid in the Combination by AsiaInfo and the 26,832,731 shares of AsiaInfo common stock to be issued by AsiaInfo in exchange for the 9,288 outstanding ordinary shares of Linkage Technologies.

 

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Relative Comparable Company Analysis. Using the comparable public trading multiples analyses for Linkage Technologies and AsiaInfo summarized above, BofA Merrill Lynch calculated implied exchange ratios by dividing the implied equity values per Linkage Technologies share by the implied equity values per share of AsiaInfo common stock. Based upon this analysis, BofA Merrill Lynch calculated the following implied exchange ratio ranges:

 

     Low    High

Enterprise Value/Calendar Year 2009 Estimated EBITDA

   2,178.8x    3,189.5x

Enterprise Value/Calendar Year 2010 Estimated EBITDA

   2,199.4x    3,212.3x

Enterprise Value/Calendar Year 2009 Estimated EBIT

   2,502.3x    3,431.5x

Enterprise Value/Calendar Year 2010 Estimated EBIT

   2,257.5x    3,437.5x

Price/Calendar Year 2009 Estimated Cash EPS

   2,024.5x    3,462.1x

Price/Calendar Year 2010 Estimated Cash EPS

   2,316.2x    3,828.8x

Relative Discounted Cash Flow Analysis. Using the standalone discounted cash flow analyses summarized above, BofA Merrill Lynch calculated the exchange ratio implied by dividing the implied discounted cash flow equity value per Linkage Technologies share, without giving effect to any effects from the Combination, by the implied discounted cash flow equity value per share of AsiaInfo common stock. Based upon this analysis, BofA Merrill Lynch calculated the following implied exchange ratio range:

 

     Low    High

Implied exchange ratio per share of AsiaInfo common stock

   1,539.2x    3,556.3x

Pro Forma Accretion/Dilution Analysis

BofA Merrill Lynch analyzed certain pro forma effects expected to result from the Combination, including, among other things, the expected effect of the Combination on the estimated cash earnings per share for AsiaInfo for calendar year 2010. Estimated financial data of Linkage Technologies were based on AsiaInfo management forecasts and estimated financial data for AsiaInfo were based on the AsiaInfo management forecasts and the AsiaInfo public forecasts. This analysis indicated that the Combination may be accretive to AsiaInfo’s cash earnings per share in 2010, assuming expected synergies. The actual results achieved by the combined company after the Combination may vary from estimated results and the variations may be material.

Other Factors

In rendering its opinion, BofA Merrill Lynch also reviewed and considered other factors, including, historical trading prices of AsiaInfo common stock during the one-year period ended December 3, 2009.

Miscellaneous

As noted above, the discussion set forth above is a summary of the material financial analyses presented by BofA Merrill Lynch to AsiaInfo’s board of directors in connection with its opinion and is not a comprehensive description of all analyses undertaken by BofA Merrill Lynch in connection with its opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to partial analysis or summary description. BofA Merrill Lynch believes that its analyses summarized above must be considered as a whole. BofA Merrill Lynch further believes that selecting portions of its analyses and the factors considered or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying BofA Merrill Lynch’s

 

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analyses and opinion. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that such analysis was given greater weight than any other analysis referred to in the summary.

In performing its analyses, BofA Merrill Lynch considered industry performance, general business and economic conditions and other matters, many of which are beyond the control of AsiaInfo and Linkage Technologies. The estimates of the future performance of AsiaInfo and Linkage Technologies in or underlying BofA Merrill Lynch’s analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those estimates or those suggested by BofA Merrill Lynch’s analyses. These analyses were prepared solely as part of BofA Merrill Lynch’s analysis of the fairness, from a financial point of view, to AsiaInfo of the Consideration to be paid in the Combination by AsiaInfo and were provided to AsiaInfo’s board of directors in connection with the delivery of BofA Merrill Lynch’s opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities have traded or may trade at any time in the future. Accordingly, the estimates used in, and the ranges of valuations resulting from, any particular analysis described above are inherently subject to substantial uncertainty and should not be taken to be BofA Merrill Lynch’s view of the actual values of AsiaInfo or Linkage Technologies.

The type and amount of consideration payable in the Combination was determined through negotiations between AsiaInfo and Linkage Cayman, rather than by any financial advisor, and were approved by AsiaInfo’s board of directors. The decision to enter into the Combination Agreement was solely that of AsiaInfo’s board of directors. As described above, BofA Merrill Lynch’s opinion and analyses were only one of many factors considered by AsiaInfo’s board of directors in its evaluation of the proposed Combination and should not be viewed as determinative of the views of AsiaInfo’s board of directors or the management of AsiaInfo with respect to the Combination or the Consideration.

AsiaInfo has agreed to pay BofA Merrill Lynch for its services in connection with the Combination an aggregate fee currently estimated to be approximately $ 1.5 million, a portion of which was payable in connection with its opinion and a significant portion of which is contingent upon the completion of the Combination. AsiaInfo also has agreed to reimburse BofA Merrill Lynch for its expenses incurred in connection with BofA Merrill Lynch’s engagement and to indemnify BofA Merrill Lynch, any controlling person of BofA Merrill Lynch and each of their respective directors, officers, employees, agents and affiliates against specified liabilities, including liabilities under the federal securities laws.

BofA Merrill Lynch and its affiliates comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and financial advisory services and other commercial services and products to a wide range of companies, governments and individuals. In the ordinary course of their businesses, BofA Merrill Lynch and its affiliates may invest on a principal basis or on behalf of customers or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions in the equity, debt or other securities or financial instruments (including derivatives, bank loans or other obligations) of AsiaInfo and certain of its respective affiliates and any other company that may be involved in the transaction contemplated hereby.

BofA Merrill Lynch and its affiliates in the future may provide investment banking, commercial banking and other financial services to AsiaInfo and may receive compensation for the rendering of these services, including acting as lead manager or sole bookrunner in connection with any financing transaction by AsiaInfo in the connection with the Combination.

Interests of AsiaInfo’s Directors, Executive Officers and Certain Significant Stockholders in the Combination

You should be aware that some of AsiaInfo’s directors and executive officers have interests in the Combination that are different from, or are in addition to, the interests of AsiaInfo stockholders generally.

 

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At the closing of the Combination, Steve Zhang will continue to be the Chief Executive Officer and President of the combined company, Wei Li will continue to be the Chief Financial Officer of the combined company, and James Ding will continue to serve as a Co-Chairman of the board of directors. Additionally, Steve Zhang, James Ding, Edward Tian, Tom Manning, Yungang Lu and Davin Mackenzie, each of whom currently serve on the AsiaInfo board of directors, are expected to continue to be members of the board of directors of the combined company.

Steve Zhang, Wei Li, Jie Li, the Vice President and General Manager of Human Resources and Administration of AsiaInfo, Jian Qi, the President and Chief Executive Officer of the Lenovo-AsiaInfo Division of AsiaInfo, and Feng Liu, the Vice President and General Manager of Research and Development of the AsiaInfo Technologies Division of AsiaInfo, hold 247,500, 60,000, 20,000, 35,000 and 44,500 performance stock units of AsiaInfo, respectively. These performance stock units vest based upon achievement of targeted increases in the Company’s operating profit. If this Combination is completed, the combined company’s results of operations could result in the vesting of some or all of these performance stock units.

Interests of Linkage Technologies’ Directors, Executive Officers and Certain Significant Shareholders in the Combination

You should be aware that Linkage Technologies’ executive officers and directors, some of whom will become executive officers and directors of AsiaInfo-Linkage following consummation of the Combination, have interests in the transaction that are different from, or in addition to, your interests as a shareholder. These interests include, among other things:

AsiaInfo will offer employment agreements (including related change of control severance agreements) to each of Libin Sun, Guoxiang Liu and Xiwei Huang, to be effective upon the closing of the Combination.

At the closing of the Combination, the initial AsiaInfo-Linkage board of directors will consist of nine directors, of which AsiaInfo will designate six directors and Linkage Cayman will designate three directors. Mr. Sun will be the Executive Co-Chairman of the board of directors of AsiaInfo-Linkage.

Upon the closing of the Combination, affiliates or immediate relatives of certain directors and officers of Linkage Technologies (including Mr. Sun, Mr. Liu and Dr. Huang), who currently beneficially own shares in Linkage Technologies, are expected to, in aggregate, beneficially own 12,068,756 shares of common stock of the combined company.

All such persons are also expected to be subject to a 24-month lock-up agreement with respect to such shares of AsiaInfo common stock as described in “The Combination Agreement—Lock-Up Agreements” beginning on page [    ]. AsiaInfo, Linkage Cayman and Mr. Sun have entered into a stockholders’ agreement as described in “The Combination Agreement—Stockholders’ Agreement” beginning on page [    ]. AsiaInfo and LT International Limited (a company incorporated in the British Virgin Islands and wholly-owned by Mr. Sun) will also enter into a registration rights agreement with respect to the shares of AsiaInfo common stock to be received by LT International Limited in connection with the Combination. See “The Combination Agreement—Registration Rights Agreements” beginning on page [     ].

Accounting Treatment of the Combination

The Combination will be accounted for as an “acquisition” by AsiaInfo of Linkage Technologies, as that term is used under US GAAP, for accounting and financial reporting purposes. In identifying AsiaInfo as the acquiring entity, AsiaInfo took into account the relative outstanding share ownership, the composition of the governing body of the combined company and the designation of certain senior management positions of the combined company. The assets (including identifiable intangible assets) and liabilities (including executory

 

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contracts and other commitments) of Linkage Technologies will be recorded at their respective fair values and added to those of AsiaInfo, including an amount for goodwill representing the difference between the purchase price and the fair value of the identifiable net assets. Excess of fair value of Linkage Technologies’ net assets over the purchase price, if any, will be recorded as a gain in earnings on the date the transactions are completed. The financial statements of the combined company issued after the closing under the Combination Agreement will reflect such fair values and will not be restated retroactively to reflect the historical financial position or results of operations of Linkage Technologies. The results of operations of Linkage Technologies will be included in the results of operations of combined company following the closing under the Combination Agreement, and thereafter the combined company will report its historical financial results and condition using AsiaInfo’s historical financial statements.

All unaudited pro forma condensed combined financial information contained in this Proxy Statement were prepared using the purchase method of accounting. The allocation of the purchase price has not been determined and will be determined after the Combination is completed and after completion of an analysis to determine the fair value of Linkage Technologies’ assets and liabilities. Accordingly, the final purchase accounting adjustments may be materially different from the unaudited pro forma adjustments. Any decrease in the fair value of the assets or increase in the fair value of the liabilities of Linkage Technologies as compared to the unaudited pro forma information included in this Proxy Statement will have the effect of increasing the amount of the purchase price allocable to goodwill.

Regulatory Approvals Required for the Combination

PRC M&A Rules

On August 8, 2006, six PRC regulatory agencies, including MOFCOM, SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, CSRC, and SAFE, jointly adopted the M&A Rules, which became effective on September 8, 2006 and were subsequently amended on June 22, 2009 by MOFCOM. Among other things, the M&A Rules require offshore special purpose vehicles, or SPVs, that are controlled by PRC companies or residents and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that SPVs are required to submit when seeking CSRC approval for their listings outside of China. To date, the CSRC has not issued any definitive rule or interpretation concerning whether the transactions contemplated by this Proxy Statement are subject to this new procedure.

In the opinion of Linkage Technologies’ PRC counsel, Global Law Office, and AsiaInfo’s PRC counsel, Han Kun Law Office, based on their informal advice from MOFCOM unless there are new PRC laws and regulations or clear requirements from the CSRC in any form providing otherwise, CSRC approval is not required for the Combination. In addition, according to Global Law Office and Han Kun Law Office, the acquisition by foreign investors of PRC domestic companies under the M&A Rules only refer to the acquisition by foreign companies of equity interests or assets of domestic PRC companies that are defined as non-foreign-invested enterprises, whereas the transactions involved in the Combination are between offshore companies; therefore, the Combination does not require approval by MOFCOM or any local commerce authority under the M&A Rules. Accordingly, the parties to the Combination Agreement have not taken steps to obtain approval from MOFCOM, any local commerce authority, CSRC or any other regulatory agency in the PRC, for the Combination. However, the interpretation and application of the M&A Rules remain unclear, and PRC government authorities have the sole discretion to determine whether the Combination is subject to the approval of MOFCOM, CSRC or other PRC regulatory agencies. If PRC government authorities subsequently determine that MOFCOM, CSRC or other regulatory agency approval is required for the Combination, or if implementing rules or guidance are issued prior to the completion of the Combination which consequently conclude approval is required for the Combination, the parties to the Combination Agreement cannot predict how long it would take to obtain such approval. Additionally, if governmental approval is required for this transaction, AsiaInfo’s and

 

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Linkage Technologies’ failure to obtain or delay in obtaining approval for the Combination could subject AsiaInfo and/or Linkage Technologies to sanctions imposed by PRC regulatory agencies, which could include fines and penalties on AsiaInfo’s and/or Linkage Technologies’ operations in China, preventing the completion of the Combination, requiring that the Combination be unwound, and other forms of sanctions that may materially and adversely affect the business, results of operations and financial condition of AsiaInfo and/or Linkage Technologies.

The M&A Rules also established additional regulatory procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise and any of the following situations exist (i) the transaction involves an important industry in China; (ii) the transaction may affect national “economic security”; or (iii) the PRC domestic enterprise has a well-known trademark or historical Chinese trade name in China. The M&A Rules also require that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. Complying with the requirements of the above regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit the completion of the Combination.

PRC Anti-Monopoly Law

China’s AML was approved by the National People’s Congress on August 30, 2007, and became effective date on August 1, 2008. While certain aspects of the AML are unclear and are subject to subsequent interpretation by China’s State Council, Anti-Monopoly Commission and Anti-Monopoly Enforcement Agency, the AML prohibits certain conduct, referred to as “monopolistic acts,” and requires checks on mergers and acquisitions of foreign and Chinese enterprises to ascertain whether they will have the effect of eliminating or restricting competition on the domestic market of China and whether they affect national security in China. The law also provides the Anti-Monopoly Commission with authority to make competition policy, publish guidelines, coordinate anti-monopoly enforcement work and conduct investigations and impose penalties on “business operators” that commit certain monopolistic acts within or outside of China that have the effect of eliminating or restricting competition in the China market.

In the opinion of Linkage Technologies’ PRC counsel, Global Law Office, and AsiaInfo’s PRC counsel, Han Kun Law Offices, unless there are new PRC laws and regulations or clear requirements in any form that require the approval under the AML for the Combination. PRC government approval under the AML is not required for the Combination because the historical revenues of AsiaInfo and Linkage Technologies fall below certain thresholds set forth in the AML. Accordingly, the parties to the Combination Agreement have not taken steps to obtain approval under the AML for the Combination. However, there are still many ambiguities under the AML and uncertainty as to the scope of the regulations. If the PRC government authorities subsequently determine that AML approval is required for the Combination, or if implementing rules or guidance are issued prior to the completion of the Combination which conclude that AML approval is required for the Combination, the parties to the Combination Agreement cannot predict how long it would take to obtain such approval.

No Appraisal Rights

Under Section 262 of the General Corporation Law of the State of Delaware, the holders of AsiaInfo common stock will have no appraisal rights in connection with the Combination.

Restrictions on Sales of Shares by Certain Affiliates of AsiaInfo and Linkage Cayman

Concurrently and in connection with the execution of the Combination Agreement, Libin Sun, the Chairman and Chief Executive Officer of Linkage Cayman, LT International Limited, an entity controlled by Mr. Sun,

 

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Guoxiang Liu, a director and President of Linkage Cayman, Xiwei Huang, a director and Chief Operating Officer and Chief Accounting Officer of Linkage Cayman, Haidong Pang, a shareholder of Linkage Cayman, and Edward Tian, a director of AsiaInfo, entered into lock-up agreements. By the date of closing of the Combination Agreement, shareholders collectively owning at least 95% of Linkage Cayman’s shares must also enter into lock-up agreements. The lock-up agreements prohibit transfers of AsiaInfo’s shares received pursuant to the Combination Agreement until they are released from lock-up, subject to certain exceptions. At each 6-month anniversary of the closing under the Combination Agreement, 25% of the shares held by each of the parties will be released from lock-up.

The foregoing description of the lock-up agreement does not purport to be complete and is qualified in its entirety by reference to the lock-up agreement, a form of which is attached as Annex D hereto. We encourage you to read the lock-up agreement in its entirety.

 

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THE COMBINATION AGREEMENT

The following discussion summarizes material provisions of the Combination Agreement, a copy of which is attached as Annex A to this Proxy Statement and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the Combination Agreement and not by this summary. This summary is not complete and is qualified in its entirety by reference to the complete text of the Combination Agreement. We urge you to read the Combination Agreement carefully in its entirety, as well as this Proxy Statement, before making any decisions regarding the Combination.

The representations and warranties described below and included in the Combination Agreement were made by AsiaInfo, on the one hand, and Linkage Cayman and certain key Linkage Cayman shareholders, on the other hand, to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the Combination Agreement and are subject to important qualifications and limitations agreed to by AsiaInfo, Linkage Cayman and certain key Linkage Cayman shareholders in connection with negotiating its terms. Moreover, the representations and warranties may be subject to a contractual standard of materiality that may be different from what may be viewed as material to stockholders, or may have been used for the purpose of allocating risk between AsiaInfo, Linkage Cayman and certain key Linkage Cayman shareholders rather than establishing matters as facts. The Combination Agreement is described in this Proxy Statement and included as Annex A only to provide you with information regarding its terms and conditions, and not to provide any other factual information regarding AsiaInfo or Linkage Cayman or their respective businesses. Accordingly, you should not rely on the representations and warranties in the Combination Agreement as characterizations of the actual state of facts about AsiaInfo, Linkage Cayman or certain key Linkage Cayman shareholders, and you should read the information provided elsewhere in this Proxy Statement and in the documents incorporated by reference into this Proxy Statement for information regarding AsiaInfo and Linkage Technologies, and their respective businesses. See “Where You Can Find More Information” beginning on page [    ] of this Proxy Statement.

The Combination

Subject to the terms and conditions of the Combination Agreement, AsiaInfo will purchase from Linkage Cayman 100% of the outstanding share capital of Linkage Technologies, and Linkage Technologies will become a wholly-owned subsidiary of AsiaInfo.

Closing of the Combination

The Combination will be consummated as soon as practicable, but no later than two business days following the waiver or satisfaction of each of the conditions to the Combination in the Combination Agreement, including receipt of stockholder approval at the AsiaInfo special meeting and the receipt of all required regulatory approvals.

Directors and Executive Management Following the Combination

Upon the consummation of the Combination, the combined company’s board of directors will be comprised of four non-independent directors and five independent directors. Linkage Cayman will be entitled to designate for appointment two non-independent directors who held management positions with Linkage Cayman prior to the consummation of the Combination, which directors shall initially be Libin Sun and Xiwei Huang, as well as one independent director. The two remaining non-independent directors shall be directors who served on AsiaInfo’s board of directors immediately prior to the closing of the Combination, and are expected to be Steve Zhang and Tom Manning. Additionally, the remaining four independent directors shall be appointed by the current AsiaInfo board of directors immediately prior to the closing of the Combination, and are expected to be James Ding, Edward Tian, Yungang Lu and Davin Mackenzie. Mr. Sun will be appointed Executive Co-Chairman of the board of directors, and Mr. Ding will serve as a Co-Chairman of the board of directors.

 

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Steve Zhang will be the Chief Executive Officer and President of the combined company, Wei Li will be the Chief Financial Officer of the combined company, and Xiwei Huang will be the Chief Operating Officer of the combined company.

Consideration to be Issued in the Combination

Upon the closing of the Combination, AsiaInfo will purchase 100% of the outstanding share capital of Linkage Technologies in exchange for the payment of US$60 million and the issuance of 26,832,731 shares of common stock of AsiaInfo, or the Consideration. The Consideration will be subject to certain pre-closing and post-closing adjustments, as described in more detail below. Linkage Cayman has agreed to distribute the Consideration promptly following the closing of the Combination to the Legacy Linkage Shareholders (each of whom is not a U.S. person) in a non-public offering in accordance with Regulation S promulgated under the Securities Act.

Of the aggregate Consideration to be delivered to Linkage Cayman, 10% (consisting of US$6 million in cash and 2,683,273 shares of AsiaInfo common stock) will instead be deposited into an escrow account for a period of 18 months as security for the indemnification obligations of Linkage Cayman and certain key Linkage Cayman shareholders described in more detail below.

The aggregate Consideration to be delivered to Linkage Cayman at the closing of the Combination may be reduced if Linkage Cayman has not met certain threshold requirements with respect to its customer orders as of January 18, 2010, which thresholds the parties currently believe have been satisfied. Additionally, to the extent that Linkage Cayman’s actual working capital and actual net debt at the time of the closing of the Combination do not meet certain threshold requirements, the amounts of any such deficiencies will be released from the escrowed funds to AsiaInfo.

Representations and Warranties

The Combination Agreement contains generally customary representations and warranties of AsiaInfo, Linkage Cayman and certain key Linkage Cayman shareholders relating to their respective businesses, or in the case of the key Linkage Cayman shareholders, their qualification and authority to enter into the Combination Agreement. For purposes of determining the satisfaction of the closing conditions relating to each party’s representations and warranties as described under “The Combination Agreement—Conditions to Completion of the Combination” beginning on page [    ], subject to limited exceptions, each representation and warranty, when read without any qualifications relating to materiality or material adverse effect, will be deemed to be true and correct in all respects unless the failure or failures of such representations and warranties to be true and correct, individually or in the aggregate, results in a material adverse effect with respect to the party making the representations and warranties. As used in the Combination Agreement, “material adverse effect” means with respect to AsiaInfo or Linkage Cayman, as the case may be, any event, change or effect that, individually or together with all other events, changes or effects has had or would reasonably be expected to have a materially adverse effect on the financial condition, properties, assets, liabilities, business, operations or results of operations of such party and its subsidiaries (taken as a whole). However, in determining whether a material adverse effect has occurred, there will be excluded any event, change or effect on the referenced party which resulted from or is attributable to:

 

   

general economic conditions (provided such party and its subsidiaries (taken as a whole) are not disproportionately impacted by such conditions);

 

   

general industry conditions (provided such party and its subsidiaries (taken as a whole) are not disproportionately impacted by such conditions);

 

   

the announcement or pendency of the Combination;

 

   

any action or inaction by such party taken or omitted to be taken with the other party’s prior written consent, at the other party’s request, or required by the Combination Agreement;

 

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any modifications of or to law applicable to such party or any generally accepted accounting principles or the interpretation or application thereof;

 

   

any act of terrorism, war, calamity or act of God, to the extent that such act does not have a materially disproportionate effect on such party; or

 

   

with respect to AsiaInfo only, any decrease in the trading price of AsiaInfo common stock due to the failure to meet any projections or budgets (provided that the underlying cause for such failure may still qualify as a material adverse effect if it satisfies one of the foregoing tests).

Each of AsiaInfo, on the one hand, and Linkage Cayman, on the other hand, has made representations and warranties to the other in the Combination Agreement that are subject, in some cases, to specified exceptions and qualifications. These representations and warranties relate to, among other things:

 

   

corporate matters, including due organization and qualification;

 

   

subsidiaries;

 

   

capitalization;

 

   

authority relative to execution and delivery of the Combination Agreement and the absence of conflicts with, or violations of, organizational documents, applicable law or certain agreements as a result of entering into the Combination Agreement and consummating the Combination;

 

   

financial statements;

 

   

matters concerning material contracts;

 

   

the absence of undisclosed liabilities;

 

   

the absence of certain changes or events;

 

   

compliance with laws;

 

   

permits;

 

   

litigation matters;

 

   

restrictions on business activities;

 

   

properties and assets;

 

   

insurance matters;

 

   

tax matters;

 

   

environmental matters;

 

   

intellectual property;

 

   

employee matters;

 

   

brokers fees payable in connection with the Combination;

 

   

interested party transactions; and

 

   

customers and suppliers.

Conduct of Business Pending the Combination

Each of AsiaInfo and Linkage Cayman has agreed in the Combination Agreement that, prior to the consummation of the Combination, except as expressly contemplated or permitted by the Combination Agreement or as required by applicable law, rule or regulation, it will, and will cause its subsidiaries to, (i) carry on their respective businesses in the usual, regular and ordinary course consistent with past practice, (ii) pay their

 

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respective debts and taxes when due subject to good faith disputes over such debts or taxes, (iii) pay or perform their other material obligations when due, and (iv) use all reasonable efforts to preserve intact their present respective business organizations, keep available the services of their respective officers and key employees and preserve their respective relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with either, to the end that their respective goodwill and ongoing businesses shall be unimpaired at the closing of the Combination. Additionally, each of AsiaInfo, on the one hand, and Linkage Cayman and certain key Linkage Cayman shareholders, on the other hand, agreed to promptly notify the other of any event or occurrence with respect to such party or any their respective businesses that would reasonably be expected to have a material adverse effect on such party or such party’s respective business.

Each of AsiaInfo and Linkage Cayman has also agreed that, with respect to itself and each such party’s respective subsidiaries (individually and taken as a whole), except as expressly contemplated or permitted by the Combination Agreement, and with certain limited exceptions, they will not undertake any of the following actions without the prior written consent of the other party:

 

   

amend its charter documents;

 

   

declare or pay any dividends on or make any other distributions with respect to its capital stock or share capital, or split, combine or reclassify any of its capital stock or share capital or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or share capital, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock or share capital, except from former employees, directors and consultants in accordance with agreements in effect prior to December 4, 2009, providing for the repurchase of shares in connection with any termination of service from it or any of its subsidiaries;

 

   

accelerate, amend, or change the period of exercisability or vesting of options or rights granted under its stock plans or authorize cash payments in exchange of any options or other rights granted under any such plans;

 

   

issue or agree to issue shares of its capital stock or share capital, other than issuance of shares in connection with certain AsiaInfo equity awards;

 

   

transfer any rights to such party’s intellectual property, other than non-exclusive licenses granted to customers in the ordinary course of business consistent with past practices;

 

   

enter into or amend any agreements granting another party exclusive marketing or other exclusive rights of any type or scope with respect to any products or intellectual property of such party;

 

   

sell, lease, license (other than non-exclusive licenses granted to customers in the ordinary course of business consistent with past practices) or otherwise dispose of or encumber any of its properties or assets that are material, individually or in the aggregate, to such party’s business (other than the sale of inventory in the ordinary course of business);

 

   

incur any indebtedness for borrowed money, or guarantee any such indebtedness, or issue or sell any debt securities or guaranty any debt securities of others;

 

   

enter into, terminate or amend, in a manner that would be reasonably expected to adversely affect the business of such party, any material contract, any agreement relating to the license, transfer or other disposition or acquisition of such party’s intellectual property or any rights to market or sell such party’s products (other than non-exclusive licenses in the ordinary course of business consistent with past practice), or any other agreement material to the business or prospects of such party that would result in a material adverse effect;

 

   

pay, discharge or satisfy, in an amount in excess of US$50,000 in the aggregate, any claims, liabilities or obligations arising other than in the ordinary course of business, other than the payment, discharge or satisfaction of liabilities reflected or reserved against in such party’s financial statements, or fees and expenses incurred in connection with the Combination;

 

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make any capital expenditures, capital additions or capital improvements, outside of the ordinary course of business in excess of US$100,000 per calendar month (on a cumulative basis), or in excess of US$50,000 for any individual expenditure, addition or improvement;

 

   

materially reduce the amount of, or materially modify any of the terms of, any insurance coverage provided by existing insurance policies that are material to such party’s business;

 

   

terminate or waive any material right, other than in the ordinary course of business consistent with past practice;

 

   

commence a lawsuit other than for the routine collection of bills or for a breach of the Combination Agreement;

 

   

acquire or agree to acquire by merging with, or by purchasing a substantial portion of the stock or assets of, or by any other manner, any business or entity or division thereof, or otherwise acquire or agree to acquire any assets that are material, individually or in the aggregate, to such party’s business, other than, in the case of AsiaInfo, one or more acquisitions of not more than US$10 million individually, or more than US$20 million in aggregate;

 

   

other than in the ordinary course of business, make or change any material election in respect of such party’s taxes, adopt or change any accounting method in respect of such party’s taxes, file any tax return or any amendment to a tax return, enter into any closing agreement, settle any claim or assessment in respect of such party’s taxes in excess of US$15,000, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of such party’s taxes;

 

   

revalue any of such party’s assets, other than in the ordinary course of business, consistent with past practice, or as required by changes in US GAAP; or

 

   

take or agree in writing or otherwise to take, any of the actions described above, or any action that would prevent such party from performing, in any material respect, or cause such party not to perform, in any material respect, its covenants described above.

Linkage Cayman has further agreed that, with respect to itself and its subsidiaries (individually and taken as a whole), except as expressly contemplated or permitted by the Combination Agreement, and with certain limited exceptions, it will not undertake any of the following actions without the prior written consent of AsiaInfo:

 

   

amend any existing equity or incentive plan or adopt any new equity or incentive plan, except in order to comply with applicable laws or regulations, pay or provide any material bonus, remuneration (other than wages, salary and/or commission at rates in effect on December 4, 2009) or material noncash benefit (except payments and benefits made pursuant to written agreements in effect prior to December 4, 2009 and disclosed by Linkage Cayman to AsiaInfo), or increase the benefits, salaries or wage rates of any of Linkage Cayman’s or its subsidiaries’ employees, in each case other than in the ordinary course of business consistent with past practice;

 

   

grant or pay any severance or termination pay or benefits to any Linkage Cayman director, officer, or any other employee, except for payments made pursuant to written agreements in effect prior to December 4, 2009, and disclosed by Linkage Cayman or as required by applicable law, or take any action that would incur severance or termination pay or benefits (whether or not required by applicable law) above US$200,000 in the aggregate;

 

   

cause or permit the transfer of any right, title or interest in and to any of: (i) the assets, including but not limited to its intellectual property and accounts receivable from a subsidiary of Linkage Cayman to Linkage; or (ii) the liabilities, including those liabilities arising out of or in connection with the negotiation and consummation of the Combination, of Linkage Cayman to any of its subsidiaries (except in the ordinary course of business, consistent with past practices); or

 

   

take or agree in writing or otherwise to take, any of the actions described above, or any action that would prevent Linkage Cayman from performing, in any material respect, or cause Linkage Cayman not to perform, in any material respect, its covenants described above.

 

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Stockholders’ Meeting and Duty to Recommend

AsiaInfo has agreed to call, give notice of, convene and hold a meeting of its stockholders as promptly as practicable to consider the adoption of the Consideration Proposal and the Name Change Proposal. AsiaInfo’s board of directors has agreed (i) to recommend the approval of the Consideration Proposal and the Name Change Proposal by the AsiaInfo stockholders, (ii) not withdraw, modify or qualify such recommendation in any manner adverse to Linkage Cayman or certain key Linkage Cayman shareholders, or take any other action or make any other public statement in connection with the AsiaInfo special meeting inconsistent with such recommendation, and (iii) use commercially reasonable efforts to solicit from the AsiaInfo stockholders proxies in favor of the Consideration Proposal and the Name Change Proposal, and subject to such directors’ fiduciary duties, take all reasonably necessary action to secure the vote of the stockholders required by applicable law to approve the Consideration Proposal and the Name Change Proposal. The Combination Agreement requires AsiaInfo to submit the Consideration Proposal and the Name Change Proposal to a stockholder vote even if the AsiaInfo board of directors no longer recommends adoption of the Consideration Proposal and/or the Name Change Proposal.

No Solicitations or Alternative Transactions

Each of Linkage Cayman and AsiaInfo has agreed that prior to the earlier of the termination of the Combination Agreement or the consummation of the Combination, it, its subsidiaries, and with respect to Linkage Cayman only, certain of its key shareholders, and any of their respective officers, directors, employees, advisors, consultants, representatives or agents, will not, directly or indirectly:

 

   

solicit, facilitate, initiate, or encourage any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, share exchange, business combination, sale of all or any material amount of its assets, sale of shares of capital stock or similar transactions involving such party or any of its, other than the Combination;

 

   

engage or participate in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any of acquisition proposal described above; or

 

   

agree to, enter into, accept, approve or recommend any acquisition proposal described above.

Each of Linkage Cayman and AsiaInfo has agreed to immediately notify the other party of any such acquisition proposals or requests for non-public information related to any such acquisition proposals that such party receives.

Agreements to Take Further Action and Use Reasonable Efforts

Subject to the terms and condition of the Combination Agreement, each party has agreed to use its commercially reasonable efforts to satisfy or cause to be satisfied all conditions precedent to the closing of the Combination contained in the Combination Agreement, to execute and deliver such instruments and do and perform such acts, and take all actions and to do all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Combination.

Indemnification

The Combination Agreement provides that from and after the effective time of the Combination, Linkage Cayman and certain key Linkage Cayman shareholders will, jointly and severally, indemnify AsiaInfo and its officers, directors, employees, agents and affiliates, in respect of certain actions, losses, diminution in value or interest suffered, incurred or sustained by any of them arising from, among other things:

 

   

breaches of or inaccuracies in any representation or warranty of Linkage Cayman or certain key Linkage Cayman shareholders;

 

   

breaches, non-fulfillment of or failure to perform any covenant or agreement of Linkage Cayman;

 

   

payments related to the Combination or Linkage Cayman’s proposed initial public offering;

 

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claims by any person relating to such person’s ownership of share capital of Linkage Cayman, or certain trust or other ownership arrangements relating to Linkage Cayman;

 

   

post-closing adjustments to the Consideration to be paid to Linkage Cayman in connection with the Combination;

 

   

certain claims by governmental authorities relating to the failure of Linkage Cayman or any of its subsidiaries to comply with certain PRC laws and mandates;

 

   

breaches by Linkage Cayman of its non-competition agreement with AsiaInfo;

 

   

claims with respect to certain intellectual property rights licensed to Linkage Cayman; and

 

   

claims with respect to the failure of Linkage Cayman or any of its subsidiaries to pay or withhold applicable taxes and/or fees incurred in connection with the Combination.

The above indemnification rights are subject to certain limitations, including in some cases materiality limits, time limits, and applicability of insurance proceeds, as more fully described in the Combination Agreement.

Conditions to Completion of the Combination

As more fully described in this Proxy Statement and the Combination Agreement, the completion of the Combination depends on a number of mutual conditions being satisfied or waived, including:

 

   

the adoption by the AsiaInfo stockholders of the Consideration Proposal and the Name Change Proposal;

 

   

the absence of any law or order that would prohibit the Combination or otherwise make the consummation of the Combination illegal; and

 

   

the receipt of any required regulatory approvals.

Each of AsiaInfo’s and Linkage Cayman’s obligations to complete the Combination is also separately subject to the satisfaction or waiver of a number of conditions, including:

 

   

the other party’s representations and warranties in the Combination Agreement (including, in the case of Linkage Cayman, the representations and warranties of certain key Linkage Cayman shareholders) being true and correct as of the closing of the Combination, without any qualifications as to materiality or material adverse effects, except where the failure of such representations and warranties to be true or correct, individually or in the aggregate, has not had a material adverse effect;

 

   

material performance of and compliance by the other party of its agreements and covenants in the Combination Agreement on or prior to the closing of the Combination; and

 

   

with respect to each party’s obligations, the absence of a material adverse effect of the other party.

AsiaInfo’s obligations to complete the Combination are also subject to the satisfaction or waiver of a number of conditions, including:

 

   

certain agreements with respect to the voting of and sale of AsiaInfo shares held by Libin Sun will be in full force and effect at the closing of the Combination;

 

   

other than those contemplated in the stockholders’ agreement between Libin Sun, Edward Tian, AsiaInfo and Linkage Cayman, there shall be no voting trusts, proxies or other agreements between Linkage Cayman or any of its subsidiaries, or to Linkage Cayman’s knowledge, any of the Legacy Linkage Shareholders, with respect to the issuance, holding, acquisition, voting or disposition of any AsiaInfo common stock;

 

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at least 70% of the Linkage Cayman management employees, and at least 70% of the Linkage Cayman employees whose annual salary or other remuneration is at least US$30,000, shall remain employees of Linkage Cayman, in each case in substantially similar roles as such employees held prior to the execution of the Combination Agreement; and

 

   

Linkage Cayman shall have delivered to AsiaInfo reasonable proof that certain fees and expenses related to the Combination have been paid in full by Linkage Cayman and its subsidiaries, and that certain fees and expenses related to Linkage Cayman’s proposed initial public offering have been paid in full by Legacy Linkage Shareholders (provided that, in lieu of such proof, Linkage Cayman may deliver a notice to AsiaInfo that up to $3 million be deducted from the Cash Consideration to cover expenses associated with Linkage Cayman’s proposed initial public offering).

The obligations of Linkage Cayman and certain of its key shareholders to complete the Combination are also subject to the satisfaction or waiver of a number of conditions, including:

 

   

certain agreements with respect to the voting of and sale of AsiaInfo shares held by Edward Tian will be in full force and effect at the closing of the Combination;

 

   

AsiaInfo shall have offered employment agreements to each of Libin Sun, Guoxiang Liu and Xiwei Huang effective upon the closing of the Combination;

 

   

AsiaInfo shall have executed and delivered a registration rights agreement to LT International Limited or Libin Sun;

 

   

the 14-day trading volume weighted average closing price per share of AsiaInfo’s common stock ending on such date as certain of the closing conditions are satisfied shall be greater than or equal to US$13.58;

 

   

the AsiaInfo common stock to be issued to Linkage Cayman as Stock Consideration shall have been authorized for listing on the NASDAQ Global Market;

 

   

one current member of the AsiaInfo board of directors shall have resigned; and

 

   

each of Libin Sun, Xiwei Huang and an additional independent director designee of Linkage Cayman shall have been duly appointed to the AsiaInfo board of directors.

Termination of the Combination Agreement

AsiaInfo and Linkage Cayman can agree at any time to terminate the Combination Agreement without completing the Combination, even if the AsiaInfo stockholders have approved the Consideration Proposal. Also, either of AsiaInfo or Linkage Cayman can terminate the Combination Agreement if:

 

   

a governmental authority shall have issued a final and non-appealable order that prohibits the consummation of the Combination, or a substantially similar transaction, provided that the party seeking termination has complied in all material respects with its obligations under the Combination Agreement;

 

   

the AsiaInfo stockholders fail to approve the Consideration Proposal or the Name Change Proposal at the special meeting; or

 

   

the Combination shall not have been consummated by June 4, 2010, which time period will be automatically extended until October 4, 2010 if necessary to complete any antitrust review by any governmental authority.

If Linkage Cayman or certain key Linkage Cayman shareholders materially breach the representations and warranties contained in the Combination Agreement, AsiaInfo shall have the right to terminate the Combination Agreement, subject to the right of the breaching party to cure, if curable, the breach within 30 days of written

 

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notice of the breach, and provided AsiaInfo is not then in material breach of the Combination Agreement. Conversely, if AsiaInfo materially breaches the representations and warranties contained in the Combination Agreement, Linkage Cayman or the shareholders’ agent shall have the right to terminate the Combination Agreement, subject to the right of the breaching party to cure, if curable, the breach within 30 days of written notice of the breach, and provided neither Linkage Cayman nor certain key Linkage Cayman shareholders are then in material breach of the Combination Agreement.

Additionally, Linkage Cayman may terminate the Combination Agreement if the AsiaInfo board of directors, or any committee thereof, shall withdraw, qualify or modify in any manner adverse to Linkage Cayman or certain of its key shareholders the recommendation to the AsiaInfo stockholders that they vote in favor of the Consideration Proposal and the Name Change Proposal.

Termination Fees

The Combination Agreement contains certain termination rights for both AsiaInfo and Linkage Cayman. Upon a material and uncured breach of representations and warranties or covenants by Linkage Cayman and certain Linkage Cayman shareholders on the one hand, or AsiaInfo on the other hand, the non-breaching party would be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million from the other. In addition, in the event that the AsiaInfo board of directors changes its recommendation that stockholders vote in favor of the proposals to be considered at the special meeting, Linkage Cayman would be entitled to terminate the Combination Agreement and receive a termination fee of $17.6 million from AsiaInfo, and in the event that the stockholders of AsiaInfo do not vote in favor of the Consideration Proposal and the Name Change Proposal, Linkage Cayman would be entitled to terminate the Combination Agreement and receive a termination fee of $10.0 million from AsiaInfo.

Employee Matters

As a condition to the closing of the Combination, at least 70% of the Linkage Cayman management employees, and at least 70% of the Linkage Cayman employees whose annual salary or other remuneration is at least US$30,000, shall remain employees of Linkage Cayman, in each case in substantially similar roles as such employees held prior to the execution of the Combination Agreement.

Amendment, Waiver and Extension of the Combination Agreement

The Combination Agreement may only be amended with the written consent of each of the parties thereto. To the extent legally allowed, the parties may mutually agree to extend the time for the performance of any of the obligations or acts of any of the parties to the Combination Agreement, or waive compliance of a party with respect to any of the covenants, agreements or conditions contained in the Combination Agreement.

Fees and Expenses

As a general matter, all fees and expenses incurred by the parties to the Combination Agreement in connection with the Combination will be borne by the party incurring such fees and expenses, irrespective of whether the Combination is consummated. Each of the parties may be obligated to pay to the other party certain termination fees in connection with the termination of the Combination Agreement in certain circumstances. See “The Combination Agreement—Termination Fees” on page [    ] for additional information.

Governing Law

The Agreement is governed by the laws of the State of New York, without regard for the conflicts of laws principles thereof.

 

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Voting Agreements

Concurrently and in connection with the execution of the Combination Agreement, Linkage Cayman, Edward Tian, a director of AsiaInfo, and James Ding, Chairman of the Board of AsiaInfo, entered into a Voting Agreement pursuant to which each of Mr. Tian and Mr. Ding agreed to vote all of their respective shares of AsiaInfo’s common stock in favor of approval of the Combination Agreement and the Combination. Until the closing under the Combination Agreement, the AsiaInfo voting shares held by Mr. Tian and Mr. Ding are also subject to certain restrictions on transfer. Additionally, Lenovo IT Alliance Limited and Linkage Cayman entered into a Voting Agreement pursuant to which Lenovo IT Alliance Limited agreed to vote all of the shares of AsiaInfo’s common stock it beneficially owns in favor of approval of the Combination Agreement and the Combination.

The foregoing description of the voting agreements does not purport to be complete and is qualified in its entirety by reference to the voting agreements, the forms of which are attached as Annex B and Annex C hereto. We encourage you to read the voting agreements in their entirety.

Lock-Up Agreements

Concurrently and in connection with the execution of the Combination Agreement, Libin Sun, the Chairman and Chief Executive Officer of Linkage Cayman, LT International Limited, an entity controlled by Mr. Sun, Guoxiang Liu, a director and President of Linkage Cayman, Xiwei Huang, a director and Chief Operating Officer and Chief Accounting Officer of Linkage Cayman, Haidong Pang, a shareholder of Linkage Cayman, and Edward Tian, a director of AsiaInfo, entered into lock-up agreements. By the date of closing of the Combination Agreement, shareholders collectively owning at least 95% of Linkage Cayman’s shares must also enter into lock-up agreements. The lock-up agreements prohibit transfers of AsiaInfo’s shares received pursuant to the Combination Agreement until they are released from lock-up, subject to certain exceptions. At each 6-month anniversary of the closing under the Combination Agreement, 25% of the shares held by each of the parties will be released from lock-up.

The foregoing description of the lock-up agreement does not purport to be complete and is qualified in its entirety by reference to the lock-up agreement, a form of which is attached as Annex D hereto. We encourage you to read the lock-up agreement in its entirety.

Registration Rights Agreement

At the closing under the Combination Agreement, AsiaInfo and LT International Limited will enter into a registration rights agreement pursuant to which AsiaInfo will grant certain registration rights for the shares of AsiaInfo common stock to be received by LT International Limited in accordance with the Combination Agreement. Pursuant to the registration rights agreement, at any time after the 180th day following the closing under the Combination Agreement, LT International Limited may demand that AsiaInfo register shares of AsiaInfo common stock held by LT International Limited. LT International Limited will be entitled to two such demand registrations under the registration rights agreement. In addition, LT International Limited will have the right to include shares of AsiaInfo common stock held by LT International Limited in certain registration statements filed by AsiaInfo after the closing under the Combination Agreement.

The foregoing description of the registration rights agreement does not purport to be complete and is qualified in its entirety by reference to the registration rights agreement, a form of which is attached as Annex E hereto. We encourage you to read the registration rights agreement in its entirety.

Stockholders’ Agreement

Concurrently and in connection with the execution of the Combination Agreement, AsiaInfo entered into a stockholders’ agreement with each of Linkage Cayman, Edward Tian and Libin Sun containing certain restrictions on the voting of AsiaInfo voting shares following the closing under the Combination Agreement.

 

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Until the shares of AsiaInfo common stock received by it pursuant to the Combination Agreement are distributed to Linkage Cayman’s shareholders, Linkage Cayman has agreed to vote, and cause the voting of, all AsiaInfo voting shares held by it for or against, or to abstain or withhold authority, on all matters submitted to the stockholders of AsiaInfo for their approval, in proportion to the votes for and against, and the abstentions and withholds, of all outstanding shares of AsiaInfo capital stock entitled to vote generally in the election of directors that are not held by Linkage Cayman, Mr. Tian or Mr. Sun or otherwise issued pursuant to the Combination Agreement, or the Proportionate Voting Requirement. Each of Mr. Tian and Mr. Sun has agreed (i) to use his reasonable efforts (solely in his capacity as a stockholder of AsiaInfo) to support the other person as a candidate for election or re-election to the AsiaInfo board of directors and (ii) to vote, and cause the voting of, all of his respective AsiaInfo voting shares in favor of the election or re-election of the other person to the board. In all other matters submitted to the stockholders of AsiaInfo for their approval, each of Mr. Tian and Mr. Sun has agreed to vote, and cause the voting of, all of his respective AsiaInfo voting shares in accordance with the Proportionate Voting Requirement. During the term of the stockholders’ agreement, the AsiaInfo voting shares held by Linkage Cayman, Mr. Tian and Mr. Sun are also subject to certain restrictions on transfer.

The stockholders’ agreement also includes a customary standstill provision which, among other things, prevents Linkage Cayman, Mr. Tian and Mr. Sun from acquiring additional voting securities of AsiaInfo and its subsidiaries. The Proportionate Voting Requirement and the standstill provision are subject to suspension upon the occurrence of certain “significant events” with respect to AsiaInfo, which include AsiaInfo entering into an agreement providing for the merger or consolidation, or any similar transaction, involving a change of control, the purchase of 25% or more of the assets of AsiaInfo, or the purchase or acquisition of beneficial ownership of securities representing 15% or more of the voting power of AsiaInfo, or the announcement of a tender offer that would result in any person or group owning more than 15% of the voting power of AsiaInfo.

Subject to certain exceptions, the stockholders’ agreement shall continue in force and effect until the third annual meeting of the stockholders of AsiaInfo following the closing under the Combination Agreement.

The foregoing description of the stockholders’ agreement does not purport to be complete and is qualified in its entirety by reference to the stockholders’ agreement, a form of which is attached as Annex F hereto. We encourage you to read the stockholders’ agreement in its entirety.

Lianchuang Non-Competition and Non-Solicitation Agreement

At the closing under the Combination Agreement, AsiaInfo, Lianchuang, and the top ten largest beneficial owners of the outstanding share capital of Lianchuang, or the Lianchuang Shareholders, will enter into a Non-Competition and Non-Solicitation Agreement, or the Lianchuang Non-Compete. Pursuant to the Lianchuang Non-Compete, from the closing under the Combination Agreement and for five (5) years thereafter, Lianchuang, the Lianchuang Shareholders, and their respective affiliates have agreed not to take certain actions that compete with AsiaInfo, solicit the customers of AsiaInfo, solicit the employees of AsiaInfo, or disclose any confidential information of AsiaInfo.

The foregoing description of the Lianchuang Non-Compete does not purport to be complete and is qualified in its entirety by reference to the Lianchuang Non-Compete, a form of which is attached as Annex G hereto. We encourage you to read the Lianchuang Non-Compete in its entirety.

 

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INFORMATION ABOUT LINKAGE TECHNOLOGIES

Business Overview

Linkage Technologies is a leading provider of software solutions and IT services for the telecom industry in China. Linkage Technologies develops and implements core operating systems for all of the three telecom operators in China, namely, China Mobile, China Telecom and China Unicom.

Linkage Technologies’ telecom software solutions are built on unified platforms, scalable modules and standardized interfaces. This is intended to allow it to seamlessly and reliably support the fixed-line, mobile and broadband operations of its telecom operator customers, and help them timely and cost-effectively respond to challenges presented by a rapidly converging and expanding subscriber base, diversified service offerings and continuous technological innovations. Marketed as an integrated system or individual functions, Linkage Technologies’ telecom software solutions include primarily the following:

 

   

BSS, or Business Support Systems, that support customer-oriented account, billing and customer service functions.

 

   

OSS, or Operation Support Systems, that manage network systems.

 

   

BI, or Business Intelligence systems, that facilitate decision analysis processes.

As of September 30, 2009, 69 out of the 97 provincial subsidiaries and headquarters of China’s three telecom operators, which together support an estimated 425 million mobile and 285 million fixed-line subscribers in China, were customers of Linkage Technologies’ software solutions and services.

As of September 30, 2009, Linkage Technologies had six research and development centers located in different cities in China and 3,308 of its 3,465 employees dedicated to research, development and implementation. Linkage Technologies’ core technologies are the subject of nine patents and 12 pending patent applications in China, and one patent and two pending patent applications in the United States.

Linkage Technologies’ total revenues grew from $46.8 million in 2006 to $88.3 million in 2008 and its net income grew from $9.2 million in 2006 to $17.1 million in 2008. For the nine months ended September 30, 2009, Linkage Technologies generated total revenues of $112.5 million and net income of $25.3 million. In addition to software development, Linkage Technologies generates revenues from offering telecom operators IT services, such as consulting and system integration, and implementation of third-party hardware and software to address their other IT needs. Revenues from software development, IT services and third-party hardware and software constituted 88.3%, 5.9% and 5.8%, respectively, of Linkage Technologies’ total revenues in 2008, and 89.7%, 2.1% and 8.2%, respectively, of its total revenues for the nine months ended September 30, 2009.

Corporate History and Structure

Set forth below is the corporate history of Linkage Technologies Investment Limited, or Linkage Technologies:

 

   

Linkage Technologies was organized under the laws of the British Virgin Islands in July 2003;

 

   

Linkage Technologies commenced operations in 1997 through Lianchuang Technology Company Limited, or Lianchuang, a joint stock limited company in China. Lianchuang was primarily engaged in providing customized proprietary software, system integration and network solutions in China;

 

   

In November 1998, Lianchuang, through two employees, incorporated Hong Kong Linkage Technology Limited, or Linkage HK, a Hong Kong company. In January 2003, Lianchuang organized Suzhou United New Science and Technology Corporation, or Linkage Suzhou, a wholly foreign owned enterprise in China;

 

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In February 2004, Linkage Technologies formed Linkage Technology (Nanjing) Co., Ltd., or Linkage Nanjing, a wholly-owned subsidiary of Linkage Technologies. In June 2004, Linkage Nanjing acquired the telecom-related business and assets of Lianchuang. Subsequently, Linkage Technologies acquired all the issued and outstanding share capital of Linkage Suzhou and Linkage HK;

 

   

In February 2004, Linkage Technologies International Holdings Limited, or Linkage Cayman was organized under the laws of the Cayman Islands. In December 2008, in connection with a proposed initial public offering of Linkage Cayman, Linkage Cayman issued 406,995,882 of its ordinary shares to the then-existing shareholders of Linkage Technologies in exchange for all of the outstanding shares of Linkage Technologies. As a result, Linkage Cayman became the holding company of Linkage Technologies and its subsidiaries. Linkage Cayman is owned by Libin Sun, LT International Limited (BVI), a company organized under the laws of the British Virgin Islands and wholly-owned by Mr. Sun, and certain other shareholders; and

 

   

In December 2008, Linkage Technologies transferred all of its equity interests in Linkage Nanjing to Linkage HK.

 

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The following diagram illustrates Linkage Technologies’ current corporate structure and the place of organization of each of Linkage Technologies’ subsidiaries as of the date of this Proxy Statement. The portion of the diagram shaded in gray represents the entities that AsiaInfo will acquire upon consummation of the Combination.

LOGO

 

(1) LT International Limited is a company organized in the British Virgin Islands and its sole shareholder is Mr. Libin Sun.
(2) Linkage Cayman was organized under the laws of the Cayman Islands.
(3) Linkage Technologies was organized under the laws of the British Virgin Islands.
(4) Linkage HK is a limited company organized under the laws of Hong Kong and a wholly-owned subsidiary of Linkage Technologies. Linkage HK is primarily engaged in third-party hardware procurement.
(5) Linkage Nanjing is a wholly foreign owned enterprise organized under the laws of the PRC and a wholly- owned subsidiary of Linkage HK. Linkage Nanjing is Linkage Technologies’ primary operating subsidiary providing software solutions and IT services to the telecom operators in China.
(6) Linkage Suzhou is a wholly foreign owned enterprise organized under the laws of the PRC and a wholly- owned subsidiary of Linkage Technologies. Linkage Suzhou is currently inactive.

 

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Linkage Technologies’ Solutions and Services

Linkage Technologies and its affiliate companies have over ten years of experience developing software solutions for China’s telecom operators and their provincial subsidiaries. Linkage Technologies provides custom-designed software solutions using a combination of proprietary and third-party software to address a comprehensive range of business operation support needs. Linkage Technologies also provides software enhancement and maintenance services for the solutions it develops.

Software Development

The key software solutions Linkage Technologies develops are BSS, OSS and BI. Its telecom software solutions are marketed as integrated systems or as individual functional modules that cover all major categories of software solutions essential to telecom operators in China and include primarily the following:

Business Support System

BSS includes accounts systems, billing systems, customer relationship management systems and integrated settlement systems. Linkage Technologies’ accounts systems allow telecom operators to provide one-stop account services and real-time access and management of account information, while exercising basic credit control and fraud prevention. Linkage Technologies’ billing systems help telecom operators track usage of various telecom services, including voice and non-voice services. Linkage Technologies’ customer relationship management systems help telecom operators identify trends in customer demand and support business management. Linkage Technologies’ integrated settlement systems allow telecom operators to perform accurate inter-network settlements and intra-network settlements.

As of September 30, 2009, Linkage Technologies had offered its BSS solutions to 30 provincial subsidiaries (including Macau) of the three telecom operators in China.

Operation Support System

OSS includes business management systems and network management systems. Linkage Technologies’ business management systems help telecom operators initiate, schedule and complete services and maintenance for subscribers, and manage number/line resources. Linkage Technologies’ network management systems contain various resource management tools to help telecom operators manage their telecom and computer networks.

As of September 30, 2009, Linkage Technologies had offered its OSS solutions to 30 provincial subsidiaries (including Macau) of the three telecom operators in China.

Business Intelligence

BI systems perform data gathering and analysis functions and include process management systems and operations analysis systems. Linkage Technologies’ BI systems serve as valuable and powerful tools for telecom operators to analyze market and operation information as a basis for strategy setting and decision making.

As of September 30, 2009, Linkage Technologies had offered its BI systems to 13 provincial subsidiaries (including Macau) of the three telecom operators in China.

 

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IT Services and Third-Party Hardware and Software

Linkage Technologies offers value-added services to address its customers’ IT requirements apart from software development. Its IT service revenues include revenues from system integration and other value-added IT consulting and planning services. Linkage Technologies also generates revenues from the implementation of third-party hardware and software in its customized software solutions.

 

   

Value-added IT consulting and planning services. Linkage Technologies leverages its industry knowledge, research capabilities and development expertise to offer its customers stand-alone, value-added consulting services for all aspects of their information systems, including system evaluation, reconfiguration, security and risk management.

 

   

System integration services. Since inception, Linkage Technologies has provided system integration services to its customers to assist them in the procurement and installation of hardware and software solutions that best suit their system requirements. While system integration is not the main focus of its business, Linkage Technologies provides these services as part of its effort to build relationships with customers and provide comprehensive “one-stop” services.

Linkage Technologies’ Customers

Linkage Technologies’ customers are the three Chinese telecom operators, namely, China Mobile, China Telecom and China Unicom, and their provincial subsidiaries. Each major telecom operator in China has approximately 30 provincial subsidiaries. The provincial subsidiaries and the headquarters generally make independent decisions on IT-related procurement, including the implementation of telecom software solutions and the selection of the software provider for the entire core operating systems, functional modules, related services and upgrades. As a result, Linkage Technologies separately negotiates and contracts with each individual provincial subsidiary and the headquarters of the respective telecom operators to provide telecom software solutions and IT services. The decision to purchase Linkage Technologies’ products and services is, in certain cases, made by operators at the headquarter level and, in other cases, at provincial levels. In some cases, Linkage Technologies’ customers require that the headquarters act as the contracting party to contracts negotiated by their provincial subsidiaries. As of September 30, 2009, Linkage Technologies had contracted with an aggregate of 69 provincial subsidiaries and the headquarters of the three operators, representing approximately two-thirds of the total number of their provincial subsidiaries and headquarters.

Linkage Technologies believes its long and trusted relationships with the provincial subsidiaries, as well as the headquarters of these operators, have enabled it to actively participate in their strategic planning for IT spending and position it at the forefront of the technological development of the Chinese telecom information systems.

 

   

China Mobile. Linkage Technologies first offered its telecom software solutions and services to China Mobile in Xinjiang province in 1999. Since then, Linkage Technologies has completed full scale telecom software solutions and specific modules for 18 provincial subsidiaries and the headquarters of China Mobile, including billing, customer relationship management, settlement, network management systems, accounts and business intelligence modules.

 

   

China Telecom. Linkage Technologies first offered its telecom software solutions and services to China Telecom in Jiangsu province in 1997. Since then, Linkage Technologies has completed full scale telecom software solutions and specific modules for 31 provincial subsidiaries and the headquarters of China Telecom, including billing, customer relationship management, settlement, network management systems, accounts and business intelligence modules.

 

   

China Unicom. Linkage Technologies first offered its telecom software solutions and services to China Unicom in Heilongjiang province in 2000. Since then, Linkage Technologies has completed full scale telecom software solutions and specific modules for 20 provincial subsidiaries and the headquarters of China Unicom, including billing, customer relationship management, settlement, network management systems, accounts and business intelligence modules.

 

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Sales and Marketing

Sales

Linkage Technologies sells its solutions primarily through its sales division, which had 57 employees as of September 30, 2009. Linkage Technologies has set up one account team for each of the three major Chinese telecom operators, and four regional teams, covering the entire PRC (other than the Hong Kong Special Administrative Region). Account teams are based in Beijing, where the three Chinese telecom operators are headquartered, and are responsible for obtaining an understanding of the development of its customers’ strategic plans and coordinating the implementation of such strategic plans with its regional teams. Headed by a senior vice president or a vice president, each regional team covers a number of major provinces and a few areas with relatively underdeveloped customer bases. They work closely with the customers’ local operational units to implement the headquarters’ strategic plans. In addition, all teams coordinate with Linkage Technologies’ technology division and customer service department to provide comprehensive customer support. Linkage Technologies’ management reinforce its sales efforts by maintaining close contact with the customers’ decision-makers for IT solutions.

Marketing

Linkage Technologies’ marketing organization focuses on defining product requirements, educating its customers, media and analysts on its technology, building brand awareness and supporting the efforts of the sales teams. Linkage Technologies promotes its solutions and services through annual conferences hosted by telecom operators, product launch news conferences, trade advertising and industry conferences, a company website and marketing media.

Customer Service

Linkage Technologies strives to provide high quality customer service based on the standards promulgated under ISO 9000, and Level III of the Capability Maturity Model. Linkage Technologies provides customer services via its contract execution management, customer service and technical support teams. Linkage Technologies’ contract execution management team plans and coordinates the execution process of its commercial contracts to manage the timing of its projects, which, in turn, facilitates its collection management. Linkage Technologies’ customer service team, operating out of its 37 service centers across 23 provinces throughout China, is available for customer inquiries and requests. Linkage Technologies maintains both a 24 hours service hotline and customer support email system. Linkage Technologies’ technical support team provides remote maintenance and on-site support to ensure customers receive localized technical service. Linkage Technologies’ local technical teams also work closely with its customers’ information technology department to provide regular on-going services such as scheduled system check-up and troubleshooting.

To further enhance its customers’ experience, Linkage Technologies surveys its customers regularly through a system of “First Contact Responsibility,” which requires all its employees to take responsibility in properly logging customer requests with its customer service department.

 

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Technology

Linkage Technologies’ solutions are developed based on unified software development platforms, which contain scalable modules and standardized interfaces. The graphic below illustrates the functions of Linkage Technologies’ proprietary technologies underlying its solutions:

LOGO

BUDE and WADE are Linkage Technologies’ two major proprietary software development platforms. BUDE is a Unix-based technical platform, while WADE is based on Java 2nd Enterprise Edition technologies. WADE is widely used as the development framework for browser/server architecture in conjunction with BUDE, which supports database management systems and provides interfaces for WADE. These platforms allow Linkage Technologies’ solutions to work in various environments, including:

 

   

Operating Systems: Windows, Linux, HP-Unix, Solaris, AIX, etc.

 

   

Application Server: WebSphere, Weblogic, Jboss, Tomcat, etc.

 

   

Middleware: Tuxedo, CICS, Tong, etc.

Below are some notable features of Linkage Technologies’ technologies:

 

   

Unified software development platform. Linkage Technologies’ BUDE and WADE development platforms are designed to standardize and simplify its development processes. They are module-based platforms that hide lower-level platforms and technical details from higher-level applications so that Linkage Technologies’ engineers can focus on the development in their assigned areas. Leveraging BUDE and WADE, Linkage Technologies has developed many of its solutions that are easily adapted to the change of business needs. For example, Linkage Technologies’ integrated settlement systems are capable of accommodating complex new business models by simply changing system configurations and thereby avoids the otherwise required modification of the underlying source code

 

   

Scalable modules. Each of Linkage Technologies’ individual functional modules can be installed on an individual stand-alone basis or as part of an integrated telecom software system. Linkage Technologies’ modules have incorporated many industry best practices and can be expanded with the

 

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customer’s evolving needs. The modular approach also preserves the customer’s initial investment in individual solutions, while minimizing future disruptions and the overall cost of system implementation.

 

   

Standardized interface. Linkage Technologies’ standardized interface is designed to centrally manage information exchanges between its functional modules and external networks and applications. These external networks and applications may be based on different technical standards and industry specifications. In order to support stable, flexible and real-time exchange of information, Linkage Technologies’ proprietary information exchange interface follows generally accepted protocols for information exchange.

 

   

Other advanced technologies. Linkage Technologies incorporates other proprietary advanced technologies in its functional modules. For example, Linkage Technologies employs various security technologies, including back-up, monitoring, auditing, and emergency reporting functions, in its CRM solutions. Linkage Technologies also incorporates powerful integration capabilities in its BI systems to allow for seamless integration with various database platforms, multi-tier analysis engines, data mining engines and foreground presentation tools.

Research and Development

Linkage Technologies attributes its past success to its research and development efforts. Linkage Technologies believes it was among the first software providers to introduce and implement the concept of developing core versions of BSS, OSS and BI, with modular add-ons. Linkage Technologies’ sustained success and future growth depend on continued investment of resources in research and development.

As of September 30, 2009, 1,251 of Linkage Technologies’ employees were involved in specific research projects aside from their regular development and implementation work for customers. Linkage Technologies’ research and development are currently carried out in six research and development centers located in Nanjing, Changsha, Tianjin, Fuzhou, Chengdu and Beijing. In October 2004, Linkage Technologies obtained Level III of the Capability Maturity Model, an industry-recognized rating system for evaluating the quality of a company’s management and software engineering practices, developed by the Software Engineering Institute at Carnegie Mellon University.

Linkage Technologies has set up a strategic planning department that is dedicated to tracking, researching and studying the development of new technology in order to predict new technology trends and timing of market adoption of these technologies with greater accuracy.

Linkage Technologies is an active participant in industry forums and standards organizations for BSS, OSS, BI and other telecom solutions. Linkage Technologies also collaborates with partners in complementary markets in order to leverage its complementary resources and expertise. These partnerships include the Nanjing University of Post and Telecommunications, HP, IBM, Microsoft, Oracle, Sun Microsystems and Sybase.

Intellectual Property

Linkage Technologies relies on copyright, patent, trademark, trade secret and other intellectual property law, as well as non-competition and confidentiality agreements with its employees, business partners and others, to protect its intellectual property rights.

Linkage Technologies owns copyrights to the core software solutions it develops, which serve as the basis for its customized solutions. As of September 30, 2009, Linkage Technologies had registered a total of 65 copyrights for its proprietary software solutions with the State Copyright Administration of the PRC. Its solutions also use technologies that are exclusively licensed to it by Lianchuang, an affiliate of Linkage Technologies, and are the subject of nine patents and 12 pending patent applications in China and one patent and

 

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two pending patent applications in the United States. On June 23, 2009, Linkage Nanjing entered into an assignment agreement with Lianchuang for the transfer of these patents and pending patent applications to it and the exclusive rights to these technologies during the time period that the registration of the assignment agreement is being approved by relevant government authorities.

Linkage Technologies owns or licenses from Lianchuang all the technologies underlying the core versions of its solutions. In most cases, Linkage Technologies’ contracts for custom-designed projects provide that its customers own intellectual property rights to software solutions and services developed under these contracts, while Linkage Technologies expressly retains ownership to the core intellectual property rights underlying the customized products and solutions. As a result of this practice, Linkage Technologies may not have rights to re-use the related software in projects involving other customers. Furthermore, a portion of these contracts provide that Linkage Technologies and its customers have joint ownership rights to certain technologies or improvements Linkage Technologies developed specifically for these customers when Linkage Technologies customizes the core versions of its solutions or when Linkage Technologies performs maintenance and enhancement design services. As a result of these sharing or co-ownership arrangements, Linkage Technologies cannot unilaterally apply for copyright registration, patent license or other intellectual property rights for the relevant technologies. In addition, its customers can use or modify these technologies or, where Linkage Technologies does not limit the transfer rights of these technologies, transfer them to third parties without its consent. Since the ability to develop and use these technologies requires know-how and expertise that is hard to duplicate, and since the solutions subject to sharing or co-ownership arrangements are highly customized, Linkage Technologies does not believe that these arrangements would have a significant negative impact on its applying its know-how or core technologies to other solutions or development processes.

Linkage Technologies relies on confidentiality and non-competition agreements to protect its proprietary information and know-how. Each of its management and its key research and development personnel have entered into a standard confidentiality and non-compete agreement, which includes confidentiality undertakings and an acknowledgement and agreement that all copyrights and patents generated during their services with Linkage Technologies are its property, and assigns to Linkage Technologies any ownership rights that they may claim in those works. The enforceability of these confidentiality and non-competition agreements may be uncertain. See “Risk Factors—Linkage Technologies’ business depends substantially on the continuing efforts of its management and other key personnel. If Linkage Technologies loses their services, it could incur significant costs in finding suitable replacements and its business may be severely disrupted” beginning on page [    ].

Competition

The telecom software solutions market in China is highly competitive. Competition in this market depends largely on industry experience, quality of solutions and services offered, reputation and price. Prior to entering into the Combination Agreement, Linkage Technologies faced competition from AsiaInfo, and continues to face competition from other domestic telecom software solutions providers such as Boco, Neusoft and Digital China, and international telecom software solutions providers such as Amdocs, Convergys, HP and IBM. Linkage Technologies also faces competition from the software development divisions of some telecom equipment manufacturers such as Huawei and ZTE.

Employees

Linkage Technologies had 1,328, 1,603 and 2,277 employees as of December 31, 2006, 2007 and 2008, respectively. As of September 30, 2009, Linkage Technologies had 3,465 employees, including 3,308 in research, development and implementation, 57 in sales and marketing, and 100 in administration. Its employees are not covered by any collective bargaining agreement. Linkage Technologies generally has good relations with its employees.

 

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Facilities

Linkage Technologies’ corporate headquarters are located in Nanjing, Jiangsu Province, China, where Linkage Technologies leases approximately 10,000 square meters of office space. Linkage Technologies also leases approximately 4,400 square meters of office space for its 15 representative offices in Beijing, Changchun, Chengdu, Guiyang, Guangzhou, Harbin, Haikou, Hangzhou, Hefei, Jinan, Kunming, Lanzhou, Tianjin, Yinchuan and Urumqi and its six research and development centers in Nanjing, Changsha, Tianjin, Fuzhou, Chengdu and Beijing. These leases typically have terms of one year. In 2006, 2007, 2008 and the nine months ended September 30, 2009, its total rental payments were approximately $0.18 million, $0.33 million, $0.90 million and $0.80 million, respectively.

Legal Proceedings

Linkage Technologies is subject to legal proceedings, investigations and claims incidental to the conduct of its business from time to time. Linkage Technologies is not currently a party to, nor is Linkage Technologies aware of, any legal proceeding, investigation or claim which, in the opinion of its management, is likely to have a material adverse effect on its business, financial condition or results of operations.

PRC Government Regulations

This section sets forth a summary of the most significant regulations or requirements that affect Linkage Technologies’ business activities in China.

Regulation of the Software Industry

Software Copyright

China’s State Council promulgated the Regulations on the Protection of Computer Software, or the Software Protection Regulations, on December 20, 2001, which became effective on January 1, 2002. The Software Protection Regulations were promulgated, among other things, to protect the copyright of computer software in China. According to the Software Protection Regulations, computer software that is independently developed and exists in a physical form or is attached to physical goods will be protected. However, such protection does not apply to any ideas, mathematical concepts, processing and operation methods used in the development of software solutions.

Under the Software Protection Regulations, PRC citizens, legal persons and organizations may enjoy copyright protection over computer software that they have developed, regardless of whether the software has been published. Foreigners or any person without a nationality may enjoy copyright protection over computer software that they have developed, as long as such computer software was first distributed in China. Software of foreigners or any person without a nationality may enjoy copyright protection in China under these regulations in accordance with a bilateral agreement signed between China and the country to which the developer is a citizen of or in which the developer habitually resides, or in accordance with an international treaty to which China is a party.

Under the Software Protection Regulations, owners of software copyright may enjoy the rights of publication, authorship, modification, duplication, issuance, lease, transmission on the information network, translation, licensing and transfer. Software copyright protection takes effect on the day of completion of the software’s development.

The protection period for software developed by legal persons and other organizations is 50 years and ends on the thirty-first day of December of the fiftieth year from the date the software solution was first published. However, the Software Protection Regulations does not protect the software if it is not published within 50 years of the completion of its development. A contract of licensing may be made to license others to exploit the software copyright, and if the licensing of exploitation of software copyright is exclusive, a written contract must be made. A written contract also must be made for the transfer of any software copyright.

 

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Civil remedies available under the Software Protection Regulations against infringements of copyright include cessation of the infringement, elimination of the effects, apology and compensation for losses. The administrative department of copyright may order the infringer of software copyright to stop all infringing acts, confiscate illegal gains, confiscate and destroy infringing copies, and may impose a fine on the offender under certain circumstances. Disputes regarding infringements of software copyright may be settled through mediation. In addition, the parties involved in the disputes may apply for arbitration in accordance with any effective arbitration provisions set forth in the copyright contract or arbitration agreement otherwise entered into between or among the parties. If the parties neither have an arbitration provision in the copyright contract, nor an arbitration agreement, they may resolve their dispute through the PRC courts directly.

Software Copyright Registration

On February 20, 2002, the State Copyright Administration of the PRC promulgated and enforced the Measures Concerning Registration of Computer Software Copyright Procedures, or the Registration Procedures, to implement the Software Protection Regulations and to promote the development of China’s software industry. The Registration Procedures apply to the registration of software copyrights and software copyright exclusive licensing contracts and assignment contracts. The registrant of a software copyright will either be the copyright owner, or another person (whether a natural person, legal person or an organization) in whom the software copyright becomes vested through succession, assignment or inheritance.

Pursuant to the Registration Procedures, the software to be registered must (i) have been independently developed or (ii) significantly improve in its function or performance after modification from the original software with the permission of the original copyright owner. If the software being registered is developed by more than one person, the copyright owners may nominate one person to handle the copyright registration process on behalf of the other copyright owners. If the copyright owners fail to reach an agreement with respect to the registration, any of the copyright owners may apply for registration but the names of the other copyright owners must be recorded on the application.

The registrant of a software copyright and the parties to a software copyright assignment contract or exclusive licensing contract may apply to the Copyright Protection Center of the PRC for registration of such software copyright and contracts. To register a software copyright, the following documents must be submitted: (i) a completed software copyright registration application form in accordance with relevant requirements; (ii) identification materials of the software; and (iii) relevant documentation demonstrating ownership. To register a software copyright assignment contract or exclusive licensing contract, the following materials must be submitted: (i) a completed contract registration form in accordance with relevant requirements; (ii) a copy of the contract; and (iii) the applicant’s identification documents. The Copyright Protection Center of the PRC will complete its examination of an accepted application within 60 days of the date of acceptance. If an application complies with the requirements of the Software Protection Regulations and the Registration Procedures, a registration will be granted, a corresponding registration certificate will be issued and the registration will be publicly announced.

Software Products Administration

On October 27, 2000, China’s Ministry of Industry and Information Technology, or the MIIT, issued the Measures Concerning Software Products Administration, to regulate and administer software products and to promote the development of the software industry in China. Pursuant to the Measures Concerning Software Products Administration, all software products operated or sold in China must be duly registered and recorded with the relevant authorities, and no entity or individual is allowed to sell or distribute any unregistered and unrecorded software products.

In order to produce software products in China, a software producer is required to meet the following requirements: (i) it possesses the status of an enterprise legal person, and its scope of operations includes the

 

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computer software business (including technology development of software or production of software products); (ii) it has a fixed production site; (iii) it possesses necessary conditions and technologies for producing software products; and (iv) it possesses quality control measures and capabilities for the production of software products. Software developers or producers are allowed to sell their registered and recorded software products independently or through agents, or by way of licensing. Software products developed in China must be registered with the local provincial governmental authorities in charge of information industry and then filed with the taxation authority at the same level and MIIT. Imported software products (i.e., software developed overseas and sold or distributed into China) must be registered with the MIIT. Upon registration, the software products shall be granted registration certificates. Each registration certificate is valid for five years from the issuance date and may be renewed upon expiry. The MIIT and other relevant departments may carry out supervision and inspection over the development, production, operation and import/export activities of software products in China.

On March 1, 2009, the MIIT promulgated the Measures Concerning Software Products Administration, or the 2009 Measures, which became effective on April 10, 2009. Under the 2009 Measures, software products operated or sold in China are not required to be registered or recorded by relevant authorities, and software products developed in China (including those developed in China on the basis of imported software) can enjoy certain favorable policies when they have been registered and recorded. The 2009 Measures also eliminated the previous requirements set forth above.

Policies to Encourage the Development of Software and Integrated Circuit Industries

On June 24, 2000, China’s State Council issued Certain Policies to Encourage the Development of Software and Integrated Circuit Industries, or the 2000 Policies, to encourage the development of the software and integrated circuit industries in China and to enhance the competitiveness of the PRC information technology industry in the international market. The 2000 Policies encourage the development of the software and integrated circuit industries in China through various methods, including:

 

   

Encouraging venture capital investment in the software industry and providing or assisting software enterprises to raise capital overseas;

 

   

Providing tax incentives, including an immediate tax rebate for taxpayers who sell self-developed software products, before 2010, of the amount of the statutory value-added tax that exceeds 3% and a number of exemptions and reduced enterprise income tax rates;

 

   

Providing government support, such as government funding in the development of software technology;

 

   

Providing preferential treatment, such as credit facilities with low interest rates to enterprises that export software products;

 

   

Taking various strategies to ensure that the software industry has sufficient expertise; and

 

   

Implementing measures to enhance intellectual property protection in China.

To qualify for preferential treatment, an enterprise must be recognized as a software enterprise by governmental authorities. A software enterprise is subject to annual inspection, failure of which in a given year shall cause the enterprise not to be able to enjoy the relevant benefits.

Regulation of the Telecommunications Industry

China’s telecom industry, where AsiaInfo’s and Linkage Technologies’ customers operate, is subject to extensive government regulation and control. Currently, all major telecom and Internet service providers in China are primarily state-owned or state-controlled and their business decisions and strategies are affected by the government’s budgeting and spending plans. In addition, they are required to comply with regulations and rules promulgated from time to time by the MIIT and other ministries and government departments.

 

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On September 25, 2000, the State Council issued the Telecommunications Regulations of the PRC, or the Telecommunications Regulations. The Telecommunications Regulations set out in clear terms the framework for operational licensing, network interconnection, the setting of telecom charges and standards of telecom services in China. On the same day, the State Council issued the Administrative Measures on Internet Information Services, which provide for control and censorship of information on the Internet.

The Provisions on the Administration of Foreign-Invested Telecommunications Enterprises, or the 2002 Provisions, became effective on January 1, 2002. Under the 2002 Provisions, foreign investors are permitted to invest in China’s telecom industry through Sino-foreign joint ventures. The ultimate proportion of contribution of the foreign investors of a foreign-funded telecom enterprise that is engaged in the basic telecom services (except radio paging services) may not be more than 49%. The ultimate proportion of contribution of the foreign investors of a foreign-funded telecom enterprise that is engaged in the value-added services (including radio paging services) may not be more than 50%.

In November 2001, the MIIT promulgated the Administrative Measures for Telecommunications Business Operating Licenses, or the License Measures, which became effective on January 1, 2002. The License Measures provide for two types of telecom operating licenses for operators in China, namely licenses for basic services and licenses for value-added services. According to the Catalogue of Classification of Telecommunication Services, which is auxiliary to the Telecommunications Regulations and the new classification edition adjusted by MIIT on June 11, 2001, basic services include, among others, fixed-line local and domestic long distance telephone services, international telecom services, mobile communications services (such as 900/1800MHz GSM, 800MHz CDMA and 3G mobile communication services), satellite communications services, paging services, data communications services (such as Internet data transmission services), trunking services, network access services and the domestic and international telecom facility services. Value-added telecom services include, among others, value-added services provided over fixed-line telephone network (e.g., telephone information, call center, voice mail and video conferencing services), value-added services provided over mobile networks, value-added services provided over Internet networks (e.g., Internet data center and Internet access and content services) and value-added services provided over other data networks (e.g., computer information, e-mail and electronic data interchange services). On February 21, 2003, the MIIT issued a new Catalogue of Classification of Telecommunication Services, which was enforced on April 1, 2003. The revised classification maintains the general distinction between basic telecom services and value-added telecom services and attempts to define the scope of each service. In particular, the 2003 classification delineated the differences between “Type 1” and “Type 2” value-added services. Type 1 includes online data and transaction processing, domestic multi-party communication services, domestic Internet virtual private network services and Internet data center services. Type 2 includes storage and retransmission (X.400 e-mail, voice mail, facsimile), call centers, Internet access and information services.

Tax

See “Linkage Technologies’ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Taxes—China” beginning on page [    ] for a description of PRC tax regulations.

Foreign Currency Exchange

Foreign currency exchange in China is primarily governed by the following regulations:

 

   

Foreign Exchange Administration Rules (1996), as amended; and

 

   

Regulations of Settlement, Sale and Payment of Foreign Exchange (1996).

According to these regulations, China’s currency, the Renminbi is convertible for current account items, including distribution of dividends, payment of interest, trade and service-related foreign exchange transactions. Conversion of Renminbi for capital account items, including direct investment, loans, securities investment and

 

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repatriation of investment, however, is still subject to the approval of SAFE or its local counterpart. FIEs may settle and buy foreign currencies at banks designated to conduct foreign exchange business after providing valid commercial documents and can also buy and sell foreign currencies at Foreign Currencies Adjusting Centers. Capital investments by FIEs outside of China are also subject to limitations, which include approvals by the MOFCOM, SAFE and the National Development and Reform Commission.

Dividend Distribution

The principal regulations in China governing distribution of dividends paid by wholly foreign-owned enterprises include:

 

   

Wholly Foreign-Owned Enterprise Law (1986), as amended; and

 

   

Implementation Rules on Wholly Foreign-Owned Enterprise Law (1990), as amended.

Under these regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the accumulative amount of such reserves reach 50% of their registered capital. These reserves are not distributable as cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

Regulation of Foreign Exchange in Certain Onshore and Offshore Transactions

In October 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, SAFE Notice 75 was further supplemented by two implementation notices issued by the SAFE on November 24, 2005 and May 29, 2007, respectively. SAFE Notice 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “PRC legal person residents” as used in SAFE Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRC for economic benefit. The SAFE implementation notice of November 24, 2005 further clarifies that the term “PRC natural person residents” as used under SAFE Notice 75 refers to those “PRC natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests in domestic entities that are classified as “domestic-funding” interests.

PRC residents are required to complete amended registrations with the local SAFE branch upon: (i) injection of equity interests or assets of an onshore enterprise to the offshore entity, or (ii) subsequent overseas equity financing by such offshore entity. PRC residents are also required to complete amended registrations or filing with the local SAFE branch within 30 days of any material change in the shareholding or capital of the offshore entity, such as changes in share capital, share transfers and long-term equity or debt investments or, providing security, and these changes do not relate to return investment activities. PRC residents who have already organized or gained control of offshore entities that have made onshore investments in the PRC before SAFE Notice 75 was promulgated must register their shareholdings in the offshore entities with the local SAFE branch on or before March 31, 2006.

Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are

 

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prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.

Management

Directors and Executive Officers

The following table sets forth information regarding Linkage Technologies’ directors and executive officers.

 

Name

   Age   

Position/Title

Libin Sun

   47    Chairman and Chief Executive Officer

Guoxiang Liu

   45    Director and President

Dr. Xiwei Huang

   40    Director, Chief Operating Officer and Chief Accounting Officer

Libin Sun is the founder, chairman of the board of directors and chief executive officer of Linkage Technologies. Mr. Sun has over 20 years of experience in the software and electronics industries and has been a member of the Standing Committee of Jiangsu Software Industry Association since 2005 and the director general of Nanjing Software Export Association since 2003. He was named one of the Top Ten Leaders of PRC Software Enterprises in 2003 by the Chinese Software Industry Association, Outstanding Entrepreneur of Jiangsu Province in 2004 by the Jiangsu provincial government and the 2004 Information Industry Person of the Year in the Eastern China region by CCID Consulting and China Computer News. Mr. Sun received his bachelor’s degree in precision electron-machinery engineering from Northwest Telecommunication Engineering College in 1986 and a master’s degree in business administration from China Europe International Business School in 2003.

Guoxiang Liu is a member of the board of directors of Linkage Technologies and has served as the president of Linkage Technologies since 2008. From 2006 to 2007, Mr. Liu was Linkage Technologies’ senior vice president overseeing its sales operations. Prior to that, from 1998 to 2004, Mr. Liu was Linkage Technologies’ vice president overseeing its technology center. Prior to joining Linkage Technologies in 1997 as a manager, Mr. Liu had worked as a researcher and lecturer in the computer science department at Nanjing University of Post and Telecommunications since 1986. Mr. Liu has received many awards from the Jiangsu provincial government and Nanjing municipal government in recognition of his contributions to science and technologies, including being named an Outstanding Person in Science and Technology in 2003. Mr. Liu received his bachelor’s degree in computer science from Fudan University in 1986.

Xiwei Huang is a member of the board of directors and has served as the chief operating officer and chief accounting officer of Linkage Technologies since the beginning of 2009. He is primarily responsible for Linkage Technologies’ project management, quality control, information systems and customer service operations. Prior to becoming Linkage Technologies’ senior vice president in 2004, Dr. Huang had served as the director of technology since joining Linkage Technologies in 1998. Dr. Huang has published many articles in science and technology journals and published six books on software engineering, network technologies and management. He was named a “Mover and Shaker” of the Chinese Software Industry in 2007 and 2008 by the China Software Industry Association. Dr. Huang received his bachelor’s degree in electrical engineering from Nanjing University of Science and Technology in 1992, a master’s degree in signal and information processing from Nanjing University of Posts and Telecommunications in 1995, and a doctoral degree in information and electrical systems from Jiaotong University in 1999.

Employment Agreements

Linkage Technologies has entered into employment agreements with each of its executive officers. Linkage Technologies may terminate an executive officer’s employment for cause, at any time, without prior notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a

 

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felony, negligent or dishonest acts to its detriment or misconduct or a failure to perform agreed duties. An executive officer may, upon advance written notice, terminate his or her employment. Each executive officer is entitled to certain compensation upon termination, if Linkage Technologies terminates the employment without cause.

Each executive officer has agreed to hold in strict confidence any trade secrets or confidential information of Linkage Technologies. Each executive officer has also agreed to faithfully and diligently serve Linkage Technologies in accordance with the employment agreement and the guidelines, policies and procedures of Linkage Technologies approved from time to time by its board of directors. Under Linkage Technologies’ employment agreements with its executive officers, each executive officer has agreed to be bound by non-competition restrictions during his or her employment and for two years after the termination of his or her employment.

Compensation of Directors and Executive Officers

For the fiscal year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Technologies paid an aggregate of approximately RMB6.3 million ($0.9 million) and RMB11.39 million ($1.7 million) in cash compensation to its executive officers. In July 2009, Linkage Cayman granted an option to purchase 6,197,907 ordinary shares of Linkage Cayman at the price of RMB0.25 ($0.04) per share to an executive officer of Linkage Cayman and Linkage Technologies. The option is subject to vesting over three years, starting from July 31, 2009, and was valued at the estimated fair market value on the date of the award. In July 2009, the first tranche of the option was exercised with respect to 1,652,775 ordinary shares. As of the date of this Proxy Statement, the remaining options have been forfeited upon the executive officer’s resignation. Linkage Technologies characterized the share grant as compensation for the executive officer’s services to it and recorded share-based compensation expenses of $1.9 million for the nine months ended September 30, 2009.

Security Ownership of Linkage Technologies

The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 of the Exchange Act, of Linkage Technologies’ ordinary shares as of the date of this Proxy Statement by (i) each person known to Linkage Technologies to own beneficially more than 5% of Linkage Technologies’ ordinary shares, (ii) each named director or executive officer of Linkage Technologies and (iii) all current officers and directors of Linkage Technologies as a group.

 

     Number of Ordinary
Shares Beneficially
Owned(1)
    Percentage of Class of
Ordinary Shares
Beneficially Owned(1)
 

Directors and Executive Officers:

    

Libin Sun

   4,346 (2)    46.8   

Guoxiang Liu

   193 (3)    2.1   

Xiwei Huang

   103 (4)    1.1   

All directors and executive officers as a group

   4,642 (5)    50.0   

Principal Shareholders

    

Linkage Cayman

   9,288 (6)    100

 

(1) Applicable number of shares owned and percentage ownership is based on each holder’s beneficial ownership of shares of Linkage Cayman, which in turn owns all of the 9,288 ordinary shares of Linkage Technologies outstanding as of the date of this Proxy Statement.
(2)

Represents 86,029,515 ordinary shares of Linkage Cayman held by LT International Limited, a British Virgin Islands company wholly-owned and controlled by Mr. Libin Sun, and 105,186,203 ordinary shares of Linkage Cayman held by Mr. Sun. The Linkage Cayman shares owned by LT International Limited and Mr. Sun in turn result in LT International Limited and Mr. Sun beneficially owning 4,346 shares of Linkage

 

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Cayman’s wholly-owned subsidiary, Linkage Technologies. The business address of Mr. Sun is No. 16 Building, No. 12 Dinghuaimen, Nanjing 210013, People’s Republic of China.

(3) Represents 8,473,302 ordinary shares of Linkage Cayman held by Mr. Liu, which results in Mr. Liu beneficially owning 193 ordinary shares of Linkage Cayman’s wholly-owned subsidiary, Linkage Technologies. The business address of Mr. Liu is No. 16 Building, No. 12 Dinghuaimen, Nanjing 210013, People’s Republic of China.
(4) Represents 4,534,272 ordinary shares of Linkage Cayman held by Dr. Huang, which results in Dr. Huang beneficially owning 103 ordinary shares of Linkage Cayman’s wholly-owned subsidiary, Linkage Technologies. The business address of Dr. Huang is No. 16 Building, No. 12 Dinghuaimen, Nanjing 210013, People’s Republic of China.
(5) Represents ordinary shares of Linkage Technologies beneficially owned by Linkage Cayman, which in turn are held by all of the directors and executive officers of Linkage Technologies as a group.
(6) Linkage Cayman is 50.0% controlled by Mr. Sun and other directors and officers of Linkage Technologies. The address for Linkage Cayman is at the offices of Codan Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman KY1-111, Cayman Islands.

Related Party Transactions

Transactions with Lianchuang

In June 2004, Linkage Nanjing acquired from Lianchuang the telecommunication businesses and related assets of Lianchuang. Linkage Technologies’ management team, including its chairman and chief executive officer, Libin Sun, its president, Guoxiang Liu, and its chief operating office and chief accounting officer, Xiwei Huang, currently holds majority equity interests in Lianchuang. In addition, Mr. Sun serves as the chairman of the board of Lianchuang and is involved in the daily operations of Lianchuang.

During the years ended December 31, 2006, 2007 and 2008, Linkage Nanjing was licensed by Lianchuang to use certain of its trademarks, patents and other technologies free of charge.

During the years ended December 31, 2006, 2007 and 2008, Linkage Nanjing purchased $173,000, $104,000 and nil, respectively, of inventories from Lianchuang. Linkage Nanjing sold $3,000, $81,000 and nil, of inventories to Lianchuang during the years ended December 31, 2006, 2007 and 2008, respectively.

During the year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Nanjing leased an office building from the employee union affiliated with Lianchuang, with total rental expense amounting to $71,000 and $0.2 million, respectively. The contract is renewable annually.

During the year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Nanjing leased vehicles from Lianchuang, with total rental expense approximately amounting to RMB0.8 million ($0.1 million) and $83,000, respectively. The contract is renewable annually.

During the year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Nanjing purchased employee training services from Nanjing Jingling College of Software Education, a subsidiary of Lianchuang, with total training fee approximately amounting to RMB1.7 million ($0.3 million) and $0.2 million, respectively.

During the years ended December 31, 2006, 2007 and 2008, Linkage Nanjing provided loans amounting to $10.5 million, $5.2 million and $15.6 million to Lianchuang, respectively. There were no formal loan agreements. The loans were repaid within one to six months and had all been settled as of December 31, 2008. During the nine months ended September 30, 2009, Linkage Nanjing provided loans amounting to $6.1 million to

 

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Lianchuang. The loans were repaid within one to six months and, Linkage Nanjing has not received any interest on the loans. In September 2009, Linkage Nanjing entered into a confirmation with Lianchuang to acknowledge the interest-free and short-term nature of the pre-existing loan arrangements with Lianchuang for 2006 through September 30, 2009. As of September 30, 2009, there was no amount due to or from Lianchuang as a result of the above transactions.

In October 2008, Linkage Nanjing and Lianchuang entered into trademark license agreements, pursuant to which Lianchuang granted Linkage Nanjing a license to use certain trademarks. On July 28, 2009, Linkage Nanjing and Lianchuang entered into a supplementary agreement to the trademark license agreements, pursuant to which Linkage Nanjing has been granted a right to use these trademarks, free of charge, for a term of 20 years from the date thereof.

As of December 31, 2007 and 2008, there were no amounts due to or from Lianchuang as a result of the above transactions.

During the year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Nanjing paid professional fees on behalf of Linkage Cayman in the amount of $0.6 million and $1.6 million, respectively, which were mainly associated with its uncompleted initial public offering of the American Depositary Shares of Linkage Cayman on the New York Stock Exchange. As of September 30, 2009, there was $2.2 million balance due from Linkage Cayman as a result of the above transactions.

In June 2009, Linkage Nanjing and Lianchuang entered into a license agreement relating to technologies that are subject of certain patents and certain patent applications, pursuant to which Lianchuang granted Linkage Nanjing an exclusive and sub-license right to use these technologies free of charge. Linkage Nanjing is entitled to make improvements to these technologies and enjoy the use of these improvements.

In June 2009, Linkage Nanjing entered into an assignment agreement with Lianchuang whereby Lianchuang agreed to assign to Linkage Nanjing the rights in the patents or certain patent applications, including proprietary technologies and trade secrets underlying these patents and patent applications free of charge.

In July 2009, Lianchuang issued an irrevocable non-competition commitment letter to Linkage Nanjing and Linkage Suzhou whereby Lianchuang agreed to refrain from competing with Linkage Nanjing or its affiliates in the business of providing software solutions and related IT services to telecom operators within and outside of China.

In September 2009, Linkage Nanjing signed a memorandum of understanding with Lianchuang to clarify that, prior to the effective dates of their trademark, patent and technology license agreements in October 2008 and June 2009, all intellectual properties owned by Lianchuang and used by Linkage Nanjing shall be deemed to have been validly licensed to Linkage Nanjing free of charge.

Share Swap

In December 2008, Linkage Cayman issued 406,995,882 of its ordinary shares to the then-existing shareholders of Linkage Technologies in exchange for all of the outstanding shares of Linkage Technologies. See “—Corporate History and Structure” beginning on page [    ].

Employment Agreements

See “—Management—Employment Agreements” beginning on page [    ].

 

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LINKAGE TECHNOLOGIES’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of the financial condition and results of operations of Linkage Technologies in conjunction with Linkage Technologies’ audited consolidated financial statements and the related notes included elsewhere in this Proxy Statement. This discussion contains forward-looking statements that involve risks and uncertainties. Linkage Technologies’ audited consolidated financial statements have been prepared in accordance with US GAAP. In addition, Linkage Technologies’ consolidated financial statements and the financial data included in this Proxy Statement reflect its restructuring and have been prepared as if its current structure had been in place throughout the relevant periods presented. Linkage Technologies’ actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Proxy Statement.

Overview

Linkage Technologies is a leading provider of software solutions and IT services for the telecom industry in China. Linkage Technologies develops and implements core operating systems for all of the three telecom operators in China, namely, China Mobile, China Telecom and China Unicom.

Linkage Technologies markets its telecom software solutions as an integrated system or as individual functions. Linkage Technologies’ telecom software solutions address essential categories of telecom operators’ software requirements, and include primarily the following: BSS, which support customer-oriented account, billing and customer service functions; OSS, which manage network systems; and BI, which facilitate decision analysis processes.

Linkage Technologies negotiates and contracts separately with each provincial subsidiary of the telecom operators. As of September 30, 2009, 69 out of the 97 provincial subsidiaries and headquarters of China Mobile, China Telecom and China Unicom were customers of Linkage Technologies’ software solutions and services.

Linkage Technologies’ total revenues grew from $46.8 million in 2006 to $88.3 million in 2008 and its net income grew from $9.2 million in 2006 to $17.1 million in 2008. For the nine months ended September 30, 2009, Linkage Technologies generated total revenues of $112.5 million and net income of $25.3 million. In addition to software development, Linkage Technologies generates revenues from offering telecom operators IT services, such as consulting and system integration, and implementation of third-party hardware and software to address their other IT needs. Revenues from software development, IT services and third-party hardware and software constituted 88.3%, 5.9% and 5.8%, respectively, of its total revenues in 2008, and 89.7%, 2.1% and 8.2%, respectively, of its total revenues for the nine months ended September 30, 2009.

Factors Affecting Linkage Technologies’ Results of Operations

Linkage Technologies’ operating results in any period are subject to general conditions typically affecting the development and operating environment for China’s telecom industry, including:

 

   

Size and growth of the telecom industry in China. The size and growth of the telecom industry in China is affected by the state of the Chinese economy in general, the potential impact of new government policies, growth of telecom subscriber base and market demand for telecom and value-added services.

 

   

Size and growth of IT spending by telecom operators in China. The size and growth of IT spending by telecom operators in the near future are affected by the scale and complexity of telecom services provided by operators and the impact the recent restructuring of China’s telecom industry and adoption of 3G technologies had, and will have, on the market. The convergence of services provided is expected to lead to increased competition among the telecom operators and increased IT spending, as a result of pressures on them to provide higher and more advanced levels of telecom service as they compete in the converged markets.

 

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Size and growth of the telecom software solutions market. In addition to the demand for telecom software solutions generated from the growth of the telecom industry and the level of IT spending by the telecom operators, the size and growth of the telecom software solutions market also depends on factors such as the degree to which customers outsource software development to telecom software solutions providers rather than develop solutions in-house, the corporate level at which purchase decisions are made, the rate of innovation that telecom software solutions providers are able to sustain and the amount of new solutions and service offerings introduced in the telecom software solutions market.

 

   

Level of competition in China’s telecom software solutions market. The level of competition in China’s telecom software solutions market is dependent on a number of factors, including but not limited to the number of telecom software solutions providers active in the market, the financial resources of those competitors, and the amount of investments by competitors in the telecom software solutions market. Intensified levels of competition may lead to pressure to provide a greater level of services at lower prices.

 

   

Fluctuations of telecom software solutions spending by the Chinese telecom operators. The time and duration of the budget cycles of Chinese telecom operators may lead to fluctuations in telecom software solutions spending.

Unfavorable changes in any of these general conditions could negatively affect the number and size of contracts for Linkage Technologies’ solutions and services and adversely affect its results of operations.

Linkage Technologies’ operating results in any period are more directly affected by company-specific factors including:

 

   

Linkage Technologies’ ability to anticipate market demand for and to successfully develop new solutions and services to China’s telecom industry;

 

   

Linkage Technologies’ ability to identify and incorporate emerging technologies that would enhance its software solutions;

 

   

Linkage Technologies’ ability to provide customer service and support;

 

   

Linkage Technologies’ ability to attract, train and retain qualified software engineers;

 

   

Linkage Technologies’ ability to effectively manage its operating costs and expenses; and

 

   

The seasonality in Linkage Technologies’ operating results. See “Risk Factors—Seasonality and fluctuations in customers’ annual IT budget and spending cycle and other factors can cause Linkage Technologies’ revenues and operating results to vary significantly from quarter to quarter and from year to year” on page [    ].

 

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Revenues

Linkage Technologies derives revenues from three primary sources: (i) software development, (ii) IT services and (iii) third-party hardware and software. In recent years, Linkage Technologies has experienced rapid growth and significantly expanded its business. Linkage Technologies’ total revenues grew to $88.3 million in 2008 from $53.8 million in 2007 and $46.8 million in 2006. Linkage Technologies’ total revenues grew to $112.5 million in the nine months ended September 30, 2009 from $52.7 million in the nine months ended September 30, 2008. The following table summarizes the breakdown of Linkage Technologies’ revenues by these three primary sources.

 

    Year Ended December 31,   Nine Months Ended September 30,
    2006   2007   2008   2008   2009
    Revenues   % of
Total
Revenues
  Revenues   % of
Total
Revenues
  Revenues   % of
Total
Revenues
  Revenues   % of
Total
Revenues
  Revenues   % of
Total
Revenues
    ($ in thousands except percentages)

Revenues by source:

                   

Software development

  32,751   70.0   44,729   83.2   77,961   88.3   47,205   89.6   100,883   89.7

IT services

  6,358   13.6   4,703   8.7   5,192   5.9   2,734   5.2   2,319   2.1

Third-party hardware and software

  7,659   16.4   4,348   8.1   5,176   5.8   2,753   5.2   9,277   8.2
                                       

Total revenues

  46,768   100.0   53,780   100.0   88,329   100.0   52,692   100.0   112,479   100.0
                                       

Software Development

Software development accounted for 70.0%, 83.2%, 88.3% and 89.7% of Linkage Technologies’ total revenues for 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively.

Revenues from software development represent fees in recognition of Linkage Technologies’ customized software development services. Generally, Linkage Technologies’ contracts for software development are for project development periods ranging from six to twelve months and include the design and implementation of new solutions or significant customization of its software to meet its customers’ needs. Linkage Technologies typically receives a fixed fee payable according to pre-negotiated payment schedules. Depending on the contract, the fee could cover customization, modification, implementation, integration, training, bundled post-contract customer support, or PCS, and third-party hardware and software and their maintenance. After the software development is completed, Linkage Technologies stays involved with the customer to enhance the solution and provide customer support. Furthermore, Linkage Technologies’ software development contracts typically include PCS, normally for one year or less, free of charge.

 

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Linkage Technologies’ revenue growth in software development is affected by the growth in the number of its customers and growth in their revenue contributions from software development. The table below lists the number of customers classified by telecom operators and the aggregate revenue contributions from software development classified by telecom operators:

 

     For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
     2006    2007    2008        2008            2009    
     ($ in thousands, except number of customers)

China Mobile:

              

Number of customers(1)

   13    14    16    14    18

Total software development revenues(2)

   11,629    18,390    24,398    15,382    25,136

China Telecom:

              

Number of customers(1)

   27    27    30    30    31

Total software development revenues(2)

   17,424    21,024    42,438    26,145    45,874

China Unicom:

              

Number of customers(1)

   14    16    19    19    20

Total software development revenues(2)

   3,230    4,515    10,277    5,588    29,659

 

(1) Customers with respect to a telecom operator include each of the provincial subsidiaries and headquarters of the telecom operator, as a stand-alone legal entity, that have active contracts with Linkage Technologies during the relevant period.
(2) The aggregate of these revenues constituted 98.6%, 98.2%, 98.9% and 99.8% of Linkage Technologies’ total software development revenues for 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively.

The growth in Linkage Technologies’ customer base and revenue contribution from each of its customers is affected by the following:

 

   

Linkage Technologies’ ability to take advantage of changes in China’s telecom industry. The restructuring of telecom operators in recent years disrupted existing customer relationships between IT solutions providers and telecom operators and created opportunities for Linkage Technologies to establish new customer relationships. As the restructuring led to the convergence of fixed-line, mobile and broadband operations, Linkage Technologies was able to leverage its prior experience that encompassed all of these areas of operations.

 

   

Linkage Technologies’ ability to develop innovative solutions and services. The addition of new customers and the retention of existing customers, as well as the amount of customer spending on Linkage Technologies’ telecom software solutions, functional modules, upgrades and related services, are all affected by its ability to develop innovative solutions and services that meet and generate market demand. These include solutions that adopt next-generation technologies, provide reliable core systems while accommodating an expanding subscriber base and array of services and functions.

 

   

Linkage Technologies’ ability to effectively sell its solutions and services. Linkage Technologies’ ability to leverage its knowledge of the telecom operators and PRC telecom industry to determine the most effective sales methods and its emphasis on identifying selling and cross-selling opportunities directly impacts its sales results.

 

   

Linkage Technologies’ ability to offer customers value-added, “one-stop” services. Linkage Technologies’ ability to attract customers and maintain customer loyalty also depends on its ability to afford them the convenience, system integrity, industry expertise and quality services that are associated with comprehensive, “one-stop” services and value-added consulting services.

 

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IT Services

IT services accounted for 13.6%, 8.7%, 5.9% and 2.1% of Linkage Technologies’ total revenues for the years ended December 31, 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively. Revenues from IT services represent fees from the provision of IT consulting and research services, maintenance and support services and system integration services. Revenues from IT services is comprised of revenues from these three components:

 

   

IT consulting and research services. Revenues from IT consulting and planning services mainly represent fees from Linkage Technologies’ consulting services independent from its software development services.

 

   

Maintenance and support services. Linkage Technologies enters into third-party hardware maintenance and software support contracts with customers generally on a yearly basis. In most cases, Linkage Technologies enters into back-to-back arrangements with similar terms with third-party hardware and software vendors.

 

   

System integration services. Linkage Technologies’ revenues from system integration services include fees for its system procurement and implementation services, and network and software maintenance services.

Third-Party Hardware and Software

Third-party hardware and software accounted for 16.4%, 8.1%, 5.8% and 8.2% of Linkage Technologies’ total revenues for the years ended December 31, 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively. Revenues from third-party hardware and software represent sales proceeds from the third-party hardware or software Linkage Technologies incorporates into its customized software solutions, primarily servers and database software, and third-party products sold under system integration contracts.

Cost of Revenues and Operating Expenses

The following table sets forth the components of Linkage Technologies’ cost of revenues and operating expenses, both as an absolute amount and as a percentage of total revenues for the period indicated.

 

    For the Year Ended
December 31,
    For the Nine Months Ended
September 30,
 
    2006     2007     2008     2008     2009  
    ($ in thousands, except percentages)  
      %           %           %           %           %  

Total revenues

  46,768      100.0      53,780      100.0      88,329      100.0      52,692      100.0      112,479      100.0   
                                                           

Cost of revenues:

                   

Software development

  (16,233   (34.7   (19,319   (35.9   (35,587   (40.3   (22,599   (42.9   (46,475   (41.3

IT services

  (953   (2.0   (519   (1.0   (942   (1.1   (646   (1.2   (1,188   (1.1

Third-party hardware and software

  (6,827   (14.6   (3,852   (7.2   (4,626   (5.2   (2,455   (4.7   (8,259   (7.3
                                                           

Total cost of revenues

  (24,013   (51.3   (23,690   (44.1   (41,155   (46.6   (25,700   (48.8   (55,922   (49.7
                                                           

Operating expenses:

                   

Sales and marketing expenses

  (4,332   (9.3   (5,651   (10.5   (7,384   (8.4   (4,999   (9.5   (6,679   (5.9

General and administrative expenses

  (7,186   (15.4   (9,661   (18.0   (15,607   (17.7   (6,496   (12.3   (14,614   (13.0

Research and development expenses

  (704   (1.5   (1,098   (2.0   (2,522   (2.8   (1,635   (3.1   (5,421   (4.8
                                                           

Total operating expenses

  (12,222   (26.2   (16,410   (30.5   (25,513   (28.9   (13,130   (24.9   (26,714   (23.8
                                                           

Income from operations

  10,533      22.5      13,680      25.4      21,661      24.5      13,862      26.3      29,843      26.5   
                                                           

 

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Cost of Revenues

Cost of revenues represented 51.3%, 44.1%, 46.6% and 49.7% of its total revenues for the years ended December 31, 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively. Linkage Technologies’ cost of revenues includes costs directly attributable to its software development, IT services and third-party hardware and software sales. Linkage Technologies expects its cost of revenues to increase as it increases its sales.

Software Development

Cost of revenues related to software development consist primarily of compensation, including bonuses and share-based compensation, and travel expenses of Linkage Technologies’ engineers while they are involved in the design, modification, or installation of its software solutions or involved in providing consultation, training, maintenance and ongoing support services.

IT Services

Costs associated with IT services consist primarily of compensation and travel expenses of Linkage Technologies’ engineers while they are involved in the provision of system integration services, third-party hardware maintenance, third-party software support, network support and consulting services.

Third-Party Hardware and Software

Costs associated with third-party hardware and software consist primarily of the following:

 

   

software license fees paid to third-party software providers, primarily database software providers, for the right to sublicense their products and solutions to Linkage Technologies’ customers as part of its solution offerings;

 

   

hardware purchase costs for hardware required to be installed in connection with Linkage Technologies’ software solutions, typically computer servers; and

 

   

procurement costs for third-party hardware and software installed in connection with system integration services where, in limited instances, Linkage Technologies is primarily responsible for the performance of hardware and software installed. Linkage Technologies generally provides warranties and maintenance for the hardware it procures and, in most instances, obtains back-to-back warranties from third-party vendors.

Operating Expenses

Operating expenses consist of sales and marketing expenses, general and administrative expenses, and research and development expenses.

Sales and Marketing Expenses

Sales and marketing expenses represented 9.3%, 10.5%, 8.4% and 5.9% of Linkage Technologies’ total revenues for the years ended December 31, 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively. Sales and marketing expenses primarily consist of costs related to Linkage Technologies’ sales and marketing team, including compensation and benefits, performance-based bonus and share-based compensation, travel and entertainment expenses, advertising or promotion expenses, telecom expenses and sales and marketing-related office expenses.

General and Administrative Expenses

General and administrative expenses represented 15.4%, 18.0%, 17.7% and 13.0% of Linkage Technologies’ total revenues for the years ended December 31, 2006, 2007, 2008 and the nine months ended

 

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September 30, 2009, respectively. These include compensation and benefits (including performance-based bonus and share-based compensation), travel and entertainment of its accounting, human resource, management and other general and administrative personnel, as well as engineers that are not assigned to any customer-related or any internal research and development projects. These also include professional fees and overhead, such as rent, depreciation and other expenses allocated to the general and administrative functions.

Research and Development Expenses

Research and development expenses represented 1.5%, 2.0%, 2.8% and 4.8% of Linkage Technologies’ total revenues for the years ended December 31, 2006, 2007, 2008 and for the nine months ended September 30, 2009, respectively. These include expenses related to Linkage Technologies’ research and development projects that are not otherwise attributed to customized software development. These expenses are primarily compensation and benefits, travel expenses and training expenses of its research and development staff that are involved in these internal research and development projects.

Share-Based Compensation Expenses

Linkage Technologies’ share-based compensation expenses for the years ended December 31, 2006, 2007, 2008 and for the nine months ended September 30, 2009 were nil, $0.6 million, $2.3 million and $1.9 million, respectively. Linkage Technologies generally recognizes share-based compensation as an expense based on the fair value of the award on the grant date. These expenses related to options to purchase Linkage Cayman ordinary shares granted by Linkage Cayman to its directors, officers, and employees. Since Linkage Technologies has determined that the services associated with this share-based compensation benefited Linkage Technologies and its subsidiaries, Linkage Technologies has allocated these share-based compensation expenses to Linkage Technologies and its subsidiaries.

In July 2009, Linkage Cayman adopted its 2009 Share Incentive Plan, or the 2009 Plan, which is expected to be terminated in connection with the Combination. Linkage Cayman has reserved 61,979,069 shares for the issuance of share-based compensation under the 2009 Plan. As of the date of this Proxy Statement, no awards have been granted under the 2009 Plan.

Linkage Technologies is responsible for estimating the fair value of the awards granted to its employees and service providers, and other share-related transactions. The determination of fair value requires Linkage Technologies to make complex and subjective judgments about projected financial and operating results. It also requires making certain assumptions, such as cost of capital, general market and macroeconomic conditions, industry trends, comparable companies, price volatility of its shares, and discount rates. These judgments and assumptions are inherently uncertain. Changes in these judgments and assumptions could significantly affect the amount of share-based compensation expense recognized in Linkage Technologies’ consolidated financial statements.

For the awards previously granted, Linkage Technologies determined the fair value of its ordinary shares using the discounted cash flow method under the income approach. Under the discounted cash flow method, the projected cash flow estimate included, among other things, an analysis of projected revenue growth, gross margins, effective tax rates, capital expenditures and working capital requirements. The discount rates reflect the risks Linkage Technologies’ management perceived as being associated with achieving the forecasts and are based on its estimated cost of capital after taking into account systemic risks and company-specific risks. Discount rates applied were between 17.5% and 21%. Linkage Technologies also applied a discount for lack of marketability, or DLOM, to reflect the fact that Linkage Technologies is a closely-held company and there is no public market for its ordinary shares. Linkage Technologies used the Black-Scholes option pricing model in assessing the DLOM. DLOM rates applied were between 10% and 18%. Linkage Technologies checked the results obtained under the discounted cash flow method against the results obtained from the guideline companies method under the market approach and found no material discrepancies.

 

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July 31, 2007. On July 31, 2007, Libin Sun, the chairman and chief executive officer of Linkage Technologies, sold 146 ordinary shares in LT International Limited, or LT International, to three employees for RMB1.3 million ($0.2 million). LT International was then one of Linkage Technologies’ shareholders and controlled by Libin Sun. These ordinary shares of LT International represented an interest in Linkage Technologies, which in turn resulted in three employees beneficially owning 80 ordinary shares of Linkage Technologies.

March 31, 2008. On March 31, 2008, Libin Sun sold 1,543 ordinary shares of HF International Limited, or HF International, to 549 employees for $4.7 million. HF International was then one of Linkage Technologies’ shareholders and was controlled by Libin Sun and a group of Linkage Technologies’ employees. These ordinary shares of HF International represented an interest in Linkage Technologies, which in turn resulted in these employees beneficially owning 500 ordinary shares of Linkage Technologies. The increase in the fair value of Linkage Technologies’ ordinary shares from $9,351 per share on July 31, 2007 to $13,940 per share on March 31, 2008 was primarily attributable to an increase of its sales revenue and market share.

July 27, 2009. On July 27, 2009, Linkage Cayman granted an option to purchase 6,197,907 ordinary shares of Linkage Cayman at the price of RMB0.25 ($0.04) per share to an executive officer. The option was subject to vesting over three years, starting from July 31, 2009, and was valued at the estimated fair market value on the date of the award. In July 2009, the first tranche of the option was exercised with respect to 1,652,775 ordinary shares of Linkage Cayman. As of the date of this Proxy Statement, the remaining options have been forfeited upon the resignation of the executive officer from Linkage Cayman and Linkage Technologies. Linkage Technologies characterized the share grant as compensation for the executive officer’s services to it and recorded share-based compensation expenses of $1.9 million for the nine months ended September 30, 2009. Linkage Technologies used the discounted cash flow method in the determination of the fair market value of the shares transferred, applying a discount rate of 17.5% and DLOM of 10% in the determination.

The increase in the fair value of Linkage Technologies’ ordinary shares from $13,940 per share on March 31, 2008 to $38,717.8 per share on July 27, 2009 was primarily attributable to an increase in projected revenues due to strong growth in demand, new solutions, and market developments. Since July 27, 2009, Linkage Technologies believes that the fair value of its ordinary shares has further increased as a result of entering into several significant contracts, increases in its projected revenues based on increased demand for next generation projects, market developments, and increased cost efficiency.

Taxes

British Virgin Islands

Under the current laws of the British Virgin Islands, Linkage Technologies is not subject to tax on its income or capital gains. In addition, no British Virgin Islands withholding tax is imposed upon any payment of dividends.

Hong Kong

Linkage Technologies’ subsidiary in Hong Kong was subject to income tax at the statutory rates of 17.5%, 17.5%, 16.5% and 16.5% for 2006, 2007, 2008 and the nine months ended on September 30, 2009, respectively.

China

Linkage Technologies’ subsidiaries in the PRC were governed by China’s Income Tax Law concerning FIEs and foreign enterprises, or the FIE Income Tax Law, and local income tax laws in 2006 and 2007. The statutory rate for a FIE was 33%, including 30% national income tax and 3% local income tax. A qualified high and new technology enterprise, or HNTE, that operates in a state-level high and new technology development zone, was entitled to a preferential tax rate of 15%. Furthermore, a profitable HNTE was entitled to an exemption, or a “tax

 

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holiday,” from all income taxes for two years beginning with the first profitable year, and a 50% reduction of income tax rate for the subsequent three years. Local income tax was fully exempted during the tax holiday. As Linkage Nanjing was qualified as an HNTE operating in a high and new technology development zone, it was subject to an income tax rate at 7.5% during the years ended December 31, 2006 and 2007. Linkage Suzhou, recognized as a newly established software company, was entitled to two years’ tax exemption followed by three years of 50% tax reduction, starting from 2004, its first profitable year. As a result, for the years ended December 31, 2006 and 2007, Linkage Suzhou was entitled to a preferential tax rate of 15%. The 3% local tax was fully exempted during the tax holiday.

On March 16, 2007, the PRC government promulgated the PRC Corporate Income Tax Law, or the New CIT Law, which became effective from January 1, 2008. All enterprises, including both domestic enterprises and FIEs, would be taxed at a statutory rate of 25%. However, certain HNTEs continue to be entitled to a preferential tax rate of 15% and enjoy the previously granted tax holidays. Linkage Nanjing was certified as such an HNTE on December 9, 2008, which certification will be effective for three years from 2008 to 2010. At the same time, Linkage Nanjing continued to be eligible for a preferential tax rate of 12.5% for 2008 under the existing tax holiday scheme. On December 31, 2008, Linkage Nanjing was certified as a “Key Software Enterprise” for 2008 and was therefore eligible for a 10% tax rate for income earned during 2008. As companies may select the most preferential tax rate to apply, Linkage Technologies applied the 10% rate to Linkage Nanjing in 2008. However, due to the significant uncertainty as to whether similar preferential tax rates can be obtained for future years, Linkage Technologies did not assume Linkage Nanjing would continue to enjoy the 10% preferential tax rate after 2008 and applied a 15% tax rate in the calculation of applicable tax rate and deferred taxes for Linkage Nanjing for 2009. Linkage Suzhou was subject to a uniform tax rate of 25% for 2008 according to the New CIT Law.

Under the New CIT Law, enterprises established in China and enterprises established outside China whose “de facto management bodies” are located in China are considered “resident enterprises.” The New CIT Law also imposes a 10% withholding income tax for interest and dividends distributed by a resident enterprise to its immediate holding company outside the PRC that is not considered a resident enterprise, which interest and dividends distributions were previously exempt. A lower withholding tax rate will be applied if there is a tax treaty arrangement between mainland China and the jurisdiction of the foreign holding company. For the year ended December 31, 2008 and the nine months ended September 30, 2009, Linkage Technologies has accrued dividend withholding tax of $1.8 million and $nil, respectively, at the rate of 10% in deferred tax liabilities for undistributed earnings of its PRC subsidiaries. Linkage Technologies expects its withholding obligations to decrease as it becomes eligible for the lower withholding tax applicable to companies with a Hong Kong holding or intermediate holding company, provided, among other things, that the Hong Kong holding company will have held 25% or more of the equity interest of Linkage Nanjing at all times within the 12-month period prior to any dividends distribution.

Critical Accounting Policies

Linkage Technologies’ discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with the US GAAP, appearing elsewhere in this Proxy Statement. The preparation of these financial statements requires Linkage Technologies to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Linkage Technologies evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent 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

 

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estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. Linkage Technologies believes that the following accounting policies involve a higher degree of judgment and complexity in their application and require it to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with Linkage Technologies’ consolidated financial statements and other disclosures included in this Proxy Statement.

When reviewing Linkage Technologies’ financial statements, you should consider (i) its selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies, and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Revenue Recognition

Linkage Technologies derives its revenues from three sources: (i) software development, which includes development and licensing of software, provision of customization, modification, implementation, integration, training and PCS, as well as recurring revenues from ongoing system support and enhancement services, (ii) IT services, which includes system integration, third-party hardware maintenance, third-party software support, network support, and IT consulting and research services, and (iii) resale of third-party hardware and software.

Linkage Technologies’ software development arrangements contain multiple deliverables. The deliverables include licenses of custom software which consist of a combination of self-developed core software and third-party software, and related services such as customization, modification, implementation and integration services, training, and PCS. Such arrangements may also include third-party hardware and hardware installation and maintenance to the extent hardware is sold as part of the arrangement. As these arrangements require significant modification or customization of the software, revenues for the combined arrangement is recognized over the service period based on the percentage-of-completion method of accounting. Because PCS has never been sold separately, Linkage Technologies does not have vendor specific objective evidence of fair value of PCS. The percentage-of-completion method of revenue recognition is therefore applied through the date the last element is required to be delivered, which is typically the end of the bundled PCS period. Progress toward completion is measured by dividing the actual direct labor costs incurred into total estimated direct labor costs for the project. Revenue with respect to a project is computed by multiplying total estimated contract revenue by the percentage of completion. Cost of revenue is computed in a similar manner by multiplying total estimated contract cost by the percentage of completion. Gross profit with respect to the project for a period is the excess of revenue over the cost of revenue. Any revisions to existing estimated contract profits, if necessary, are made in the period in which the circumstances requiring the revisions become known. Provisions for expected losses on uncompleted contracts are recorded in the period in which such losses become probable.

The process of estimation inherent in the application of the percentage-of-completion method of accounting for revenue is subject to judgments and uncertainties and may affect the amount of software development revenue and related expenses reported in Linkage Technologies’ consolidated financial statements. A number of internal and external factors can affect Linkage Technologies’ estimates to complete customer engagements, including skill level and experience of project managers, staff assigned to engagements and continuity and attrition level of processional services staff. Changes in the estimated stage of completion of a particular project could create variability in Linkage Technologies’ revenue and results of operations if it is required to increase or decrease previously recognized revenue related to a particular project or if it expects to incur a loss on the project.

Certain of Linkage Technologies’ software development arrangements include ongoing system support and enhancement services. These services consist of designing and implementing enhancements to existing software, providing overall system support and performing operational tasks in the customer’s IT function on behalf of the customer. These services are generally provided over a specified period of time, typically ranging from a few months to two years. The cost of providing such services cannot be reliably estimated as the workload varies with

 

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the customer’s service requests during the service period. Under these arrangements, the entire arrangement fee and accumulated contract costs are deferred and recognized ratably over the longer of the PCS and the system support and enhancement service period, commencing subsequent to delivery of the customized software and when PCS, system support and enhancement services are the only remaining deliverables.

Revenue from ongoing system support and enhancement arrangements that are not combined with other elements are recognized ratably over the service period and when persuasive evidence of an arrangement exists, the fee is fixed or determinable, and collectability is reasonably assured.

Subsequent sales of upgrades and enhancements are accounted for separately from the initial sales of customized software as upgrades and enhancements are not negotiated within a short time frame of the initial sale, the software from the initial sale is not dependent on the delivery of the upgrades or enhancements, neither the fees for the initial or subsequent sale are subject to refund if one or the other contracts is not fulfilled nor are payment terms for either sale tied to the performance of the other.

Linkage Technologies’ system integration arrangements also include multiple deliverables, such as third-party hardware and software, installation, integration, training, maintenance, and support. Linkage Technologies evaluated the deliverables for separation and determined that the delivered items should not be considered a separate unit of account because not all undelivered elements have objective and reliable evidence of fair value. Revenues are recognized when Linkage Technologies has substantially met its performance obligations under the contract and received final acceptance from the customer. Generally revenues are recognized net of the amounts paid to suppliers of the third-party hardware and software as Linkage Technologies is considered to be an agent in these arrangements.

Linkage Technologies enters into third-party hardware maintenance and software support contracts with end customers and generally enter into back-to-back arrangements of similar key terms with the third-party hardware and software vendors to cover its risks in the customer contracts. Revenues are recognized ratably over the term of the maintenance or support agreement when all other revenue recognition criteria are met. Under such arrangements, Linkage Technologies recognizes revenues net of the back-to-back contracts as it is considered an agent in these arrangements. In a limited number of arrangements where Linkage Technologies is contracted to provide network support services and no back-to-back arrangements exist with third-party hardware and software vendors, Linkage Technologies reports revenues at gross amounts billed to the customer because it is the primary obligor in those arrangements.

Linkage Technologies’ research findings under IT consulting and research arrangements are evaluated by the customer based on the customer’s specific criteria. Revenues are recognized when Linkage Technologies receives final acceptance from the customer, assuming all other revenue recognition criteria have been met.

Revenue from resale of third party hardware and software, if not bundled with other deliverables, is recognized upon delivery and acceptance.

The determination of whether Linkage Technologies serves as a principal or agent in an arrangement is based on an evaluation of the terms of the arrangement and is judgmental. Most of Linkage Technologies’ system integration and third-party hardware maintenance and software support arrangements are reported on a net basis because it does not take general inventory risk, has little or no latitude in setting sales prices, does not make changes to third-party products, has no discretion in supplier selection, has limited physical loss inventory risk, and the third party product suppliers are the primary obligors.

Billings are rendered based on agreed upon contract milestones. Revenues recognized in excess of billings is recorded as unbilled receivables and is included in trade accounts receivable. Unbilled receivables also include costs that are incurred when performing system integration services as an agent and will be billed based on contractual billing milestones. These costs typically relate to hardware, software and spare parts that have been acquired by Linkage Technologies and have been delivered to the customer. Billings in excess of revenues recognized are recorded as deferred revenue.

 

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Allowance for Doubtful Accounts

Linkage Technologies provides allowances for doubtful accounts for its trade accounts receivable based on an analysis of the history of bad debts, the creditworthiness of its customers, aging of the accounts receivable, changes in its customers’ payment terms, economic conditions, and other specific circumstances related to the accounts. Linkage Technologies performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers.

Linkage Technologies’ accounts receivable balances on December 31, 2007 and 2008 and September 30, 2009 were $36.0 million, $52.4 million and $84.8 million, respectively, net of allowance for doubtful accounts of $81,000, $144,000 and $144,000, respectively. If the financial condition of its customers were to deteriorate, resulting in their failure to make payments, an additional allowance might be required.

Share-Based Compensation

Linkage Technologies is responsible for estimating the fair value of its share-related transactions, which have been the result of the issuance of ordinary shares at a discount from fair value. The determination of fair value requires Linkage Technologies to make complex and subjective judgments about projected financial and operating results. It also requires making certain assumptions such as cost of capital, general market and macroeconomic conditions, industry trends, comparable companies and its share price volatility, expected lives of options and discount rates. These assumptions are inherently uncertain. Changes in these assumptions could significantly affect the amount of employee share-based compensation expense Linkage Technologies recognizes in its consolidated financial statements.

Linkage Technologies recognized total share-based compensation expense of $nil, $0.6 million, $2.3 million and $1.9 million for the years ended December 31, 2006, 2007, and 2008 and the nine months ended September 30, 2009, respectively.

Determination of the fair value of share-based compensation is further discussed in “—Factors Affecting Linkage Technologies’ Results of Operations—Share-Based Compensation Expenses” beginning on page [    ].

Income Taxes

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net operating loss carryforwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of Linkage Technologies, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on the characteristics of the underlying assets and liabilities, or the expected timing of their use when they do not relate to a specific asset or liability. As of December 31, 2007 and 2008, Linkage Technologies had not recorded a valuation allowance as Linkage Technologies believes it is more likely than not that its deferred tax assets will be realized. Current income taxes are provided for in accordance with the laws of the relevant tax authorities.

On January 1, 2007, Linkage Technologies adopted authoritative accounting guidance providing that the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, the guidance addresses de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The total amount of unrecognized tax benefits as of the date of adopting the guidance was nil. Interest and penalties on income taxes will be classified as a component of the provisions for income taxes.

 

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Results of Operations

The following table sets forth a summary of Linkage Technologies’ consolidated results of operations for the periods indicated under US GAAP.

 

    For the Year Ended
December 31,
    For the Nine Months Ended
September 30,
 
    2006     2007     2008     2008     2009  
    ($ in thousands, except percentages)  
          %           %           %           %           %  

Revenues:

                   

Software development

  32,751      70.0      44,729      83.2      77,961      88.3      47,205      89.6      100,883      89.7   

IT services

  6,358      13.6      4,703      8.7      5,192      5.9      2,734      5.2      2,319      2.1   

Third-party hardware and software

  7,659      16.4      4,348      8.1      5,176      5.8      2,753      5.2      9,277      8.2   
                                                           

Total revenues

  46,768      100.0      53,780      100.0      88,329      100.0      52,692      100.0      112,479      100.0   
                                                           

Cost of revenues:

                   

Software development(1)

  (16,233   (34.7   (19,319   (35.9   (35,587   (40.3   (22,599   (42.9   (46,475   (41.3

IT services

  (953   (2.0   (519   (1.0   (942   (1.1   (646   (1.2   (1,188   (1.1

Third-party hardware and software

  (6,827   (14.6   (3,852   (7.2   (4,626   (5.2   (2,455   (4.7   (8,259   (7.3
                                                           

Total cost of revenues

  (24,013   (51.3   (23,690   (44.1   (41,155   (46.6   (25,700   (48.8   (55,922   (49.7
                                                           

Gross profit

  22,755      48.7      30,090      55.9      47,174      53.4      26,992      51.2      56,557      50.3   

Operating expenses:

                   

Sales and marketing expenses(1)

  (4,332   (9.3   (5,651   (10.5   (7,384   (8.4   (4,999   (9.5   (6,679   (5.9

General and administrative expenses(1)

  (7,186   (15.4   (9,661   (18.0   (15,607   (17.7   (6,496   (12.3   (14,614   (13.0

Research and development expenses

  (704   (1.5   (1,098   (2.0   (2,522   (2.9   (1,635   (3.1   (5,421   (4.8
                                                           

Total operating expenses

  (12,222   (26.2   (16,410   (30.5   (25,513   (28.9   (13,130   (24.9   (26,714   (23.8
                                                           

Income from operations

  10,533      22.5      13,680      25.4      21,661      24.5      13,862      26.3      29,843      26.5   
                                                           

Other income (expense):