Longtop Financial Technologies Limited Issues Statement in Response to Research Reports

HONG KONG, May 10, 2011 /PRNewswire-Asia/ -- Longtop Financial Technologies Limited ("Longtop") (NYSE: LFT), today issued a statement in response to a purported research report published by OLP Global. The report claimed, among other things, that Longtop and a Xiamen-based HR company, Xiamen Longtop Human Resource Service Co. Ltd. (XLHRS), are related parties, that Longtop under-contributed employee benefits, and that it conducted questionable acquisitions. As discussed in detail below, Longtop management refutes these allegations, and, in view of similarly specious allegations published by Citron Research on May 9, 2011, wishes to express concern that Longtop appears to be a target of efforts to attack the integrity of its business and its financial statements as the time for the announcement of its fiscal 2011 earnings approaches.

Allegation #1 Two Longtop employees have been administering XLHRS company filings, a clear indication of Longtop's involvement in XLHRS operations …. Our discovery of Longtop and XLHRS as related parties, coupled with management's repeated denial of any operating links between the two, leads us to believe that the integrity of the cost of revenue line item has been severely compromised. (Source: OLP Global)

OLP Global first alleges that it made a "discovery" that Longtop and XLHRS are related parties because the signatures of two Longtop employees appear on XLHRS filings with the Administration of Industry and Commerce (the AIC, which is the company registrar in the People's Republic of China (the PRC) with authority to oversee the formation registration of corporate entities (e.g. XLHRS) and any amendments thereto) and then makes the remarkable leap from this baseless accusation to the bald statement that "the integrity of the cost of revenue line item has been severely compromised."

Longtop requested the authorization to sign and submit certain filings on behalf of XLHRS as a protective measure in February 2009 because the number of employees seconded from XLHRS to Longtop had begun to increase with Longtop's growth.  In order to allow Longtop to monitor XLHRS's filings with the AIC, XLHRS agreed that a representative from Longtop's legal department would serve as an agent for XLHRS's AIC filings.  

Longtop's Human Resource Service Contract with XLHRS (the XLHRS Contract), was amended on March 20, 2010 to give Longtop the contractual right to approve certain matters as noted below.  This contract is filed as Exhibit 4.36 to Longtop's Form 20-F.  Article 16 (3) of the XLHRS Contract provides the following: "Party B [i.e. XLHRS] without the written approval of Party A [i.e. Longtop] will not take out bank loans in excess of Rmb 5 million, mortgage or pledge any of its assets or shares to a third party, undertake stock trading, real estate investment or undertake business outside the business scope of its business license."

In order to ensure that Article 16 (3) is complied with, Longtop has continued to designate individuals from its legal department, with XLHRS's approval, to be agents for XLHRS's dealings with the AIC. The authorization (which is both procedural and customary in the PRC) granted to Longtop's employees to act as agents does not give Longtop any control over XLHRS, nor does it cause XLHRS to be a related party of Longtop; it simply helps to protect Longtop from any impairment or change to XLHRS's business, capital or other factors that could have an adverse effect on XLHRS's performance of the XLHRS Contract and hence Longtop's business.  

Allegation #2: Our research indicates that Longtop has under-contributed social welfare benefits, creating inflated margins and possibly violating China's labor law….Given recent change in Longtop's human resource practice, we believe Longtop will be obligated to contribute the appropriate amount for employees in their respective cities of residence, which will negatively impact margins. (Source: OLP Global).   According to LFT 20-F, XLHRS is to receive a service fee for all 3,200 employees they "handle" for Longtop's mostly technical and professional workforce (appx 76% of its headcount).  This service fee is defined as "for salary + bonus + social insurance + other expense for the entire year". On a conservative basis, this would amount to $400 to 500 million RMB. (Source: Citron Reports)

OLP Global alleges that Longtop has "under-contributed social welfare benefits and Citron indicates that XLHRS should have service fees of "$400 to 500 million RMB". Under the laws of the PRC and PRC GAAP, all staffing companies in China only record as revenue the amount of service fees, and they do not record as revenue the gross payroll paid for its employees which are contracted to its customers. The staffing company's customer, in this case Longtop, records as an expense in both its PRC and US GAAP financial statements the cost of the service fee as well as all of the employee costs for salary and social welfare.  Longtop does not have unrecorded liabilities related to its social welfare payments. Welfare payments made by Longtop are disclosed in Form 20-F for 2010 and can be easily benchmarked to other US public companies in China, once again, by anyone interested in performing legitimate research. For the fiscal years ended March 31, 2009 (audited), March 31, 2010 (audited) and March 31, 2011 (unaudited), total social welfare contributions made by Longtop were US$4.2 million (2010 audited financial statements note 13), US$7.7 million (2010 audited financial statements note 13) and US$14.8 million (unaudited) respectively. Based on the average number of employees during the year using quarter end headcount, Longtop's average welfare per person was approximately US$2,300 per person in fiscal 2010 and $2,900 in fiscal 2011.    

Longtop reiterates that it believes, as stated previously, that the recent change in HR structure will be margin neutral.

For similar reasons, Longtop refutes the allegation in a purported research report published on May 9, 2011 by Citron Research that Longtop may have used XLHRS as "a vehicle to hide off balance sheet transactions."

Allegation #3: Questionable acquisition practice. Our review of Longtop's 20 acquisitions raises several red flags. Most acquired entities appeared to be unprofitable, with outsized operating expenses relative to the scale of these respective businesses…. Other red flags we identified include ownership issues and opaque disclosures that make it impossible for investors to independently verify a number of transactions. (Source: OLP Global)

While Longtop has not checked the accuracy of the financial data on acquisitions referred to in the OLP Global report, investors should note the following:

1) There could be differences between what OLP Global claims to have reviewed and what Longtop has reported because Longtop reports externally under US GAAP and not PRC GAAP, which is largely cash-based rather than accrual-based. For example revenue is generally recorded under PRC GAAP when the tax invoice is issued, shortly before collection. It also appears that OLP Global has not reviewed the company's audited financial statements which disclose the US GAAP results for more significant acquisitions.  

2) When Longtop acquires legal entities, some or most of the business and employees often are transferred out of the acquired entities into Longtop's existing legal entities (mainly Longtop  System (China) Co., Ltd.) as soon as practical for a number of reasons including promoting the "Longtop" brand rather than the acquired companies brand.  As a result, many of the acquired legal entities become largely inactive, and reviewing post-acquisition PRC GAAP financials is not indicative of the business's performance.  

Regarding comments made by OLP Global on specific acquisitions, Longtop will respond one by one.

Beijing Giantstone. Longtop believes the acquisition of Giantstone has considerable opportunity given the potential for core banking in China, which has experienced tremendous growth in the past three years.   In the early part of 2009, Giantstone had around 200 employees and at March 31, 2011, Longtop's core banking business unit had grown to over 600 employees. According to IDC, Longtop became #1 in business related solutions in China's banking IT solution market in 2009 and Giantstone has been instrumental in Longtop achieving this ranking.  

Sysnet Data Co. Again, Longtop has not checked the accuracy of the financial data on acquisitions referred to in the OLP report, which purported to include financial information of Sysnet prior to the acquisition.  As disclosed in Longtop's 2010 Form 20-F, Note 7(b) to the audited financial statements,  "Revenue and net income from Sysnet since the acquisition date included in the consolidated statement of operations for the year ended March 31, 2010 were $12,884 and $1,743, respectively."  Sysnet's net income on a "non GAAP" basis would have been significantly higher.  Longtop believes the Sysnet employees have made a tremendous contribution to Longtop's insurance business where according to IDC, Longtop became number 2 in China's insurance IT solution market in 2009.   Consideration for the Sysnet acquisition included a two year earnout for both calendar 2009 and calendar 2010, and the earnout was not based on Sysnet's PRC GAAP financials.  When Longtop acquires companies and there are earnouts, they are often operated as standalone profit centers, which meant in this case that in 2009 Longtop had two insurance teams – its own internal insurance team and the Sysnet team.   The 2010 calendar year earnout for Sysnet was cancelled because, once Sysnet had exceeded its 2009 earnout target, it was highly likely that the 2010 earnout would be achieved. In addition, there was a low risk of Sysnet staff leaving if they were fully integrated into Longtop and there would be an advantage to better servicing Longtop's customers by having "one insurance team" rather than two. As a result, after the cancellation of the Sysnet earnout a full integration was undertaken with a combination of the Sysnet and Longtop teams.  

Grand Legend Holdings. Shortly after the acquisition in 2006 Grand Legend Holdings was folded into Longtop's business operations and the legal entity Longtop System (China) Co., Ltd. The legal entity has become largely inactive and most of the employees continue to work in the Longtop System (China) Co. Ltd.

Minecode. As Longtop has disclosed in its annual report on Form 20-F, "In March 2007, we acquired Minecode, which provided technology outsourcing services in the United States primarily for Microsoft. Minecode became a subsidiary of Longtop Technologies International (LTI) and was disposed of in July 2007 as part of the LTI disposition, in which we distributed LTI and its subsidiaries to our shareholders." Pursuant to the acquisition agreements, LTI was not allowed to use the "Minecode" name post-acquisition.   Minecode did not go into bankruptcy, as OLP Global alleges.  Rather, the main shareholder who sold Minecode to LTI went into personal bankruptcy, which was an unfortunate event, but was totally unrelated to Longtop's business history.  

FEnet Co. Ltd. Guangzhou. Only a small part of Longtop's Business Intelligence (BI) revenues are recorded in FEnet and most of the business is recorded in Longtop  System (China) Co., Ltd, the group's primary operating subsidiary in China. As stated above, reviewing post acquisition PRC GAAP financials for one legal entity does not provide an accurate picture of Fenet's business performance because it has been integrated. With the addition of the Fenet employees in the later part of 2007, Longtop has become the undisputed market leader in banking BI solutions according to IDC with market share of 44% in 2009.  

Huayuchang Tongchuang. Firstly, OLP Global misstates the acquisition cost as US$15.6 million. Instead it was an immaterial amount of less than a few million dollars and therefore not disclosed. As disclosed in our annual filing with SEC: "In May 2008, we acquired 100% of the equity interests in Beijing Huayuchang Co-Founder and Technology Company, or Huayuchang Tongchuang. Huayuchang Tongchuang is engaged in the business of providing ATM maintenance services to financial institutions in China.  We made the acquisition in order to increase our market share in the ATM maintenance market." Post acquisition some of Huayuchang's business was transferred to Longtop's ATM maintenance legal entities and Huayuchang is primarily used when it has approved vendor status or existing contracts that cannot be assigned. Longtop's ATM maintenance business line is profitable.

Precision Hightech Co., Ltd. is purported by OLP to be one of "acquisitions announced but never closed".  Longtop acquired only some assets of this company and did not acquire the legal entities of Precision Hightech. As a result, there was no transfer of ownership, and this would be apparent to anyone interested in researching the question rather than piling on spurious false allegations. As disclosed in our annual report on Form 20-F: "In July 2008, we acquired the assets and business of Precision Hightech Company Ltd, or Puji.  Puji provides core banking software products and solutions to financial institutions in China.  We acquired Puji in order to increase our share in the market for such services."

Xiamen Hooyoo Information Technology Co. is purported by OLP to be "Questionable ownership transfer to management".  The reasons the registered owners at AIC are employees of Longtop is detailed in Longtop's 2010 20-F annual report. "In July 2008, we acquired Xiamen Hooyoo Information Technology Co., Ltd, or Hooyoo and its subsidiaries and in September 2008, we acquired the assets of Huashang Shengshi Internet Co. Ltd., or Huashang.  Both companies provide domain name sales and online hosting services. Because regulations in China currently restrict or prevent foreign-invested entities from engaging in value-added telecommunication services, including online hosting services, we acquired and currently hold Hooyoo, and hold the assets acquired from Huashang, through a VIE arrangement, under which two of our employees hold all of the equity interests in Longtop Online (formerly, Xiamen Bizcn Network Co., Ltd.), which is the sole parent of Hooyoo and holds the assets acquired from Huashang. We control Longtop Online, however, through a series of contractual arrangements with the two employees."  

Huashang Shengshi Internet Co. As mentioned above, Longtop acquired the assets and not the legal entities, and the assets were folded into Hooyoo. Therefore there is no reason why Longtop would be the shareholder of this company.  

Beijing Jactus Ruanbo. As stated in our annual report on Form 20-F, "In February 2009, we acquired Beijing Jactus Ruanbo Software and Technology Co., Ltd., or Jactus, a leading third-party testing company focused on China's financial industry.  We acquired Jactus in order to increase our share in the market for such services." A substantial amount of the business and employees of Jactus were transferred to Longtop's operating subsidiaries.  A review of post acquisition PRC GAAP financials is not indicative of the business performance.

Infopower is purported by OLP to be one of "acquisitions announced but never closed". Longtop acquired the assets of "Infopower" rather than the legal entity.  This is the reason that there has been no change of ownership registered with the AIC.

FND Soft was acquired because of its core insurance capabilities and is fully integrated into Longtop. FND Soft's profitability will be improved by selling its products and services to its existing customers.  

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by such terms as ''believes,'' ''expects,'' ''anticipates,'' ''intends,'' ''estimates,'' the negative of these terms, or other comparable terminology. Factors that could cause actual results to differ include the effectiveness, profitability, and marketability of the company's solutions; the Company's limited operating history; its reliance on a limited number of customers that  continue to account for a high percentage of the Company's revenues; risk of payment failure by any of its large customers, which could significantly harm the Company's cash flows and profitability; future shortage or availability of the supply of employees; general economic and business conditions; the volatility of the company's operating results and financial condition; the Company's ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed in the company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the companies and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the company believes that the expectations expressed in these forward looking statements are reasonable, they cannot assure you that their expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results. Any projections in this release are based on limited information currently available to us, which is subject to change.

About Longtop Financial Technologies Limited

Longtop is a leading software development and solutions provider targeting the financial services industry in China. Longtop develops and delivers a comprehensive range of software applications and solutions with a focus on meeting the rapidly growing IT needs of the financial services institutions in China. Longtop is the highest ranked Chinese financial technology provider on the Global FinTech 100 survey of top technology partners to the financial services industry. Independent research firm IDC has also named Longtop the No.1 market share leader in China's Banking IT solution market and the No.2 market share leader in China's Insurance IT solution market in calendar year 2009. Headquartered in Beijing, Longtop has six solution delivery centers, three research and development centers and 95 ATM service centers located in 27 out of 31 provinces in China.

For more information, please visit: http://www.longtop.com .

SOURCE Longtop Financial Technologies Limited