Table of Contents
SECURITIES AND EXCHANGE COMMISSION
o | Registration statement pursuant to Section 12(b) or 12 (g) of the Securities Exchange Act of 1934 |
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
o | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
(Translation of Registrant’s Name Into English)
(Jurisdiction of Incorporation or Organization)
Beijing 100193, People’s Republic of China
(Address of Principal Executive Offices)
Sidney Xuande Huang, +86(10) 8282-5266,
shuang@vanceinfo.com,
3/F Building 8, Zhongguancun Software Park, Haidian District
Beijing 100193, People’s Republic of China
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange On Which Registered | |
American Depositary Shares, each | New York Stock Exchange | |
representing one ordinary share, par | ||
value US$0.001 per share |
None
(Title of Class)
None
(Title of Class)
Large accelerated filero | Accelerated filerþ | Non-accelerated filero |
Page | ||||||||
1 | ||||||||
2 | ||||||||
2 | ||||||||
3 | ||||||||
3 | ||||||||
27 | ||||||||
48 | ||||||||
48 | ||||||||
71 | ||||||||
81 | ||||||||
82 | ||||||||
83 | ||||||||
84 | ||||||||
92 | ||||||||
93 | ||||||||
95 | ||||||||
95 | ||||||||
95 | ||||||||
96 | ||||||||
98 | ||||||||
98 | ||||||||
98 | ||||||||
98 | ||||||||
99 | ||||||||
99 | ||||||||
100 | ||||||||
100 | ||||||||
100 | ||||||||
100 | ||||||||
100 | ||||||||
Exhibit 8.1 | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 12.2 | ||||||||
Exhibit 13.1 | ||||||||
Exhibit 13.2 | ||||||||
Exhibit 15.1 | ||||||||
Exhibit 15.2 | ||||||||
Exhibit 15.3 |
Table of Contents
• | “attrition rate”, with respect to an information technology, or IT service company or its business unit during a specified period, refers to the ratio of the number of professionals that have left that company during the period, excluding employees employed for less than six months, to the number of full-time professionals that were on that company’s payroll at the ending date of the same period; |
• | “China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this annual report only, Taiwan, Hong Kong and Macau; |
• | “Greater China” refers to the People’s Republic of China, including, for purposes of this annual report only, Taiwan and Hong Kong; |
• | “Huawei” refers to Huawei Technologies Co., Ltd. and certain of its affiliates; |
• | “IBM” refers to International Business Machine China Company Limited, IBM Global Services (China) Company Limited and IBM Solution and Services (Shenzhen) Co., Ltd.; |
• | “Microsoft” refers to Microsoft Corporation and Microsoft (China) Co., Ltd.; |
• | “professionals”, with respect to an IT service company, refer to employees executing IT services for its clients; |
• | “Sequoia” refers to Sequoia Capital China I, L.P. and Sequoia Capital Growth Fund III, L.P., each of which is a holder of our ordinary shares, and their affiliates; |
• | “TIBCO” refers to TIBCO Software Inc.; |
• | “US$,” “U.S. dollar” or “$” refers to the legal currency of the United States; and |
• | “we,” “us,” “our company,” “our” and “VanceInfo” refer to VanceInfo Technologies Inc., a Cayman Islands company, its predecessor, the IT services business of Beijing Wensi Chuangyi Software Technology Co., Ltd., its subsidiaries and its variable interest entity, Shanghai Megainfo Tech Co., Ltd., before its liquidation in January 2009. |
1
Table of Contents
• | our expansion plans; |
• | our anticipated growth strategy; |
• | our plans to recruit more employees; |
• | our plans to invest in research and development to enhance our service lines; |
• | our future business development, results of operations and financial condition; |
• | expected changes in our net revenues and certain cost or expense items; |
• | our ability to attract and retain clients; and |
• | trends and competition in the offshore IT services industry. |
2
Table of Contents
3
Table of Contents
VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2005 | 2006 | |||||||||||||||||||
As adjusted(1) | As adjusted(1) | 2007 | 2008 | 2009 | ||||||||||||||||
(in US$ thousands, except percentage, share, per share and per ADS data) | ||||||||||||||||||||
Consolidated Statement of Operations Data | ||||||||||||||||||||
Net revenues | 15,481 | 29,051 | 62,714 | 102,663 | 148,066 | |||||||||||||||
Cost of revenues(2) | (9,125 | ) | (17,961 | ) | (38,544 | ) | (62,911 | ) | (92,171 | ) | ||||||||||
Gross profit | 6,356 | 11,090 | 24,170 | 39,752 | 55,895 | |||||||||||||||
Selling, general and administrative expenses(2) | (3,296 | ) | (6,821 | ) | (16,180 | ) | (25,905 | ) | (34,710 | ) | ||||||||||
Change in fair value of contingent consideration liability arising from business acquisitions | — | — | — | — | (62 | ) | ||||||||||||||
Other operating income | 102 | 54 | 860 | 858 | 1,754 | |||||||||||||||
Income from operations | 3,162 | 4,323 | 8,850 | 14,705 | 22,877 | |||||||||||||||
Net income | 3,259 | 4,411 | 9,621 | 16,089 | 21,508 | |||||||||||||||
Net (income)/loss attributable to noncontrolling interest | (24 | ) | (35 | ) | (52 | ) | 84 | — | ||||||||||||
Deemed dividend on Series A convertible redeemable preferred shares — accretion of redemption premium | (462 | ) | (611 | ) | (632 | ) | — | — | ||||||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 2,773 | 3,765 | 8,937 | 16,173 | 21,508 | |||||||||||||||
Income per ordinary share: | ||||||||||||||||||||
Basic | 0.13 | 0.08 | 0.22 | 0.43 | 0.56 | |||||||||||||||
Diluted | 0.13 | 0.07 | 0.19 | 0.40 | 0.52 | |||||||||||||||
Income per ADS: | ||||||||||||||||||||
Basic | 0.13 | 0.08 | 0.22 | 0.43 | 0.56 | |||||||||||||||
Diluted | 0.13 | 0.07 | 0.19 | 0.40 | 0.52 | |||||||||||||||
Weighted average ordinary shares used in calculating net income per ordinary share: | ||||||||||||||||||||
Basic | 11,530,684 | 9,605,507 | 11,426,183 | 37,276,306 | 38,389,495 | |||||||||||||||
Diluted | 11,530,684 | 10,205,449 | 13,446,087 | 40,695,982 | 41,576,217 |
4
Table of Contents
VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2005 | 2006 | |||||||||||||||||||
As adjusted(1) | As adjusted(1) | 2007 | 2008 | 2009 | ||||||||||||||||
(in US$ thousands, except percentage, share, per share and per ADS data) | ||||||||||||||||||||
Other Consolidated Financial Data | ||||||||||||||||||||
Gross margin(3) | 41.1 | % | 38.2 | % | 38.5 | % | 38.7 | % | 37.8 | % | ||||||||||
Operating margin(4) | 20.4 | 14.9 | 14.1 | 14.3 | 15.5 | |||||||||||||||
Net margin(5) | 21.1 | 15.2 | 15.3 | 15.7 | 14.5 |
(1) | We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively. | |
(2) | Includes share-based compensation expenses as follows: |
VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Share-based compensation expenses included in: | ||||||||||||||||||||
Cost of revenues | — | (45 | ) | (111 | ) | (265 | ) | (313 | ) | |||||||||||
Selling, general and administrative expenses | (67 | ) | (668 | ) | (885 | ) | (1,126 | ) | (1,252 | ) |
(3) | Gross margin represents gross profit as a percentage of net revenues. | |
(4) | Operating margin represents income from operations as a percentage of net revenues. | |
(5) | Net margin represents net income as a percentage of net revenues. |
As of December 31, | ||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||
As adjusted(1) | As adjusted(1) | As adjusted(1) | 2008 | 2009 | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | 4,437 | 20,565 | 76,835 | 79,963 | 64,057 | |||||||||||||||
Term Deposits and Short-term Investments | — | — | 1,371 | 1,466 | 22,122 | |||||||||||||||
Accounts receivable | 5,774 | 11,815 | 24,708 | 36,827 | 60,524 | |||||||||||||||
Total assets | 15,700 | 42,044 | 129,076 | 155,451 | 205,191 | |||||||||||||||
Total liabilities | 2,171 | 5,583 | 18,068 | 23,948 | 42,629 |
5
Table of Contents
As of December 31, | ||||||||||||||||||||
2005 | 2006 | 2007 | ||||||||||||||||||
As adjusted(1) | As adjusted(1) | As adjusted(1) | 2008 | 2009 | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Convertible redeemable preferred shares | 7,226 | 31,648 | — | — | — | |||||||||||||||
Shareholders’ equity | 6,303 | 4,813 | 110,008 | 131,503 | 162,562 | |||||||||||||||
Total liabilities, convertible redeemable preferred shares and shareholders’ equity | 15,700 | 42,044 | 129,076 | 155,451 | 205,191 |
(1) | We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively. |
6
Table of Contents
7
Table of Contents
• | other Chinese IT services companies, such as, Chinasoft International Ltd., or Chinasoft International, HiSoft Technology International Limited, or Hisoft, Neusoft Group Ltd., or Neusoft, and SinoCom Software Group Limited, or SinoCom, iSoftStone Information Technology (Group) Co., Ltd, or iSoftStone; |
• | Indian IT services companies, such as Cognizant Technology Solutions Corp., or Cognizant, HCL Technologies Ltd., or HCL, Infosys Technologies Ltd., or Infosys, Tata Consultancy Services Ltd., or TCS, and Wipro Technologies, or Wipro; |
• | in-house IT departments of large corporations; and |
• | offshore IT service providers in emerging outsourcing destinations with low wage costs such as Southeast Asia, Latin America and Eastern Europe. |
8
Table of Contents
9
Table of Contents
10
Table of Contents
• | diversion of management’s attention; |
• | difficulties in retaining clients of acquired companies; |
• | difficulties in retaining personnel of acquired companies; |
• | entry into unfamiliar markets; |
• | unanticipated problems or legal liabilities; and |
• | tax and accounting issues. |
11
Table of Contents
12
Table of Contents
13
Table of Contents
14
Table of Contents
15
Table of Contents
16
Table of Contents
17
Table of Contents
18
Table of Contents
19
Table of Contents
20
Table of Contents
21
Table of Contents
22
Table of Contents
• | The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like our public offerings are subject to this new procedure; |
• | In spite of the above, given that we have completed our restructuring before September 8, 2006, the effective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for its approval of the issuance and sale of our ADSs and ordinary shares, or the listing and trading of our ADSs on the New York Stock Exchange; and |
• | The issuance and sale of our ADSs and ordinary shares and the listing and trading of the ADSs on the New York Stock Exchange do not conflict with or violate this new PRC regulation. |
23
Table of Contents
24
Table of Contents
• | actual or anticipated fluctuations in our quarterly operating results; |
• | changes in financial estimates by securities research analysts; |
• | changes in the economic performance or market valuations of other IT services companies; |
• | announcements by us or our competitors of new services, acquisitions, strategic partnerships, joint ventures or capital commitments; |
• | technological breakthroughs in the IT services industry; |
• | potential litigation or administrative investigations; |
• | addition or departure of key personnel; |
• | fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies; |
• | release of lock-up or other transfer restrictions on our outstanding ADSs or ordinary shares or sales of additional ADSs; and |
• | general economic and market conditions or other developments affecting us, our industry, our markets or the global economy. |
25
Table of Contents
26
Table of Contents
27
Table of Contents
• | In March 2007, we acquired ITC, an IT service provider primarily focusing on R&D services, from Mr. Hao Yu and Mr. Wei Wei. |
• | In March 2007, we entered into certain contractual arrangements with Megainfo through which we gained effective control over the operations of Megainfo. |
• | In May 2007, we acquired a 75% equity interest in Shanghai VanceInfo, an IT service provider primarily focusing on ADM services, from Mr. Jilun Zhang and Mr. Rongbin Shi. In July 2008, we completed the acquisition of an additional 10% equity interest in Shanghai VanceInfo from NEC System Technologies Ltd., a Japanese company. In August 2008, we completed the acquisition of the remaining 15% of Shanghai VanceInfo from Mr. Jilun Zhang and Mr. Rongbin Shi. |
• | In May 2007, we acquired an additional 48.99% of the equity interest of VanceInfo Japan Inc., or VanceInfo Japan, from Mr. Jinsong Tang. |
• | In July 2007, we acquired Chosen, an IT service provider primarily focusing on SAP consulting and implementation services, from Mr. Gang Li, Mr. Tong Liu and Mr. Bin Huang. |
• | In May 2008, we acquired a team of engineers from Shenzhen Tianchuang Software Development Co., Ltd., or Tianchuang, a small-sized supplier to Huawei, one of our major clients. The acquisition was accounted for as a business combination. |
• | In October 2008, we completed the acquisition of a 33% equity interest in Link Result Limited, or Link Result, a China-based company providing IT outsourcing services to multinational financial institutions, from A-IT Software Services PTE Ltd. The investment was accounted for using the equity method of accounting. |
28
Table of Contents
• | In October 2008, we completed the acquisition of 100% of the equity interest in WIT, a U.S. based mobile testing and application development services provider, from Wireless Info Tech Limited. |
• | In January 2009, we acquired from Guangzhou Kernel Technology Limited, or Kernel, a small China-based supplier providing customized application development services to Huawei, its software outsourcing service business with Huawei, together with a team of engineers and other employees. Over 150 IT professionals from Kernel’s offices in Guangzhou, Shenzhen and Nanjing joined us in connection with the transaction. The acquisition was accounted for as a business combination. |
• | In July 2009, we acquired the operating subsidiaries, i.e. TP Companies, of TP Corporation Limited, a Hong Kong-headquartered provider of customer relationship management, or CRM, solutions and system integration. |
• | In October 2009, we acquired a team of engineers together with the smart phone software testing business and the related assets from a China-based mobile service provider which provides research and development services to a leading global handset manufacturer. Over 150 professionals joined us in connection with the transaction. |
• | In February 2010, we made a strategic investment in Beijing Viatt Information Technology Co. Ltd, or Viatt, an IT services and solution provider for Chinese domestic financial institutions. Under the terms of the agreements, we made a loan of approximately RMB3.0 million (US$0.4 million), which is convertible into a 20% equity interest in Viatt with an exclusive right to acquire the remaining 80% of the equity in the next 12 to 18 months at our sole discretion. |
• | In March 2010, we acquired a team of engineers together with the cell phone software development outsourcing business and the related assets from Beijing Mobitech Software Co., Ltd., or Mobi, a small China-based company providing mobile software development service. Over 50 professionals of Mobi joined us in connection with the transaction. |
29
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||
2007 | 2008 | 2009 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
R&D Outsourcing Services | ||||||||||||||||||||||||
R&D services | 36,013 | 57.4 | % | 60,808 | 59.2 | % | 90,581 | 61.2 | % | |||||||||||||||
Globalization and localization | 3,886 | 6.2 | 4,259 | 4.2 | 5,118 | 3.5 | ||||||||||||||||||
IT Services | ||||||||||||||||||||||||
Enterprise solutions | 8,748 | 14.0 | 13,542 | 13.2 | 14,429 | 9.7 | ||||||||||||||||||
ADM | 9,348 | 14.9 | 17,061 | 16.6 | 26,373 | 17.8 | ||||||||||||||||||
Quality assurance and testing | 4,719 | 7.5 | 6,717 | 6.5 | 7,807 | 5.3 | ||||||||||||||||||
Other Solutions and Services | — | — | 276 | 0.3 | 3,758 | 2.5 | ||||||||||||||||||
Total net revenues | 62,714 | 100.0 | % | 102,663 | 100.0 | % | 148,066 | 100 | % | |||||||||||||||
30
Table of Contents
• | understanding of leading industry standard B2B protocols; |
• | Extensible Markup Language, or XML, processing and parsing; |
• | security and authentication based on product key infrastructure, or PKI platform; |
• | TIBCO infrastructure products; and |
• | Java language for platform independence. |
31
Table of Contents
32
Table of Contents
• | packaged evaluation and selection; |
• | packaged implementation; |
• | customization; |
• | regional rollout; |
• | enhancement, maintenance and product support; |
• | version upgrades; and |
• | business intelligence/data warehouse, or BI/DW. |
• | accurate sales forecast by model and retail shop; |
• | operation performance evaluation by volume and profitability by retail shops; and |
• | sales and competition analysis to outline promotion and incentive plan. |
33
Table of Contents
• | quality assurance, which is critical for NEC System to serve its customers in Japan; |
• | on-time delivery; and |
• | understanding the demands of end users. |
34
Table of Contents
• | extensive experience in testing; |
• | solid knowledge of financial services industry practice; |
• | clear understanding of relevant local regulations; and |
• | cost effective and timely delivery capabilities. |
35
Table of Contents
• | software and content localization; |
• | localization engineering; |
• | localization testing; |
• | internationalization engineering; and |
• | internationalization testing. |
36
Table of Contents
37
Table of Contents
38
Table of Contents
For the Year Ended December 31, | ||||||||||||||||||||||||
2007 | 2008 | 2009 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Greater China(1) | 7,329 | 11.7 | % | 22,045 | 21.5 | % | 59,373 | 40.1 | % | |||||||||||||||
United States(1) | 43,153 | 68.8 | 56,175 | 54.7 | 56,634 | 38.3 | ||||||||||||||||||
Europe(1) | 6,284 | 10.0 | 14,991 | 14.6 | 23,148 | 15.6 | ||||||||||||||||||
Japan(1) | 5,828 | 9.3 | 9,157 | 8.9 | 8,466 | 5.7 | ||||||||||||||||||
Others | 120 | 0.2 | 295 | 0.3 | 445 | 0.3 | ||||||||||||||||||
Total net revenues | 62,714 | 100.0 | % | 102,663 | 100.0 | % | 148,066 | 100.0 | % | |||||||||||||||
(1) | Countries or regions where the headquarters of our clients are located. |
39
Table of Contents
• | Chinese IT services companies, such as Chinasoft International, Hisoft, Neusoft, SinoCom, and iSoftStone; |
• | Indian IT services companies, such as Cognizant, HCL, Infosys, TCS and Wipro; and |
• | Offshore IT service providers in emerging outsourcing destinations with low wage costs such as the Southeast Asia, Latin America and Eastern Europe. |
40
Table of Contents
41
Table of Contents
42
Table of Contents
43
Table of Contents
44
Table of Contents
• | The CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like our initial public offering are subject to this new procedure; |
• | In spite of the above, given that we had completed our restructuring before September 8, 2006, the effective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for its approval of the listing and trading of our ADSs on the New York Stock Exchange; and |
• | The issuance and sale of our ADSs and ordinary shares and the listing and trading of the ADSs on the New York Stock Exchange do not conflict with or violate this new PRC regulation. |
45
Table of Contents
(1) | VanceInfo Japan Inc., or VanceInfo Japan, formerly named Worksoft Japan Inc., has 1,400,000 outstanding shares, with 1,399,900 shares owned by VanceInfo, 100 shares owned by Mr. Xiaolai Wang, a Chinese citizen. | |
(2) | VanceInfo Creative Software Technology Ltd., or VanceInfo Beijing, a Chinese limited liability company, 100% owned by VanceInfo. | |
(3) | VanceInfo Technologies Inc., or VanceInfo US, formerly named Worksoft Creative Software Technology Inc., a corporation incorporated under the laws of the State of Delaware in the United States, 100% owned by VanceInfo. | |
(4) | VanceInfo Creative Software Technology Ltd., or VanceInfo BVI, formerly named Worksoft Creative Software Technology Ltd., a holding company incorporated under the laws of the British Virgin Islands, 100% owned by VanceInfo. | |
(5) | Nanjing VanceInfo Creative Software Technology Limited, or Nanjing VanceInfo, a Chinese limited liability company, 100% owned by VanceInfo Beijing. | |
(6) | Shanghai VanceInfo Creative Software Technology Limited, or VanceInfo Shanghai Creative, a Chinese limited liability company, 100% owned by VanceInfo Beijing. | |
(7) | Beijing Chosen Technology Co., Ltd., or Chosen, a Chinese limited liability company, 100% owned by VanceInfo Beijing. | |
(8) | Shanghai VanceInfo Technologies Limited, or Shanghai VanceInfo, formerly named Shanghai Solutions Software Co., Ltd., a Chinese limited liability company, 100% owned by VanceInfo Beijing. |
46
Table of Contents
(9) | Wireless Info Tech, Ltd., or WIT, a corporation incorporated under the laws of the California in the United States, 100% owned by VanceInfo US. | |
(10) | VanceInfo Malaysia Inc. Sdn. Bhd., or VanceInfo Malaysia, a corporation incorporated under the laws of Malaysia, 100% owned by VanceInfo BVI. | |
(11) | VanceInfo Technologies Limited, or VanceInfo Hong Kong, formerly named Worksoft Information Technology Service Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(12) | TP Teleservices Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(13) | TP (Hong Kong) Limited, or TP Hong Kong, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(14) | TP Consultants Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(15) | TP (Taiwan) Limited, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(16) | VanceInfo Technologies Limited, or VanceInfo Tianjin, a Chinese limited liability company, 100% owned by VanceInfo Hong Kong. | |
(17) | Shenzhen VanceInfo Creative Software Technology Limited, or VanceInfo Shenzhen, a Chinese limited liability company, 100% owned by VanceInfo Hong Kong. | |
(18) | TP Software Technology (Shanghai) Co., Ltd., or TP Shanghai, a Chinese limited liability company, 100% owned by TP Hong Kong. |
Space (in | ||||||
square | ||||||
Location | meters) | Usage of Property | ||||
Beijing | 27,209 | * | Headquarters, General Administration Globalization and Localization ADM, R&D Services | |||
Shanghai | 11,178 | * | ADM, Quality Assurance and Testing, R&D Services | |||
Nanjing | 10,738 | * | R&D Services, Training | |||
Hangzhou | 814 | R&D Services | ||||
Shenzhen | 8,353 | * | General Administration, ADM, R&D Services | |||
Chengdu | 1,368 | R&D Services | ||||
Hong Kong | 1,354 | ADM, R&D Services |
* | The sum of space under multiple leases. |
47
Table of Contents
• | the overall economic conditions in our principal geographic markets, which may affect market demand for offshore IT services; |
• | the quality and portfolio of our service lines and industry expertise compared with those of our competitors; |
• | the billing rates and utilization rates of our professionals, our compensation and benefit expenses and other operating costs and expenses; |
• | the availability of a large talent pool in China and supply of qualified professionals; and |
• | the PRC government’s investment in infrastructure construction and adoption of various incentives in the IT services industry. |
48
Table of Contents
Year Ended December 31, | ||||||||||||||||||||||||
2007 | 2008 | 2009 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
R&D Outsourcing Services | ||||||||||||||||||||||||
R&D services | 36,013 | 57.4 | % | 60,808 | 59.2 | % | 90,581 | 61.2 | % | |||||||||||||||
Globalization and localization | 3,886 | 6.2 | 4,259 | 4.2 | 5,118 | 3.5 | ||||||||||||||||||
IT Services | ||||||||||||||||||||||||
Enterprise solutions | 8,748 | 14.0 | 13,542 | 13.2 | 14,429 | 9.7 | ||||||||||||||||||
ADM | 9,348 | 14.9 | 17,061 | 16.6 | 26,373 | 17.8 | ||||||||||||||||||
Quality assurance and testing | 4,719 | 7.5 | 6,717 | 6.5 | 7,807 | 5.3 | ||||||||||||||||||
Other Solutions and Services | — | — | 276 | 0.3 | 3,758 | 2.5 | ||||||||||||||||||
Total net revenues | 62,714 | 100.0 | % | 102,663 | 100.0 | % | 148,066 | 100 | % | |||||||||||||||
49
Table of Contents
For the Year Ended December 31, | ||||||||||||||||||||||||
2007 | 2008 | 2009 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Clients accounting for 10% or more of our net revenues | 21,678 | 34.6 | % | 39,880 | 38.8 | % | 69,633 | 47.0 | % | |||||||||||||||
Top five clients | 33,707 | 53.7 | 55,240 | 53.8 | 83,300 | 56.3 | ||||||||||||||||||
Top 10 clients | 43,523 | 69.4 | 70,449 | 68.6 | 99,936 | 67.5 |
For the Year Ended December 31, | ||||||||||||||||||||||||
2007 | 2008 | 2009 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Greater China(1) | 7,329 | 11.7 | % | 22,045 | 21.5 | % | 59,373 | 40.1 | % | |||||||||||||||
United States(1) | 43,153 | 68.8 | 56,175 | 54.7 | 56,634 | 38.3 | ||||||||||||||||||
Europe(1) | 6,284 | 10.0 | 14,991 | 14.6 | 23,148 | 15.6 | ||||||||||||||||||
Japan(1) | 5,828 | 9.3 | 9,157 | 8.9 | 8,466 | 5.7 | ||||||||||||||||||
Others | 120 | 0.2 | 295 | 0.3 | 445 | 0.3 | ||||||||||||||||||
Total net revenues | 62,714 | 100.0 | % | 102,663 | 100.0 | % | 148,066 | 100.0 | % | |||||||||||||||
(1) | Countries or regions where the headquarters of our clients are located. |
50
Table of Contents
51
Table of Contents
For the Year Ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(in US$ thousands) | ||||||||||||
Share-based compensation expenses: | ||||||||||||
Cost of revenues | 111 | 265 | 313 | |||||||||
Selling, general and administrative expenses | 885 | 1126 | 1252 | |||||||||
Total | 996 | 1,391 | 1,565 | |||||||||
52
Table of Contents
53
Table of Contents
54
Table of Contents
55
Table of Contents
56
Table of Contents
57
Table of Contents
As of December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(in US$ thousands) | ||||||||||||
Period in days | ||||||||||||
0 – 90 | 23,508 | 35,351 | 47,505 | |||||||||
91 – 180 | 668 | 1,066 | 11,893 | |||||||||
More than 180 | 532 | 410 | 1,126 | |||||||||
Total | 24,708 | 36,827 | 60,524 | |||||||||
58
Table of Contents
59
Table of Contents
60
Table of Contents
For the Year Ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(in US$ thousands) | ||||||||||||
Consolidated Statement of Operations Data | ||||||||||||
Net revenues | 62,714 | 102,663 | 148,066 | |||||||||
Cost of revenues | (38,544 | ) | (62,911 | ) | (92,171 | ) | ||||||
Gross profit | 24,170 | 39,752 | 55,895 | |||||||||
Selling, general and administrative expenses | (16,180 | ) | (25,905 | ) | (34,710 | ) | ||||||
Change in fair value of contingent consideration liability arising from business acquisitions | — | — | (62 | ) | ||||||||
Other operating income | 860 | 858 | 1,754 | |||||||||
Income from operations | 8,850 | 14,705 | 22,877 | |||||||||
Interest income | 1,032 | 2,028 | 856 | |||||||||
Interest expense | (47 | ) | (69 | ) | (86 | ) | ||||||
Exchange differences | 317 | 703 | (119 | ) | ||||||||
Change in fair value of the warrants | (357 | ) | — | — | ||||||||
Income before income taxs and earnings in equity method investment | 9,795 | 17,367 | 23,528 | |||||||||
Income tax expense | (174 | ) | (1,298 | ) | (2,089 | ) | ||||||
Income before earnings in equity method investment | 9,621 | 16,069 | 21,439 | |||||||||
Earnings in equity method investment | — | 20 | 69 | |||||||||
Net income | 9,621 | 16,089 | 21,508 | |||||||||
Net (income)/loss attributable to noncontrolling interest | (52 | ) | 84 | — | ||||||||
Deemed dividend on Series A convertible redeemable preferred shares—accretion of redemption premium | (632 | ) | — | — | ||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 8,937 | 16,173 | 21,508 | |||||||||
For the Year Ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Consolidated Statement of Operations Data | ||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of revenues | (61.5 | ) | (61.3 | ) | (62.2 | ) | ||||||
Gross profit | 38.5 | 38.7 | 37.8 | |||||||||
Selling, general and administrative expenses | (25.8 | ) | (25.2 | ) | (23.4 | ) | ||||||
Change in fair value of contingent consideration liability arising from business acquisitions | — | — | (* | ) | ||||||||
Other operating income | 1.4 | 0.8 | 1.2 | |||||||||
Income from operations | 14.1 | 14.3 | 15.5 | |||||||||
Interest income | 1.6 | 2.0 | 0.6 |
61
Table of Contents
For the Year Ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Interest expense | (0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
Exchange differences | 0.5 | 0.7 | (0.1 | ) | ||||||||
Change in fair value of the warrants | (0.5 | ) | — | — | ||||||||
Income before income taxs and earnings in equity method investment | 15.6 | 16.9 | 15.9 | |||||||||
Income tax expense | (0.3 | ) | (1.2 | ) | (1.4 | ) | ||||||
Income before earnings in equity method investment | 15.3 | 15.7 | 14.5 | |||||||||
Earnings in equity method investment | — | * | * | |||||||||
Net income | 15.3 | 15.7 | 14.5 | |||||||||
Net (income)/loss attributable to noncontrolling interest | (* | ) | 0.1 | — | ||||||||
Deemed dividend on Series A convertible redeemable preferred shares—accretion of redemption premium | (1.0 | ) | — | — | ||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 14.3 | 15.8 | 14.5 | |||||||||
* | less than 0.1% | |
(1) | We adopted ASC Topic 810-10-65 regarding accounting for noncontrolling interest in consolidated financial statements on January 1, 2009, retrospectively. |
62
Table of Contents
63
Table of Contents
64
Table of Contents
65
Table of Contents
For the Year Ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
(in US$ thousands) | ||||||||||||
Net cash provided by operating activities | 7,479 | 15,404 | 12,804 | |||||||||
Net cash used in investing activities | (9,275 | ) | (10,128 | ) | (31,362 | ) | ||||||
Net cash provided by (used in) financing activities | 57,741 | (2,826 | ) | 2,673 | ||||||||
Effect of exchange rate changes | 325 | 678 | (21 | ) | ||||||||
Net increase in cash and cash equivalents | 55,945 | 2,450 | (15,885 | ) | ||||||||
Cash and cash equivalents at the beginning of the year | 20,565 | 76,835 | 79,963 | |||||||||
Cash and cash equivalents at the end of the year | 76,835 | 79,963 | 64,057 |
66
Table of Contents
67
Table of Contents
68
Table of Contents
69
Table of Contents
Payment Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
Operating leases | 12,168 | 5,129 | 6,534 | 337 | 168 | |||||||||||||||
Purchase obligations | 17,548 | 14,922 | 2,626 | — | — | |||||||||||||||
Total contractual obligations | 29,716 | 20,051 | 9,160 | 337 | 168 | |||||||||||||||
• | our expansion plans; |
• | our anticipated growth strategy; |
• | our plans to recruit more employees; |
• | our plans to invest in research and development to enhance our service lines; |
• | our future business development, results of operations and financial condition; |
• | expected changes in our net revenues and certain cost or expense items; |
• | our ability to attract and retain clients; and |
• | trends and competition in the offshore IT services industry. |
70
Table of Contents
Directors and Executive Officers | Age | Position/Title | ||||
Chris Shuning Chen | 46 | Chairman and Chief Executive Officer | ||||
David Lifeng Chen | 41 | Director and President | ||||
Hao Chen | 43 | Director | ||||
Ruby Lu | 39 | Director | ||||
Kui Zhou | 42 | Director | ||||
Daniel Mingdong Wu | 43 | Director | ||||
Samuelson S.M. Young | 58 | Director | ||||
Sidney Xuande Huang | 44 | Chief Operating Officer and Chief Financial Officer | ||||
Junbo Liu | 47 | Executive Vice President and Chief Business Development Officer | ||||
Gerry Jianxin Lu | 43 | Executive Vice President | ||||
Jeff Jian Wu | 42 | Executive Vice President and Chief Globalization Officer | ||||
Kevin Zhong Liu | 38 | Executive Vice President | ||||
Stanley Ying Zhou | 47 | Executive Vice President and Chief Administrative Officer |
71
Table of Contents
72
Table of Contents
73
Table of Contents
74
Table of Contents
• | Options.Options provide for the right to purchase our ordinary shares at a specified price, and usually will become exercisable at the discretion of our plan administrator in one or more installments after the date of grant. The option exercise price may be paid in cash, by check, our ordinary shares which have been held by the optionholder for such time as may be required to avoid adverse accounting treatment, other property with a value equal to the exercise price, through a broker assisted cash-less exercise or such other methods as our plan administrator may approve from time to time. |
• | Restricted Shares.A restricted share award is the grant of our ordinary shares at a price determined by our plan administrator. A restricted share is nontransferable, unless otherwise determined by our plan administrator at the time of award and may be repurchased by us upon termination of employment or service during a restricted period. Our plan administrator shall also determine in the award agreement whether the participant will be entitled to vote the restricted shares or receive dividends on such shares. |
• | Restricted Share Units.Restricted share units represent the right to receive our ordinary shares at a specified date in the future, subject to forfeiture of such right. If the restricted share unit has not been forfeited, then on the date specified in the award agreement we shall deliver to the holder unrestricted ordinary shares which will be freely transferable. |
Restricted Shares | ||||||||
Name | Granted | Grant Date | End of Vesting Period | |||||
Chris Shuning Chen | 7,961 | February 23, 2010 | February 23, 2014 | |||||
David Lifeng Chen | 5,789 | February 23, 2010 | February 23, 2014 | |||||
Hao Chen | * | February 23, 2010 | February 23, 2014 | |||||
Ruby Lu | * | February 23, 2010 | February 23, 2014 | |||||
Kui Zhou | * | February 23, 2010 | February 23, 2014 | |||||
Sidney Xuande Huang | * | February 23, 2010 | February 23, 2014 | |||||
Junbo Liu | * | February 23, 2010 | February 23, 2014 | |||||
Gerry Jianxin Lu | * | February 23, 2010 | February 23, 2014 | |||||
Jeff Jian Wu | * | February 23, 2010 | February 23, 2014 | |||||
Kevin Zhong Liu | 2,533 | February 23, 2010 | February 23, 2014 | |||||
Stanley Ying Zhou | 3,474 | February 23, 2010 | February 23, 2014 | |||||
Directors and Executive officers as a group | 47,717 |
* | Each of these directors and officers beneficially owns less than 1% of our outstanding ordinary shares. |
75
Table of Contents
• | selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
• | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
• | reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act; |
• | discussing the annual audited financial statements with management and the independent auditors; |
• | reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of material control deficiencies; |
• | annually reviewing and reassessing the adequacy of our audit committee charter; |
• | meeting separately and periodically with management and the independent auditors; and |
• | reporting regularly to the board of directors. |
• | reviewing and recommending to the board with respect to the total compensation package for our three most senior executives; |
• | approving and overseeing the total compensation package for our executives other than the three most senior executives; |
76
Table of Contents
• | reviewing and recommending to the board with respect to the compensation of our directors; and |
• | reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans. |
• | selecting and recommending to the board nominees for election or re-election to the board, or for appointment to fill any vacancy; |
• | reviewing annually with the board the current composition of the board with regards to characteristics such as independence, age, skills, experience and availability of service to us; |
• | selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation committee, as well as the corporate governance and nominating committee itself; |
• | advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken; and |
• | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
77
Table of Contents
• | each of our directors and executive officers who are also our shareholders; and |
• | each person known to us to own beneficially more than 5.0% of our ordinary shares. |
Share Beneficially Owned | ||||||||
Number(1) | %(2) | |||||||
Directors and Executive Officers: | ||||||||
Chris Shuning Chen(3) | 3,759,170 | 9.3 | ||||||
David Lifeng Chen(4) | 440,169 | 1.1 | ||||||
Hao Chen(5) | 956,500 | 2.4 | ||||||
Ruby Lu(6) | * | * | ||||||
Kui Zhou(7) | 2,199,089 | 5.5 | ||||||
Daniel Mingdong Wu(8) | * | * | ||||||
Samuelson S.M. Young(9) | * | * | ||||||
Sidney Xuande Huang(10) | * | * | ||||||
Junbo Liu(11) | * | * | ||||||
Gerry Jianxin Lu(12) | * | * | ||||||
Jeff Jian Wu(13) | * | * | ||||||
Kevin Zhong Liu(14) | 466,790 | 1.2 | ||||||
Stanley Ying Zhou(15) | 467,353 | 1.2 | ||||||
All Directors and Executive Officers as a Group(16) | 8,751,828 | 21.4 | ||||||
Principal Shareholders: | ||||||||
Sequoia(17) | 2,863,033 | 7.2 | ||||||
Button Software Ltd.(18) | 3,230,420 | 8.1 | ||||||
Inno Global Technology Limited and affiliates(19) | 2,016,200 | 5.1 | ||||||
FMR LLC and affiliates(20) | 3,364,874 | 8.4 |
* | Less than 1% | |
(1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment owner with respect to the securities. |
78
Table of Contents
(2) | For each person and group included in this table, percentage ownership was calculated by dividing the number of shares beneficially owned by such person or group by the sum of 39,860,320, being the number of ordinary shares outstanding as of March 31, 2010, and the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after March 31, 2010. | |
(3) | Represents 2,630,420 ordinary shares held by Button Software Ltd., a British Virgin Islands company, and 528,750 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 beneficially owned by Mr. Chris Shuning Chen. In addition, Button Software Ltd. entered into certain agreements with Credit Suisse Capital LLC (the “Button VPF”) in November 2009. Pursuant to the Button VPF, Button Software Ltd. pledged and monetized 600,000 ADSs held by it. Button Software Ltd. is ultimately owned by Mr. Chris Shuning Chen’s family trust. Mr. Chen is the sole director of Button Software Ltd. and, as such, exercises voting power on behalf of this shareholder on all matters of VanceInfo requiring shareholder approval. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(4) | Represents 293,400 ordinary shares and 16,000 ADSs held by Mr. David Lifeng Chen’s family trust, and 130,769 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Chen. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(5) | Represents 951,500 ADSs held by LC Fund II and 5,000 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Hao Chen. Mr. Chen disclaims beneficial ownership with respect to the shares held by LC Fund II except to the extent of his pecuniary interest therein. The business address for Mr. Chen is the 10/F, Tower A, Raycom Info Tech Park, No. 2 Kexueyuan Nanlu Zhongguancun, Haidian District, Beijing 100080, People’s Republic of China. | |
(6) | Represents ADSs held by Ms. Ruby Lu. The business address for Ms. Lu is 2420 Sand Hill Road, Suite 200 Menlo Park, CA 94025, United States of America. | |
(7) | Represents 63,895 ADSs held by Kui Zhou, 1,201,032 ordinary shares held by Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., and Sequoia Capital China Principals Fund I, L.P., and 934,162 ordinary shares held by Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. Mr. Kui Zhou disclaims beneficial ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. except to the extent of his pecuniary interest therein. The business address for Mr. Zhou is Room 3606, Tower 3, China Central Place, No 77 Jianguo Road, Chaoyang District, Beijing 100025, People’s Republic of China. | |
(8) | Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Daniel Mingdong Wu. The business address for Mr. Wu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(9) | Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Samuelson S.M. Young. The business address for Mr. Young is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(10) | Represents ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by held by Mr. Sidney Xuande Huang. The business address for Mr. Huang is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(11) | Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Junbo Liu. The business address for Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(12) | Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Newrise Investments limited, a British Virgin Islands company wholly owned and controlled by Mr. Gerry Jianxin Lu. The business address for Mr. Lu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(13) | Represents ordinary shares and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Mr. Jeff Jian Wu. The business address for Mr. Wu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(14) | Represents 306,065 ordinary shares, 100,000 ADSs, and 60,725 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Longsea Management Limited, a British Virgin Islands company wholly owned and controlled by Mr. Kevin Zhong Liu. The business address for Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. |
79
Table of Contents
(15) | Represents 406,065 ordinary shares and 61,288 ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by Charlene Limited, a British Virgin Islands company wholly owned and controlled by Mr. Stanley Ying Zhou. The business address for Mr. Zhou is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(16) | Represents ordinary shares held by all of our directors and executive officers as a group and ordinary shares issuable upon exercise of options within 60 days after March 31, 2010 held by all of our directors and executive officers as a group. | |
(17) | Represents 945,945, 146,395, 108,692, 881,325, 43,135 and 9,702 ordinary shares held by Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P., respectively, and 139,868, 63,895, 234,316, 141,827, 72,695 and 75,238 ADSs held by Nanpeng Shen, Kui Zhou, Michael J. Moritz, Douglas M. Leone, James Goetz and Roelof Botha, respectively. | |
Sequoia Capital China Management I, L.P. is the general partner of Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P. The general partner of Sequoia Capital China Management I, L.P. is SC China Holding Limited, which in turn is ultimately controlled by its managing directors, Nanpeng Shen and Kui Zhou. Each of Mr. Shen and Mr. Zhou disclaims beneficial ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P. except to the extent of their pecuniary interest therein. The business address for Sequoia Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P., each of which is a limited partnership incorporated in the Cayman Islands, is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025, United States of America. | ||
SCGF III Management, LLC is the general partner of Sequoia Capital Growth Fund III, L.P. and Sequoia Capital Growth Partners III, L.P., and is the managing member of Sequoia Capital Growth III Principals Fund. The managing members of SCGF III Management, LLC are Michael J. Moritz, Douglas M. Leone, Michael Goguen, James Goetz, J. Scott Carter and Roelof Botha. These management members disclaim beneficial ownership with respect to the shares held by Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P. except to the extent of their pecuniary interest therein. The business address for Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III, L.P., each of which is an investment fund incorporated in the state of Delaware, USA, is 3000 Sand Hill Road, 4-250, Menlo Park, CA 94025, United States of America. | ||
(18) | Represents 2,630,420 ordinary shares held by Button Software Ltd., a British Virgin Islands company ultimately owned by Mr. Chris Shuning Chen’s family trust. In addition, pursuant to the Button VPF, Button Software Ltd. pledged and monetized 600,000 ADSs held by it. The registered address for Button Software Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin Islands. | |
(19) | Represents 40,200 ADSs beneficially owned by Mr. Baoguo Zhu, 1,776,000 ordinary shares held by Inno Global Technology Limited, a British Virgin Islands company wholly owned and controlled by Mr. Zhu, and 200,000 ADSs held by Deep Prime Limited, a British Virgin Islands company wholly owned and controlled by Mr. Zhu’s wife. The registered address for Inno Global Technology Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands. | |
(20) | Based on Schedule 13G jointly filed by FMR LLC, Edward C. Johnson 3d and Fidelity Management & Research Company on February 16, 2010. |
80
Table of Contents
• | neither Mr. Zhao nor Megainfo may sell, transfer, pledge or otherwise dispose of, or permit any security interests to be imposed on Megainfo’s any assets, business or income; |
• | except for the indebtedness created in the ordinary course of business, neither Mr. Zhao nor Megainfo may borrow or lend to any third party, or provide security to any third party; |
81
Table of Contents
• | Megainfo may not distribute any profits or dividends; |
• | neither Mr. Zhao nor Megainfo may change any director, supervisor or executive manager of Megainfo; and |
• | neither Mr. Zhao nor Megainfo may make any material decision or alteration with respect to Megainfo’s operations or financial management. |
82
Table of Contents
83
Table of Contents
Trading Price ($) | ||||||||
High | Low | |||||||
2007 (from December 12, 2007 to December 31, 2007) | 10.95 | 8.51 | ||||||
2008 | 13.98 | 4.28 | ||||||
First quarter | 9.25 | 4.90 | ||||||
Second quarter | 13.98 | 6.45 | ||||||
Third quarter | 10.19 | 5.80 | ||||||
Fourth quarter | 8.28 | 4.28 | ||||||
2009 | 21.07 | 4.20 | ||||||
First quarter | 6.00 | 4.20 | ||||||
Second quarter | 15.50 | 4.95 | ||||||
Third quarter | 19.60 | 10.54 | ||||||
Fourth quarter | 21.07 | 14.50 | ||||||
October | 21.07 | 14.62 | ||||||
November | 19.80 | 14.50 | ||||||
December | 20.50 | 16.70 | ||||||
2010 | 26.48 | 14.79 | ||||||
First quarter | 23.85 | 14.79 | ||||||
January | 21.83 | 16.00 | ||||||
February | 19.79 | 14.79 | ||||||
March | 23.85 | 19.90 | ||||||
April (through April 29, 2010) | 26.48 | 22.00 |
84
Table of Contents
85
Table of Contents
• | banks; |
• | financial institutions; |
• | insurance companies; |
• | regulated investment companies; |
• | real estate investment trusts; |
86
Table of Contents
• | broker-dealers; |
• | traders that elect to mark to market; |
• | U.S. expatriates; |
• | tax-exempt entities; |
• | persons liable for alternative minimum tax; |
• | persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction; |
• | persons that actually or constructively own 10% or more of the total combined voting power of all classes of our voting stock; |
• | persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; or |
• | persons holding ADSs or ordinary shares through partnerships or other pass-through entities. |
• | an individual who is a citizen or resident of the United States; |
• | a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any State thereof or the District of Columbia; |
• | an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or |
• | a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |
87
Table of Contents
88
Table of Contents
• | at least 75% of its gross income for such year is passive income; or |
• | at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. |
• | the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares; |
89
Table of Contents
• | the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first taxable year in which we were a PFIC, will be treated as ordinary income; and |
• | the amount allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
90
Table of Contents
91
Table of Contents
92
Table of Contents
Category | Depositary actions | Associated fee | ||
(a) Depositing or substituting the underlying shares | Each person to whom ADSs are issued against deposits of shares, including deposits and issuances in respect of: • Share distributions, stock dividend, stock split, merger • Exchange of securities or any other transaction or event affecting the ADSs or the deposited securities | US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs issued | ||
(b) Receiving or distributing dividends | Distribution of cash dividends | US$0.02 or less per ADS |
93
Table of Contents
Category | Depositary actions | Associated fee | ||
(c) Selling or exercising rights | Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities | Up to US$5.00 for each 100 ADSs (or portion thereof) | ||
(d) Withdrawing an underlying security | Acceptance of ADRs surrendered for withdrawal of deposited securities | US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered | ||
(e) Transferring, splitting or grouping receipts | Transfers of depositary receipts | US$1.50 per ADS | ||
(f) General depositary services, particularly those charged on an annual basis | Services performed by the depositary in administering the ADRs | US$0.02 per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charge from one or more cash dividends or other cash distributions | ||
(g) Expenses of the Depositary | Expenses incurred on behalf of ADR Holders in connection with: • Compliance with foreign exchange control regulations or any law or regulation relating to foreign investment • The depositary’s or its custodian’s compliance with applicable law, rule or regulation • Stock transfer or other taxes and other governmental charges • Cable, telex and facsimile transmission and delivery charges • fees for the transfer or registration of deposited securities in connection with the deposit or withdrawal of deposited securities • Expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency) • Any other charge payable by depositary or its agents in connection with the servicing of the shares or the deposited securities | Expenses payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charges from one or more cash dividends or other cash distributions |
94
Table of Contents
• | approximately US$13.4 million to establish new offices and to fund other capital expenditures; and |
• | approximately US$10.2 million to fund strategic acquisitions. |
95
Table of Contents
96
Table of Contents
97
Table of Contents
2008 | 2009 | |||||||
(in US$ thousands) | ||||||||
Audit fees(1) | 1,185 | 1,120 | ||||||
Tax fees(2) | 14 | — |
(1) | “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our annual financial statements, the review of our interim financial statements, and also other assurance services rendered in connection with our follow-on offering in 2009 and filing of various registration statements. | |
(2) | “Tax fees” means fees billed for tax compliance, tax advice, and tax planning services. |
98
Table of Contents
Total Number of | Approximate | |||||||||||||||
ADSs Purchased | Dollar Value of | |||||||||||||||
as Part of Publicly | ADSs that May | |||||||||||||||
Total Number of | Average Price | Announced | Yet Be Purchased | |||||||||||||
Period | ADS Purchased(1) | Paid Per ADS | Program(2) | Under the Program (1) | ||||||||||||
February 21, 2009 – February 28, 2009 | 0 | N/A | 0 | $ | 10,000,000 | |||||||||||
March 1, 2009 – March 31, 2009 | 2,800 | $ | 4.6914 | 2,800 | $ | 9,986,864 | ||||||||||
April 1, 2009 – April 30, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
May 1, 2009 – May 31, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
June 1, 2009 – June 30, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
July 1, 2009 – July 31, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
August 1, 2009 – August 31, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
September 1, 2009 – September 30, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
October 1, 2009 – October 31, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
November 1, 2009 – November 30, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
December 1, 2009 – December 31, 2009 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
January 1, 2010 – January 31, 2010 | 0 | N/A | 0 | $ | 9,986,864 | |||||||||||
February 1, 2010 – February 20, 2010 | 0 | N/A | 0 | $ | 0 | |||||||||||
Total | 2,800 | $ | 4.6914 | 2,800 | $ | 0 |
(1) | Each of our ADS represents one ordinary share. | |
(2) | We publicly announced a share repurchase program on February 21, 2009, pursuant to which we are authorized to repurchase up to US$10 million worth of our outstanding ADSs within the next 12 months following February 21, 2009 (the program’s approval date). This share repurchase program expired on February 20, 2010. |
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
99
Table of Contents
Exhibit Number | Description of Document | |||
1.1 | Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated by reference to Exhibit 3.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
2.1 | Registrant’s Specimen American Depositary Receipt (incorporated by reference to Exhibit 4.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
2.2 | Registrant’s Specimen Certificate for Ordinary shares (incorporated by reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
2.3 | Form of Deposit Agreement among the Registrant, the depositary and holder of the American Depositary Receipts (incorporated by reference to Exhibit 4.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.1 | Shareholders Agreement among the Registrant and other parties thereto dated as of April 28, 2006, as amended as of July 30, 2007 (incorporated by reference to Exhibit 4.7 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.2 | Series A Preferred Share Purchase Agreement among the Registrant and other parties thereto dated as of February 3, 2005 (incorporated by reference to Exhibit 4.4 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.3 | Series B Preferred Share Purchase Agreement among the Registrant and other parties thereto dated as of April 28, 2006, as amended as of July 30, 2007 (incorporated by reference to Exhibit 4.6 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.4 | Stock Plan dated as of November 3, 2005, as amended in April and May 2006, including form of Award Agreement (incorporated by reference to Exhibit 10.1 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). |
100
Table of Contents
Exhibit Number | Description of Document | |||
4.5 | Share Incentive Plan dated as of July 30, 2007, as supplemented and amended on August 1, 2007, including form of Award Agreement (incorporated by reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.6 | Form of Indemnification Agreement with the Registrant’s directors(incorporated by reference to Exhibit 10.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.7 | Form of Employment Contract between the Registrant and a Senior Executive Officer of the Registrant (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.8 | English Translation of Form of Employment Contract between Worksoft Creative Software Technology Ltd. and a Senior Executive Officer of it (incorporated by reference to Exhibit 10.5 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.9 | English Translation of Asset Transfer Agreement between Worksoft Creative Software Technology Ltd. and SureKAM Co., Ltd. as of September 6, 2005 (incorporated by reference to Exhibit 10.6 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.10 | English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd. and other parties thereto dated as of September 15, 2006 (incorporated by reference to Exhibit 10.7 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.11 | English Translation of Asset Transfer Agreement between Worksoft Creative Software Technology Ltd. and Beijing SunBridges Technologies Development Co., Ltd. dated as of December 1, 2006. (incorporated by reference to Exhibit 10.8 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.12 | English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd., Hao Yu and Wei Wei dated as of March 15, 2007 (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.13 | English Translation of Power of Attorney between Ming Zhao and Chris Shuning Chen dated March 31, 2007 (incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.14 | English Translation of Exclusive Technology Development and Consultancy Agreement among Worksoft Creative Software Technology Ltd., Shanghai Megainfo Tech Co., Ltd. and Ming Zhao dated as of March 31, 2007 (incorporated by reference to Exhibit 10.11 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.15 | English Translation of Loan Agreement among the Registrant, Airland International Limited and Bizexpress Limited dated March 31, 2007 (incorporated by reference to Exhibit 10.12 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.16 | English Translation of Equity Transfer Contract among Worksoft Creative Software Technology Ltd., Jilun Zhang and Rongbin Shi dated as of April 1, 2007 (incorporated by reference to Exhibit 10.13 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). |
101
Table of Contents
Exhibit Number | Description of Document | |||
4.17 | English Translation of Equity Transfer Contract between the Registrant and Jinsong Tang dated as of May 31, 2007 (incorporated by reference to Exhibit 10.14 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.18 | English Translation of Equity Transfer Contract between Worksoft Creative Software Technology Ltd. and parties thereto dated as of July 29, 2007 (incorporated by reference to Exhibit 10.15 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.19 | English Translation of Loan Agreement among the Registrant, Hao Yu, Wei Wei and other parties thereto dated as of March 15, 2007 (incorporated by reference to Exhibit 10.16 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.20 | Master Services Agreement and Intellectual Property Assignment between Worksoft Creative Software Technology Ltd. and Microsoft (China) Co., Ltd. dated as of November 1, 2005 (incorporated by reference to Exhibit 10.17 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.21 | Technical Service Agreement between Worksoft Creative Software Technology Ltd. and International Business Machine China Company Limited dated as of September 13, 2004 (incorporated by reference to Exhibit 10.18 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
4.22 | English Translation of Premises Lease Contract between VanceInfo Creative Software Technology Ltd. and Beijing Zhongguancun Huaxia Sci-Tech Co., Ltd. dated as of February 25, 2008 (incorporated by reference to Exhibit 4.22 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on May 15, 2009). | |||
8.1 | * | Subsidiaries of the Registrant. | ||
11.1 | Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on November 23, 2007). | |||
12.1 | * | CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
12.2 | * | CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
13.1 | * | CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
13.2 | * | CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
15.1 | * | Consent of Conyers Dill & Pearman. | ||
15.2 | * | Consent of Fangda Partners. | ||
15.3 | * | Consent of Deloitte Touche Tohmatsu CPA Ltd. |
* | Filed with this Annual Report on Form 20-F. |
102
Table of Contents
VANCEINFO TECHNOLOGIES INC. | ||||
By: | /s/ Chris Shuning Chen | |||
Name: Chris Shuning Chen | ||||
Title: Chairman and Chief Executive Officer |
Table of Contents
For the years ended December 31, 2007, 2008 and 2009
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
CONTENTS | PAGE(S) | |||
F-1 | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-7 |
Table of Contents
April 30, 2010
F-1
Table of Contents
(In U.S. dollars in thousands, except share data)
As of December 31, | ||||||||
2008 | 2009 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 79,963 | 64,057 | ||||||
Term deposit | 1,466 | 10,000 | ||||||
Short term investments — held to maturity securities | — | 12,122 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $587 in 2008 and $1,018 in 2009 | 36,827 | 60,524 | ||||||
Prepaid expenses and other current assets | 3,084 | 6,026 | ||||||
Deferred income tax assets — current | 285 | 1,473 | ||||||
Total current assets | 121,625 | 154,202 | ||||||
Rental deposits and prepaid rentals | 2,010 | 1,658 | ||||||
Property and equipment, net | 11,260 | 15,000 | ||||||
Acquired intangible assets, net | 4,158 | 7,739 | ||||||
Goodwill | 15,537 | 24,783 | ||||||
Long-term investment | 861 | 930 | ||||||
Deposit for land development project | — | 879 | ||||||
Total assets | 155,451 | 205,191 | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable | 3,203 | 702 | ||||||
Accrued expenses and other payables | 16,452 | 24,200 | ||||||
Income tax payable | 2,275 | 4,863 | ||||||
Deferred income-current | 132 | 260 | ||||||
Deferred revenue-current | — | 2,634 | ||||||
Total current liabilities | 22,062 | 32,659 | ||||||
Deferred income tax liabilities-non current | 737 | 1,328 | ||||||
Deferred income-non-current | 1,149 | 1,778 | ||||||
Deferred revenue -non-current | — | 97 | ||||||
Contingent consideration payable for business acquisition | — | 6,767 | ||||||
Total liabilities | 23,948 | 42,629 | ||||||
Commitments and contingencies (Notes 22, 23 and 24) | ||||||||
Equity: | ||||||||
Ordinary shares ($0.001 par value, 70,000,000 shares authorized; 39,120,879 and 39,888,092 shares issued and outstanding in 2008 and 2009, respectively) | 39 | 40 | ||||||
Additional paid-in capital | 101,184 | 111,680 | ||||||
Shares issuable in connection with business acquisitions | 1,527 | 520 | ||||||
Accumulated other comprehensive income | 4,863 | 4,924 | ||||||
Statutory reserves | 1,316 | 2,307 | ||||||
Retained earnings | 22,574 | 43,091 | ||||||
Total equity | 131,503 | 162,562 | ||||||
Total liabilities and equity | 155,451 | 205,191 | ||||||
F-2
Table of Contents
(In U.S. dollars in thousands, except share and share related data)
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Revenues | 64,458 | 105,556 | 152,065 | |||||||||
Business tax | (1,744 | ) | (2,893 | ) | (3,999 | ) | ||||||
Net revenues | 62,714 | 102,663 | 148,066 | |||||||||
Cost of revenues (including share-based compensation of $111, $265 and $313 in 2007, 2008 and 2009, respectively) | (38,544 | ) | (62,911 | ) | (92,171 | ) | ||||||
Gross profit | 24,170 | 39,752 | 55,895 | |||||||||
Selling, general and administrative expenses (including share-based compensation of $885, $1,126 and $1,252 in 2007, 2008 and 2009, respectively) | (16,180 | ) | (25,905 | ) | (34,710 | ) | ||||||
Change in fair value of contingent consideration payable for business acquisition | — | — | (62 | ) | ||||||||
Other operating income | 860 | 858 | 1,754 | |||||||||
Income from operations | 8,850 | 14,705 | 22,877 | |||||||||
Interest income | 1,032 | 2,028 | 856 | |||||||||
Interest expense | (47 | ) | (69 | ) | (86 | ) | ||||||
Exchange differences | 317 | 703 | (119 | ) | ||||||||
Change in fair value of warrants | (357 | ) | — | — | ||||||||
Income before income taxes and earnings in equity method investment | 9,795 | 17,367 | 23,528 | |||||||||
Income tax expense | (174 | ) | (1,298 | ) | (2,089 | ) | ||||||
Income before earnings in equity method investment | 9,621 | 16,069 | 21,439 | |||||||||
Earnings in equity method investment | — | 20 | 69 | |||||||||
Net income | 9,621 | 16,089 | 21,508 | |||||||||
Net (income) loss attributable to noncontrolling interest | (52 | ) | 84 | — | ||||||||
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium | (632 | ) | — | — | ||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 8,937 | 16,173 | 21,508 | |||||||||
Net income | 9,621 | 16,089 | 21,508 | |||||||||
Other comprehensive income, net of tax: | ||||||||||||
Foreign currency translation adjustments | 1,710 | 2,578 | (48 | ) | ||||||||
Unrealized gains on foreign currency exchange forward contract recognized in other comprehensive income | — | — | 145 | |||||||||
Gains on foreign currency exchange forward contract reclassified to earnings | — | — | (36 | ) | ||||||||
Total other comprehensive income, net of tax | 1,710 | 2,578 | 61 | |||||||||
Comprehensive income | 11,331 | 18,667 | 21,569 | |||||||||
Comprehensive income attributable to the noncontrolling interest | (52 | ) | 84 | — | ||||||||
Comprehensive income attributable to VanceInfo Technologies Inc. | 11,279 | 18,751 | 21,569 | |||||||||
Net income per share | ||||||||||||
Basic-ordinary share | 0.22 | 0.43 | 0.56 | |||||||||
Basic-Series A convertible redeemable preferred share | 0.40 | N/A | N/A | |||||||||
Basic-Series B-1 convertible redeemable preferred share | 0.40 | N/A | N/A | |||||||||
Basic-Series B-2 convertible redeemable preferred share | 0.51 | N/A | N/A | |||||||||
Basic-Series B-3 convertible redeemable preferred share | 0.22 | N/A | N/A | |||||||||
Diluted-ordinary share | 0.19 | 0.40 | 0.52 | |||||||||
Weighted average shares used in calculating net income per share | ||||||||||||
Basic-ordinary share | 11,426,183 | 37,276,306 | 38,389,495 | |||||||||
Basic-Series A convertible redeemable preferred share | 6,860,247 | N/A | N/A | |||||||||
Basic-Series B-1 convertible redeemable preferred share | 2,867,123 | N/A | N/A | |||||||||
Basic-Series B-2 convertible redeemable preferred share | 6,117,988 | N/A | N/A | |||||||||
Basic-Series B-3 convertible redeemable preferred share | 77,704 | N/A | N/A | |||||||||
Diluted-ordinary share | 13,446,087 | 40,695,982 | 41,576,217 | |||||||||
F-3
Table of Contents
(In U.S. dollars in thousands, except share data)
Shares issuable | Accumulated | |||||||||||||||||||||||||||||||||||
in connection | other | Total | ||||||||||||||||||||||||||||||||||
Ordinary shares | Additional | with business | comprehensive | Statutory | Retained | Noncontrolling | shareholders’ | |||||||||||||||||||||||||||||
Shares | Amount | paid-in capital | acquisitions | income | reserves | earnings | interest | equity | ||||||||||||||||||||||||||||
Balance as of January 1, 2007 | 8,696,219 | 9 | 3,279 | — | 575 | 55 | 722 | 173 | 4,813 | |||||||||||||||||||||||||||
Repurchase of ordinary shares | (86,219 | ) | — | (127 | ) | — | — | — | (304 | ) | — | (431 | ) | |||||||||||||||||||||||
Repurchase of Series A convertible redeemable preferred shares | — | — | — | — | — | — | (60 | ) | — | (60 | ) | |||||||||||||||||||||||||
Issuance of ordinary shares in connection with business acquisitions | 2,369,569 | 2 | 4,525 | — | — | — | — | — | 4,527 | |||||||||||||||||||||||||||
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium | — | — | — | — | — | — | (632 | ) | — | (632 | ) | |||||||||||||||||||||||||
Removal of redemption rights of Series B-3 convertible redeemable preferred shares | — | — | 1,260 | — | — | — | — | — | 1,260 | |||||||||||||||||||||||||||
Conversion of preferred shares upon the initial public offering (“IPO”) | 18,771,838 | 19 | 33,993 | — | — | — | — | — | 34,012 | |||||||||||||||||||||||||||
Issuance of ordinary shares upon IPO | 7,447,500 | 7 | 54,780 | — | — | — | — | — | 54,787 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 996 | — | — | — | — | — | 996 | |||||||||||||||||||||||||||
Provision for statutory reserve | — | — | — | — | — | 869 | (869 | ) | — | — | ||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 1,710 | — | — | — | 1,710 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 9,569 | 52 | 9,621 | |||||||||||||||||||||||||||
Noncontrolling interest acquired in business combination | 405 | 405 | ||||||||||||||||||||||||||||||||||
Balance as of December 31, 2007 | 37,198,907 | 37 | 98,706 | — | 2,285 | 924 | 8,426 | 630 | 111,008 | |||||||||||||||||||||||||||
Issuance of ordinary shares in connection with business acquisitions | 148,594 | — | 1,174 | — | — | — | — | — | 1,174 | |||||||||||||||||||||||||||
Shares issuable in connection with Chosen acquisition (Note 4) | — | — | — | 1,527 | — | — | — | — | 1,527 | |||||||||||||||||||||||||||
Ordinary shares issued for share-based compensation | 2,000,000 | 2 | 300 | — | — | — | — | — | 302 | |||||||||||||||||||||||||||
Repurchase of ordinary shares | (226,622 | ) | — | (387 | ) | — | — | — | (1,633 | ) | — | (2,020 | ) | |||||||||||||||||||||||
Share-based compensation | — | — | 1,391 | — | — | — | — | — | 1,391 | |||||||||||||||||||||||||||
Provision for statutory reserve | — | — | — | — | — | 392 | (392 | ) | — | — | ||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 2,578 | — | — | — | 2,578 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 16,173 | (84 | ) | 16,089 | ||||||||||||||||||||||||||
Acquisition of further interest in subsidiary | (546 | ) | (546 | ) | ||||||||||||||||||||||||||||||||
Balance as of December 31, 2008 | 39,120,879 | 39 | 101,184 | 1,527 | 4,863 | 1,316 | 22,574 | — | 131,503 | |||||||||||||||||||||||||||
Issuance of ordinary shares in connection with business acquisitions | 422,213 | 1 | 2,088 | (1,527 | ) | — | — | — | — | 562 | ||||||||||||||||||||||||||
Shares issuable in connection with TP acquisition (Note 4) | — | — | — | 520 | — | — | — | — | 520 | |||||||||||||||||||||||||||
Repurchase of ordinary shares | (2,800 | ) | — | (13 | ) | — | — | — | — | — | (13 | ) | ||||||||||||||||||||||||
Issuance of ordinary shares upon share offering | 345,000 | — | 2,648 | — | — | — | — | — | 2,648 | |||||||||||||||||||||||||||
Ordinary shares issued for share-based compensation | 2,800 | — | 4,208 | — | — | — | — | — | 4,208 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 1,565 | — | — | — | — | — | 1,565 | |||||||||||||||||||||||||||
Provision for statutory reserve | — | 991 | (991 | ) | — | — | ||||||||||||||||||||||||||||||
Unrealized gain on foreign currency exchange forward contract recognized in other comprehensive income | — | — | — | — | 145 | — | — | — | 145 | |||||||||||||||||||||||||||
Reclassification of gain on foreign currency exchange forward contract to earnings | — | — | — | — | (36 | ) | — | — | — | (36 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (48 | ) | — | — | — | (48 | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 21,508 | — | 21,508 | |||||||||||||||||||||||||||
Balance as of December 31, 2009 | 39,888,092 | 40 | 111,680 | 520 | 4,924 | 2,307 | 43,091 | — | 162,562 | |||||||||||||||||||||||||||
F-4
Table of Contents
(In U.S. dollars in thousands)
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | 9,621 | 16,089 | 21,508 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Share-based compensation | 996 | 1,391 | 1,565 | |||||||||
Depreciation and amortization of property and equipment | 1,776 | 2,896 | 4,078 | |||||||||
Amortization of intangible assets | 761 | 823 | 1,668 | |||||||||
Gain on a foreign currency exchange forward contract recognized in earnings | — | — | (52 | ) | ||||||||
Loss on disposal of property and equipment | 189 | 219 | 282 | |||||||||
Allowance for doubtful accounts | 287 | 210 | 445 | |||||||||
Change in fair value of loans to shareholders | (83 | ) | — | — | ||||||||
Change in fair value of warrants | 357 | — | — | |||||||||
Change in fair value of contingent consideration payable for business acquisition | — | — | 62 | |||||||||
Earnings in equity method investment | — | (20 | ) | (69 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Rental deposits and prepaid rentals | (107 | ) | (1,321 | ) | 430 | |||||||
Accounts receivable | (7,910 | ) | (9,580 | ) | (22,446 | ) | ||||||
Accrued interest income of loan to shareholders | (96 | ) | (100 | ) | — | |||||||
Prepaid expenses and other current assets | (968 | ) | (323 | ) | (1,063 | ) | ||||||
Deferred tax assets-current | (18 | ) | (257 | ) | (1,156 | ) | ||||||
Accounts payable | 734 | 192 | (2,485 | ) | ||||||||
Deferred revenue | — | — | 30 | |||||||||
Accrued expenses and other payables | 1,815 | 4,258 | 7,016 | |||||||||
Income tax payable | 30 | 1,470 | 2,479 | |||||||||
Deferred income | — | — | 757 | |||||||||
Deferred tax liability-current | 132 | (145 | ) | — | ||||||||
Deferred tax liability-non current | (37 | ) | (398 | ) | (245 | ) | ||||||
Net cash provided by operating activities | 7,479 | 15,404 | 12,804 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (3,681 | ) | (6,144 | ) | (6,416 | ) | ||||||
Purchase of long-term investment | — | (841 | ) | — | ||||||||
Purchase of short-term investment | — | — | (12,104 | ) | ||||||||
Loans to shareholders | (4,086 | ) | — | — | ||||||||
Repayments from shareholders for loans advanced | 3,713 | 3,579 | — | |||||||||
Consideration paid for business acquisitions (net of cash acquired of $2,214, $891 and $1,730 in 2007, 2008 and 2009, respectively) | (3,852 | ) | (6,738 | ) | (3,462 | ) | ||||||
Proceeds from disposal of property and equipment | 2 | 15 | 34 | |||||||||
Term deposit | (1,371 | ) | (1,463 | ) | (10,000 | ) | ||||||
Cash received upon maturity of term deposit | — | 1,464 | 1,465 | |||||||||
Deposit paid for land development project | — | — | (879 | ) | ||||||||
Net cash used in investing activities | (9,275 | ) | (10,128 | ) | (31,362 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of options | — | 302 | 3,625 | |||||||||
Repayments of loans assumed in business acquisitions | (517 | ) | (200 | ) | (2,386 | ) | ||||||
Proceeds from issuance of Series B-1, B-2 and B-3 convertible redeemable preferred shares and warrants | 1,761 | — | — | |||||||||
Proceeds from issuance of common stock upon IPO (net of $7,469 and $1,054 issuance costs paid in 2007 and 2008, respectively) | 55,835 | (1,054 | ) | — | ||||||||
Repurchase of ordinary shares | (431 | ) | (2,020 | ) | (13 | ) | ||||||
Repurchase of Series A convertible redeemable preferred shares | (90 | ) | — | — | ||||||||
Proceeds from issuance of common stock upon share offering in 2009 (net of $712 issuance costs paid in 2009) | — | — | 2,912 | |||||||||
Proceeds from short-term borrowings | 1,183 | 1,463 | — | |||||||||
Repayments of short-term borrowings | — | (1,317 | ) | (1,465 | ) | |||||||
Net cash provided by (used in) financing activities | 57,741 | (2,826 | ) | 2,673 | ||||||||
F-5
Table of Contents
(In U.S. dollars in thousands)
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Effect of exchange rate changes | 325 | 678 | (21 | ) | ||||||||
Cash and cash equivalents at beginning of year | 20,565 | 76,835 | 79,963 | |||||||||
Net increase (decrease) in cash and cash equivalents | 55,945 | 2,450 | (15,885 | ) | ||||||||
Cash and cash equivalents at end of year | 76,835 | 79,963 | 64,057 | |||||||||
Supplemental disclosures of cash flow information | ||||||||||||
Income tax paid | 26 | 343 | 1,055 | |||||||||
Interest paid | 39 | 96 | 80 | |||||||||
Non-cash investing activities: | ||||||||||||
Acquisition of businesses: | ||||||||||||
Value of ordinary shares issued and to be issued | 4,528 | 2,701 | 549 | |||||||||
Cash consideration paid | 6,066 | 3,645 | 1,377 | |||||||||
Outstanding consideration payable | 3,867 | 3,106 | 8,187 | |||||||||
Change in fair value of contingent consideration | — | — | (62 | ) | ||||||||
Net assets acquired (including intangible assets of $254, $3,203 and $5,258, in 2007, 2008 and 2009, respectively) | 14,461 | 9,452 | 10,051 | |||||||||
Payable for purchase of property and equipment | 96 | 181 | 1,233 | |||||||||
Removal of redemption rights of Series B-3 convertible redeemable preferred shares (Note 18) | 1,260 | — | — | |||||||||
Accrued issuance costs related to offerings | 1,048 | — | 264 | |||||||||
F-6
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
1. | ORGANIZATION AND PRINCIPAL ACTIVITIES |
VanceInfo Technologies Inc. (“VanceInfo” or the “Company”), formerly known as Thinkplus Investments Limited, was incorporated under the laws of the British Virgin Islands (“BVI”) on April 19, 2004 and was re-domiciled to the Cayman Islands on October 10, 2005. VanceInfo, together with its subsidiaries and variable interest entity, are hereinafter referred to as the “Group”. |
On August 31, 2004, through VanceInfo Creative Software Technology Ltd. (“VanceInfo Beijing”), VanceInfo acquired the information technology services (“IT services”) business and related assets of Beijing Wensi Chuangyi Software Technology Co., Ltd. (“Wensi Chuangyi”) and its subsidiaries, the predecessor of VanceInfo. Wensi Chuangyi was established under the laws of the People’s Republic of China (“PRC”) in 1995 and engaged in the provision of localization and quality assurance testing services. The acquisition of Wensi Chuangyi was accounted for as a purchase business combination with net assets recorded at their fair value at the date of acquisition. Before the acquisition of Wensi Chuangyi, the Group did not have significant operations. |
The Group is principally engaged in the provision of IT services that mainly include quality assurance testing, application development and maintenances, research and development, globalization and localization, and enterprise solutions in the PRC. |
As of December 31, 2009, the Group’s subsidiaries were as follows: |
Date of | Place of | Percentage | ||||||
acquisition/ | establishment/ | of beneficial | ||||||
Subsidiaries | incorporation | incorporation | ownership | |||||
VanceInfo Beijing | July 2, 2004 | PRC | 100 | % | ||||
VanceInfo Japan Inc. (“VanceInfo Japan”) | November 25, 2004 | Japan | 99.9 | % | ||||
VanceInfo Creative Software Technology Ltd. (“VanceInfo BVI”) | August 6, 2004 | BVI | 100 | % | ||||
VanceInfo Technologies Inc. (“VanceInfo US”) | November 29, 2005 | United States of America (“US”) | 100 | % | ||||
VanceInfo Technologies Limited | March 27, 2007 | Hong Kong | 100 | % | ||||
VanceInfo Technologies Limited | November 15, 2007 | PRC | 100 | % | ||||
Shanghai VanceInfo Technologies Limited (“Solutions”) | May 29, 2007 | PRC | 100 | % | ||||
Beijing Chosen Technology Co., Ltd. (“Chosen”) | July 31, 2007 | PRC | 100 | % | ||||
Shanghai VanceInfo Creative Software Technology Limited | September 9, 2008 | PRC | 100 | % | ||||
Wireless Info Tech, Ltd. (“WIT”) | October 1, 2008 | US | 100 | % | ||||
VanceInfo Malaysia Inc. Sdn. Bhd. | October 9, 2008 | Malaysia | 100 | % | ||||
Shenzhen VanceInfo Creative Software Technology Limited | October 28, 2008 | PRC | 100 | % | ||||
Nanjing VanceInfo Creative Software Technology Limited | December 19, 2008 | PRC | 100 | % | ||||
TP Teleservices Limited (“TP Teleservices”) | July 2, 2009 | Hong Kong | 100 | % | ||||
TP (Hong Kong) Limited (“TP HK”) | July 2, 2009 | Hong Kong | 100 | % | ||||
TP Consultants Limited (“TP Consultant”) | July 2, 2009 | Hong Kong | 100 | % | ||||
TP (Taiwan) Limited (“TP Taiwan”) | July 2, 2009 | Hong Kong | 100 | % | ||||
TP Software Technology (Shanghai) Co., Ltd.(“TP Shanghai”) | July 2, 2009 | PRC | 100 | % |
F-7
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Basis of presentation |
The consolidated financial statements of the Group are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). | ||
Basis of consolidation |
The consolidated financial statements include the financial statements of VanceInfo, its subsidiaries and its variable interest entity. All inter-company transactions and balances have been eliminated upon consolidation. | ||
Use of estimates |
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenue and expenses in the financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s financial statements include revenue recognition, share-based compensation expenses, allowance for doubtful accounts, impairment of goodwill, purchase price allocation in business combinations, and valuation allowance for deferred tax assets. Actual results could differ from those estimates. | ||
Significant risks and uncertainties |
The Group participates in a dynamic industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations, or cash flows: advances and trends in new technologies and industry standards; competition from other competitors; regulatory or other PRC related factors; risks associated with the Group’s ability to attract and retain employees necessary to support its growth; risks associated with the Group’s growth strategies; and general risks associated with the IT services industry. | ||
Cash and cash equivalents |
Cash and cash equivalents consist of cash on hand and highly liquid investments, which are unrestricted as to withdrawal or use, and which have maturities of three months or less when purchased. |
F-8
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Fair value |
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability. |
Authoritative literature provides a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement as follows: | ||
Level 1 |
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. | ||
Level 2 |
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data. | ||
Level 3 |
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. |
The Group’s financial instruments include cash and cash equivalents, held to maturity short term investments, accounts receivable and accounts payable, the carrying values of which approximate their fair value due to their short-term maturities. |
F-9
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Fair value— continued |
Level 3— continued |
The Group’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 include a foreign currency exchange forward contract based on level 2 inputs and contingent consideration payable in connection with a business acquisition based on level 3 inputs. The Company did not carry any financial assets or liabilities measured at fair value on recurring basis as of December 31, 2008. |
The Group’s financial assets and liabilities measured at fair value on a non-recurring basis include acquired assets and liabilities based on level 3 inputs in connection with business acquisitions. |
It is not practicable to estimate the fair value of the Group’s equity method long-term investment because of lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. |
Short term investments |
Short term investments are comprised of marketable debt and equity securities, which are classified as held to maturity, trading, or available for sale. Short term investments are classified as held-to-maturity when the Group has the positive intent and ability to hold the securities to maturity. All of the Group’s held to maturity securities are classified as short term investments on the consolidated balance sheets based on their contractual maturity dates which are less than one year and are stated at their amortized costs. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. The Group did not purchase or sell any trading securities historically. Short term investments classified as available for sale are carried at their fair values and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income. Available for sale securities are classified as current assets on the accompanying consolidated balance sheets because they are available for immediate sale. The Group did not hold any available for sale securities historically. |
The Group reviews its short-term investments for other-than-temporary impairment based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its short-term investments. If the cost of an investment exceeds the investment’s fair value, the Group considers, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, and the Group’s intent and ability to hold the investment. The Group did not recognize any other-than-temporary impairment on short term investments historically. |
F-10
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Derivatives and hedge accounting |
The Group’s risk management strategy includes the use of derivative and non-derivative financial instruments as hedges of foreign currency exchange risk, whenever management determines their use to be reasonable and practical. This strategy does not permit the use of derivative financial instruments for trading purposes, nor does it allow for speculation. |
The Group uses foreign currency forward exchange contracts to hedge the exposure to foreign currency risk, primarily Japanese Yen (“JPY”). The purpose of the Group’s foreign currency derivative activities is to protect the Group from the risk that the functional currencies net cash flows of the Group’s operating entities resulting from forecasted JPY denominated revenue transactions will be negatively affected by the fluctuation in exchange rates. The Group uses foreign currency forward exchange contracts to offset changes in the amount of future cash flows associated with certain third-party sales expected to occur within the next twelve months. These contracts, which are designated and documented as cash flow hedges, qualify for hedge accounting treatment. The effectiveness of the cash flow hedge contracts is assessed quarterly using regression analysis as well as other timing and probability criteria. To receive special hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges are expected to be highly effective in offsetting changes to future cash flows generated from hedged transactions. |
The Group carries these contracts as either assets or liabilities at fair value. The Group excludes from its assessment of hedge effectiveness the portion of changes in fair value of the forward contracts attributable to the changes in difference between the spot exchange rate and the forward exchange rate (“spot-forward difference”), which is recognized in the exchange differences account in the statement of operations when incurred. The Group recognizes the effective portion of the gains and losses on these contracts, which represents the changes in fair values of these contracts excluding the changes in relation to spot-forward difference, in other comprehensive income and reclassifies such gains and losses subsequently in the exchange differences account in the statement of operations when the forecasted revenue is recognized. |
F-11
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Accounts receivable |
Accounts receivable represents those receivables derived in the ordinary course of business. The Group conducts credit evaluations of customers and generally do not require collateral or other security from their customers. The Group establishes an allowance for doubtful accounts based upon estimates, historical experience and other factors surrounding the credit risk of specific customers. |
Movement of allowance for doubtful accounts is as follows: |
Balance as of | Balance as of | |||||||||||||||
beginning of | Charge to | Exchange | end of | |||||||||||||
the year | expense | adjustment | the year | |||||||||||||
2008 | 342 | 210 | 35 | 587 | ||||||||||||
2009 | 587 | 445 | (14 | ) | 1,018 | |||||||||||
Property and equipment, net |
Property and equipment, net, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: |
Furniture and office equipment | 5 years | |||
Motor vehicles | 5 years | |||
Computers and software | 5 years | |||
Leasehold improvements | Shorter of the term of the lease or the estimated useful lives of the assets |
Business combinations |
Business combinations are recorded using the purchase method of accounting. On January 1, 2009, the Group adopted a new accounting pronouncement with prospective application which made certain changes to the previous authoritative literature on business combinations. From January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized and measured as the excess of the total consideration transferred plus the fair value of any noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of the identifiable net assets acquired. Previously, any non-controlling interest was reflected at historical cost. Common forms of the consideration made in acquisitions include cash and common equity instruments. Consideration transferred in a business acquisition is measured at the fair value as at the date of acquisition. For shares issued in a business combination, the Group has estimated the fair value as of the date of acquisition. |
F-12
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Business combinations— continued |
Where the consideration in an acquisition includes contingent consideration, the payment of which depends on the achievement of certain specified conditions post-acquisition, from January 1, 2009 the contingent consideration is recognized and measured at its fair value at the acquisition date and if recorded as a liability, it is subsequently carried at fair value with changes in fair value reflected in earnings. For periods prior to January 1, 2009 contingent consideration was not recorded until the contingency was resolved. |
Acquired intangible assets with finite lives are carried at cost less accumulated amortization. Amortization of customer base and relationship is computed using the estimated attrition pattern of the acquired customers or straight-line method. Amortization of other finite-lived intangible assets is computed using the straight-line method. The estimated economic lives of acquired intangible assets with finite lives are as follows: |
Contract backlog | 0.17- 1 year | |||
Customer base and relationship | 3-10 years | |||
Non-compete agreement | 2-5 years | |||
Software Technology | 2 years |
Acquired intangible assets with indefinite lives are carried at cost without amortization recognized. |
Long-term investment |
Investee companies over which the Group has the ability to exercise significant influence, but does not have a controlling interest are accounted for using the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between 20% and 50%, and other factors, such as representation in the investee’s Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. |
An impairment charge is recorded when the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. |
F-13
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Impairment of long-lived assets |
The Group reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. |
Impairment of goodwill and indefinite-lived intangible assets |
The Group annually, or more frequently if the Group believes indicators of impairment exist, reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. |
Specifically, goodwill impairment is determined using a two-step process. The first step compares the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Estimating fair value is performed by utilizing various valuation techniques, with the primary technique being a discounted cash flow. |
The impairment test for other intangible asset not subject to amortization consists of a comparison of the fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions are inherent in this process, including estimates of discount rates. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. |
The Group has determined to perform the annual impairment tests on December 31 of each year. The Group did not incur any impairment loss on goodwill or other intangible assets not subject to amortization for the years ended December 31, 2007, 2008 or 2009. |
F-14
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Revenue recognition | ||
Research and development outsourcing services and IT services |
The majority of the contracts are for the provision of services performed on a time-and-material basis. For time-and-material contracts, the Group may render initial development and maintenance services, typically for a period of less than one year and are subject to the terms of the master agreement which fixes the billing rates for man-hours based on level of experience of the engineers regardless of the type of engaged services. The Group bills customers for related service performance based on pre-agreed charge rates. Customers may terminate contracts before completion and revenue is considered to be realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Thus, the revenues from this type of contract are recognized as the billable services are rendered. Software developed by the Group on behalf of its customers is transferred in its entirety to the customer. Revenues recognized for time-and-material contracts amounted to $58,361, $93,525 and $107,866 for the years ended December 31, 2007, 2008 and 2009, respectively. |
The remaining revenues are earned from fixed-price service contracts. Revenue from fixed-price contracts require the Group to perform services throughout the contractual period, which is generally less than one year. Revenues from fixed-price contracts are generally recognized as per the proportional performance method using an output measure determined by achievement of milestones which include planning documentation and testing reports. The Group estimates the man-hours involved in achieving each of these milestones and when the milestone is achieved the Group recognizes a proportion of the total revenue under the contract based on the hours incurred in achieving that milestone against its latest estimate of the total man-hours to be incurred in performing the contract. Revenues recognized for fixed-price contracts amounted to $6,097, $12,031 and $40,426 for the years ended December 31, 2007, 2008 and 2009, respectively. |
Reimbursable out-of-pocket expenses and material costs are recognized as revenues when billed. |
The discount terms in the Group’s arrangements with customers generally entitle the customer to discounts if the customer completes a specified cumulative level of revenue transactions. The discounts are passed to the customer either as cash payments or as a reduction of payments due from the customer. The Group has recorded its revenue rebate as reduction in revenues appropriately at the time of sales. |
F-15
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Revenue recognition— continued | ||
Other solutions |
The Group, through TP acquired in 2009 (see Note 4), derives revenues from providing system integration solutions, which normally includ the procurement of hardware on behalf of customers and customized software licenses, implementation of the software and hardware, and post contract customer supports (“PCS”) including telephone supports, on-site supports and regular maintenance services. |
The Group has established the vender-specific objective evidence (“VSOE”) of fair value of the PCS based on standalone sales on regular basis and therefore treats the arrangements as two units of accounting, which are (1) hardware and software implementation and (2) PCS. Revenues of the hardware and software implementation are primarily recognized using percentage-of-completion method measured based on the relationship of costs already incurred to the total estimated costs to be incurred. The Group considers labor costs and other direct contract costs in calculating the percentage of completion. Revenues of the PCS are recognized ratably over the PCS period. |
In addition, the Group, through certain subsidiary, performed a few other projects which involved initial IT services, software resale, and maintenance service. Since the Group did not establish the VSOE of the fair value of each element of these projects, the contract amounts were recognized as revenues ratably over the period of PCS, which was the last undelivered element in the arrangements. |
Revenues recognized in excess of billings are recorded as unbilled receivables and are included in accounts receivable. Amounts billed but not yet collected are recorded as billed receivables and are included in accounts receivable. Billings in excess of revenues recognized are recorded as deferred revenue. |
Business tax |
The Group’s PRC subsidiaries are subject to business tax at rate of 5% of total revenues for certain types of contracts. Certain contracts under specific formalities are exempted from business tax in accordance with the PRC tax laws. Business tax is recorded as a reduction in revenues when incurred. |
F-16
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Government subsidies |
The Group receives non-repayable subsidies from PRC local government agencies after meeting certain conditions, such as locating their office in certain districts or obtaining certain technological certification. The subsidies are recorded in other operating income of the consolidated statements of operations in the period in which the right to receive such subsidies is established. |
Operating leases |
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the lease periods. |
Advertising costs |
The Group expenses advertising costs as incurred. Total advertising expenses were $52, $8 and $62 for the years ended December 31, 2007, 2008 and 2009, respectively, and have been included as part of selling, general and administrative expenses. |
Income taxes |
Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards 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 management, 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 tax authorities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. |
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 taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Group classifies interest and penalties, if any, as a component of its income tax provision. |
F-17
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Foreign currency translation |
The functional and reporting currency of VanceInfo and VanceInfo BVI are the United States dollar (“U.S. dollar”). The financial records of the Company’s other subsidiaries and variable interest entity are maintained in their local currencies, which are the functional currencies of these entities. |
Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are converted into functional currency at the applicable rates of exchange prevailing when the transactions occurred. Transaction gains and losses are recognized in the statements of operations. |
The Group’s entities with functional currency other than U.S. dollar translate their operating results and financial position into the U.S. dollar, the Company’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income. | ||
Comprehensive income |
Comprehensive income includes net income, unrealized gains on foreign currency forward exchange contracts for effective portion and foreign currency translation adjustments. Comprehensive income is reported in the consolidated statements of operations and comprehensive income. | ||
Concentration of credit risk |
Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Group places their cash and cash equivalents with authorized financial institutions. |
Details of customers accounting for 10% or more of total revenues are as follows: |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
% | % | % | ||||||||||
Customer | ||||||||||||
A | 14 | 11 | 5 | |||||||||
B | 20 | 18 | 13 | |||||||||
C | 3 | 10 | 23 | |||||||||
D | 6 | 9 | 11 | |||||||||
F-18
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Concentration of credit risk— continued |
Details of customers accounting for 10% or more of accounts receivable are as follows: |
As of December 31, | ||||||||
2008 | 2009 | |||||||
% | % | |||||||
Customer | ||||||||
A | 13 | 3 | ||||||
B | 9 | 6 | ||||||
C | 19 | 39 | ||||||
Share-based payments |
Share-based payment transactions with employees and non-employee directors are measured based on the grant date fair value of the equity instrument issued and recognized as compensation expense net of a forfeiture rate over the requisite service period based on a graded vesting attribution method, with a corresponding impact reflected in additional paid-in capital. The estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change. | ||
Net income per share |
The Group has determined that its convertible redeemable preferred shares are participating securities as the preferred shares participate in undistributed earnings on an as-if-converted basis. Accordingly, the Group has used the two-class method of computing net income per share, for ordinary and preferred shares according to participation rights in undistributed earnings. Under this method, undistributed net income is allocated on a pro rata basis to the ordinary and preferred shares to the extent that each class may share income for the period; whereas undistributed net loss is allocated to ordinary shares because preferred shares are not contractually obligated to share the loss. |
Ordinary shares to be issued contingent upon the attainment of specified earnings levels in future periods by the acquired businesses are recorded when the contingency is resolved and additional share consideration is issuable. |
The Group had convertible redeemable preferred shares, stock options, warrants, nonvested shares, and ordinary shares to be issued contingent upon the satisfaction of certain conditions in connection with business acquisitions, which could potentially dilute basic earnings per share in the future. To calculate the number of shares for diluted income per share, the effect of the convertible redeemable preferred shares is computed using the if-converted method; the effect of the warrants, stock options and nonvested shares is computed using the treasury stock method. If all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted income per share is based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period and if the result would be dilutive. |
F-19
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Recently issued accounting standards |
In June 2009, the Financial Accounting Standards Board (“FASB”) issued an authoritative pronouncement that changes how a company determines whether an entity should be consolidated when such entity is insufficiently capitalized or is not controlled by the company through voting (or similar rights). The determination of whether a company is required to consolidate an entity is based on, among other things, the entity’s purpose and design and the company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The pronouncement retains the scope of previously issued pronouncements but added entities previously considered qualifying special purpose entities, since the concept of these entities was eliminated by FASB. The pronouncement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations. |
In September 2009, the FASB issued an authoritative pronouncement regarding revenue arrangements with multiple deliverables. This pronouncement was issued in response to practice concerns related to accounting for revenue arrangements with multiple deliverables under the existing pronouncement. Although the new pronouncement retains the criteria from the existing pronouncement for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the separation criterion under the existing pronouncement that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The new pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date or retrospectively for all periods presented. Early application is permitted; however, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement. |
F-20
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Recently issued accounting standards— continued |
In September 2009, the FASB issued an authoritative pronouncement regarding software revenue recognition for arrangements with multiple deliverables. The pronouncement addresses how consideration should be allocated to different units of accounting and removes the previous criterion that entities must use objective and reliable evidence of fair value in separately accounting for deliverables. The pronouncement provides that products containing both software and non-software components that function together to deliver the product’s essential functionality are excluded from the scope of current revenue recognition guidance for software products. The pronouncement includes factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality. The pronouncement is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this pronouncement prospectively to new or materially modified arrangements after the pronouncement’s effective date, or retrospectively for all periods presented. Early application is permitted. However, if the entity elects prospective application and early adopts this pronouncement after its first interim reporting period, it must also retrospectively apply this pronouncement as of the beginning of that fiscal year and disclose the effect of the retrospective adjustments on the prior interim periods’ revenue, income before taxes, net income, and earnings per share. The Company is in the process of evaluating the effect of adoption of this pronouncement. |
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value measurements. This guidance amends previous guidance on fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a gross basis rather than on a net basis as currently required. This guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for annual and interim periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual and interim periods beginning after December 15, 2010. Early application is permitted and, in the period of initial adoption, entities are not required to provide the amended disclosures for any previous periods presented for comparative purposes. The Company does not expect the adoption of this pronouncement to have a significant impact on its financial condition or results of operations. |
In April 2010, the FASB issued an authoritative pronouncement regarding milestone method of revenue recognition. The scope of this pronoucement is limited to arrangements that include milestones relating to research or development deliverables. The pronoucement specifies guidance that must be met for a vendor to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance applies to milestones in arrangements within the scope of this pronoucement regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronoucement will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The Company is in the process of evaluating the effect of adoption of this pronouncement. |
In April 2010, FASB issued an authoritative pronouncement regarding the effect of denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity securities trades and that currency is different from (1) entity's functional currency, (2) functional currency of the foreign operation for which the employee provides services, and (3) payroll currency of the employee. The guidance clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should be considered an equity award assuming all other criteria for equity classification are met. The pronoucement will be effective for interim and annual periods beginning on or after December 15, 2010, and will be applied prospectively. Affected entities will be required to record a cumulative catch-up adjustment for all awards outstanding as of the beginning of the annual period in which the guidance is adopted. The Company is in the process of evaluating the effect of adoption of this pronouncement. |
F-21
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
3. | SEGMENT INFORMATION |
The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. The Group has only one operating segment. | ||
Geographic information |
The Group major operating entities’ country of domicile is Greater China which refers to the PRC, including, for purposes of the accompanying financial statements only, Taiwan and Hong Kong. |
The following tables summarize the Group’s long-lived assets and net revenues in different geographic locations: |
As of December 31, | ||||||||
Long-lived assets | 2008 | 2009 | ||||||
Greater China | 31,895 | 47,277 | ||||||
US | 646 | 2,388 | ||||||
Others | 1,285 | 1,324 | ||||||
Total | 33,826 | 50,989 | ||||||
For the year ended December 31, | ||||||||||||
Net revenues (1) | 2007 | 2008 | 2009 | |||||||||
US | 43,153 | 56,175 | 56,634 | |||||||||
Greater China | 7,329 | 22,045 | 59,373 | |||||||||
Europe | 6,284 | 14,991 | 23,148 | |||||||||
Japan | 5,828 | 9,157 | 8,466 | |||||||||
Others | 120 | 295 | 445 | |||||||||
Total | 62,714 | 102,663 | 148,066 | |||||||||
(1) | Based on the countries in which the customers’ headquarters are located. In determining the geographic information, customers under common control, such as subsidiary and its parent entity, are treated as a single customer. |
F-22
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
The following table summarizes the Group’s net revenue by service lines: |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Research and Development | ||||||||||||
Outsourcing Services | ||||||||||||
Research & development services | 36,013 | 60,808 | 90,581 | |||||||||
Globalization & localization | 3,886 | 4,259 | 5,118 | |||||||||
IT Services: | ||||||||||||
Enterprise solutions | 8,748 | 13,542 | 14,429 | |||||||||
Application development & maintenance | 9,348 | 17,061 | 26,373 | |||||||||
Quality assurance & testing | 4,719 | 6,717 | 7,807 | |||||||||
Other Solutions and Services | — | 276 | 3,758 | |||||||||
Total | 62,714 | 102,663 | 148,066 | |||||||||
F-23
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS |
Value of ordinary shares | 1,357 | |||
Contingent consideration recognized | 1,810 | |||
Cost of transaction | 76 | |||
Total | 3,243 | |||
Amortization | ||||||||
period | ||||||||
Cash acquired | 226 | |||||||
Loans to shareholders | 1,313 | |||||||
Other current assets | 810 | |||||||
Property and equipment | 158 | |||||||
Intangible assets: | ||||||||
Contract backlog | 103 | 0.3 year | ||||||
Customer base and relationship | 1,153 | 7.8 years | ||||||
Non-compete agreement | 282 | 3.8 years | ||||||
Deferred income tax liabilities | (252 | ) | ||||||
Current liabilities | (550 | ) | ||||||
Total | 3,243 | |||||||
F-24
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
For the year | ||||
ended December 31, | ||||
2007 | ||||
(unaudited) | ||||
Pro forma net revenue | 65,171 | |||
Pro forma net income | 9,658 | |||
Pro forma net income per ordinary share-basic | 0.23 | |||
Pro forma net income per Series A convertible redeemable preferred share-basic | 0.40 | |||
Pro forma net income per Series B-1 convertible redeemable preferred share-basic | 0.40 | |||
Pro forma net income per Series B-2 convertible redeemable preferred share-basic | 0.52 | |||
Pro forma net income per Series B-3 convertible redeemable preferred share-basic | 0.23 | |||
Pro forma net income per ordinary share-diluted | 0.19 | |||
F-25
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Value of ordinary shares | 1,562 | |||
Contingent consideration recognized | 394 | |||
Cost of transaction | 58 | |||
Total | 2,014 | |||
Amortization | ||||||||
period | ||||||||
Cash acquired | 1,804 | |||||||
Other current assets | 1,328 | |||||||
Property and equipment | 277 | |||||||
Intangible assets: | ||||||||
Customer base and relationship | 187 | 9.6 years | ||||||
Non-compete agreement | 21 | 3.8 years | ||||||
Deferred income tax liabilities | (51 | ) | ||||||
Short-term loan | (261 | ) | ||||||
Other current liabilities | (672 | ) | ||||||
Noncontrolling interest | (619 | ) | ||||||
Total | 2,014 | |||||||
F-26
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
For the year | ||||
ended December 31, | ||||
2007 | ||||
(unaudited) | ||||
Pro forma net revenue | 65,890 | |||
Pro forma net income | 9,505 | |||
Pro forma net income per ordinary share-basic | 0.22 | |||
Pro forma net income per Series A convertible redeemable preferred share-basic | 0.39 | |||
Pro forma net income per Series B-1 convertible redeemable preferred share-basic | 0.40 | |||
Pro forma net income per Series B-2 convertible redeemable preferred share-basic | 0.51 | |||
Pro forma net income per Series B-3 convertible redeemable preferred share-basic | 0.22 | |||
Pro forma net income per ordinary share-diluted | 0.19 | |||
Cash consideration | 927 | |||
Value of ordinary shares | 412 | |||
Cost of transaction | 9 | |||
Total | 1,348 | |||
F-27
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued | |
Acquisition of Solutions’ equity interest— continued | ||
The purchase price was allocated as follows: |
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Contract Backlog | 1 | 0.17 year | ||||||
Non-compete agreement | 6 | 2.4 years | ||||||
Goodwill | 795 | |||||||
Noncontrolling interest | 546 | |||||||
Total | 1,348 | |||||||
• | Service fees:VanceInfo Beijing provides exclusive technology development and consulting services to Megainfo. Megainfo pays VanceInfo Beijing monthly service fees in the amount determined by VanceInfo Beijing. |
• | Call option:The shareholder of Megainfo irrevocably granted VanceInfo Beijing or its designated third party an exclusive option to purchase from Megainfo’s shareholder, to the extent permitted under the laws of the PRC, all or part of the equity interests in Megainfo, for consideration of RMB1. |
• | Equity pledge:Under the equity pledge, the shareholder of Megainfo pledged all of his equity interests, including the right to receive declared dividends, in Megainfo to Vanceinfo Beijing to guarantee Megainfo and its shareholder’s performance of their obligations under the exclusive technology development and consulting agreement. |
F-28
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 776 | |||
Value of ordinary shares | 252 | |||
Contingent consideration recognized | 79 | |||
Cost of transaction | 58 | |||
Total | 1,165 | |||
Amortization period | ||||||||
Property and equipment | 220 | |||||||
Intangible assets: | ||||||||
Contract backlog | 5 | 0.3 year | ||||||
Customer base and relationship | 534 | 4.8 years | ||||||
Non-compete agreement | 43 | 3 years | ||||||
Deferred income tax liabilities | (154 | ) | ||||||
Other net assets acquired | 517 | |||||||
Total | 1,165 | |||||||
F-29
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
For the year | ||||
ended December 31, | ||||
2007 | ||||
(unaudited) | ||||
Pro forma net revenue | 65,070 | |||
Pro forma net income | 9,244 | |||
Pro forma net income per ordinary share-basic | 0.21 | |||
Pro forma net income per Series A convertible redeemable preferred share-basic | 0.38 | |||
Pro forma net income per Series B-1 convertible redeemable preferred share-basic | 0.39 | |||
Pro forma net income per Series B-2 convertible redeemable preferred share-basic | 0.50 | |||
Pro forma net income per Series B-3 convertible redeemable preferred share-basic | 0.21 | |||
Pro forma net income per ordinary share-diluted | 0.18 | |||
F-30
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 111 | |||
Value of ordinary shares | 98 | |||
Cost of transaction | 8 | |||
Total | 217 | |||
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Customer base and relationship | 7 | 5.6 years | ||||||
Non-compete agreement | 6 | 3.6 years | ||||||
Goodwill | 16 | |||||||
Noncontrolling interest | 188 | |||||||
Total | 217 | |||||||
F-31
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 858 | |||
Value of ordinary shares | 989 | |||
Cost of transaction | 50 | |||
Total | 1,897 | |||
Amortization | ||||||||
period | ||||||||
Cash acquired | 82 | |||||||
Other current assets | 1,185 | |||||||
Property and equipment | 62 | |||||||
Intangible assets: | ||||||||
Customer base and relationship | 1,061 | 5.4 years | ||||||
Non-compete agreement | 132 | 4 years | ||||||
Goodwill | 354 | |||||||
Current liabilities | (674 | ) | ||||||
Deferred income tax liabilities | (305 | ) | ||||||
Total | 1,897 | |||||||
F-32
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
For the year | ||||
ended December 31, | ||||
2007 | ||||
(unaudited) | ||||
Pro forma net revenue | 66,885 | |||
Pro forma net income | 10,073 | |||
Pro forma net income per ordinary share-basic | 0.24 | |||
Pro forma net income per Series A convertible redeemable preferred share-basic | 0.41 | |||
Pro forma net income per Series B-1 convertible redeemable preferred share-basic | 0.42 | |||
Pro forma net income per Series B-2 convertible redeemable preferred share-basic | 0.53 | |||
Pro forma net income per Series B-3 convertible redeemable preferred share-basic | 0.24 | |||
Pro forma net income per ordinary share-diluted | 0.21 | |||
F-33
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Contract backlog | 1 | 0.67 year | ||||||
Non-compete agreement | 2 | 2 years | ||||||
Goodwill | 203 | |||||||
Other net assets acquired | 37 | |||||||
Total | 243 | |||||||
F-34
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 1,080 | |||
Cost of transaction | 67 | |||
Total | 1,147 | |||
Amortization | ||||||||
period | ||||||||
Cash acquired | 891 | |||||||
Other current assets | 858 | |||||||
Property and equipment | 285 | |||||||
Rental deposits | 33 | |||||||
Intangible assets: | ||||||||
Non-compete agreement | 48 | 5 years | ||||||
Goodwill | 214 | |||||||
Short-term loan | (200 | ) | ||||||
Current liabilities | (861 | ) | ||||||
Deferred income tax liabilities | (121 | ) | ||||||
Total | 1,147 | |||||||
F-35
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued | |
Acquisition of WIT’s equity interest— continued |
For the year | ||||||||
ended December 31, | ||||||||
2007 | 2008 | |||||||
(unaudited) | (unaudited) | |||||||
Pro forma net revenue | 63,053 | 106,115 | ||||||
Pro forma net income | 9,664 | 16,963 | ||||||
Pro forma net income per ordinary share-basic | 0.23 | 0.45 | ||||||
Pro forma net income per Series A convertible redeemable preferred share-basic | 0.40 | N/A | ||||||
Pro forma net income per Series B-1 convertible redeemable preferred share-basic | 0.40 | N/A | ||||||
Pro forma net income per Series B-2 convertible redeemable preferred share-basic | 0.52 | N/A | ||||||
Pro forma net income per Series B-3 convertible redeemable preferred share-basic | 0.23 | N/A | ||||||
Pro forma net income per ordinary share-diluted | 0.19 | 0.42 | ||||||
F-36
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 206 | |||
Value of ordinary shares | 29 | |||
Total | 235 | |||
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Contract backlog | 2 | 1 year | ||||||
Non-compete agreement | 2 | 2 years | ||||||
Goodwill | 173 | |||||||
Other net assets acquired | 58 | |||||||
Total | 235 | |||||||
F-37
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Cash consideration | 4,856 | |||
Equity consideration | 3,788 | |||
Total | 8,644 | |||
Amortization | ||||||||
period | ||||||||
Cash | 1,730 | |||||||
Other current assets | 2,926 | |||||||
Property and equipment | 248 | |||||||
Rental deposits | 82 | |||||||
Intangible assets: | ||||||||
Customer base and relationship | 2,163 | 5 years | ||||||
Tradename | 1,645 | Indefinite | ||||||
Non-compete agreement | 332 | 5 years | ||||||
Contract backlog | 743 | 1.5 years | ||||||
Software Technology | 323 | 2 years | ||||||
Goodwill | 6,277 | |||||||
Deferred tax assets — non-current | 43 | |||||||
Current liabilities | (4,607 | ) | ||||||
Deferred tax liabilities | (875 | ) | ||||||
Short term loans | (2,386 | ) | ||||||
Total | 8,644 | |||||||
F-38
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
For the year | ||||||||
ended December 31, | ||||||||
2008 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Pro forma net revenue | 108,995 | 151,068 | ||||||
Pro forma net income | 16,019 | 21,869 | ||||||
Pro forma net income per ordinary share-basic | 0.43 | 0.57 | ||||||
Pro forma net income per ordinary share-diluted | 0.39 | 0.53 | ||||||
F-39
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
4. | ACQUISITIONS — continued |
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Customer base and relationship | 26 | 5 years | ||||||
Non-compete agreement | 22 | 2 years | ||||||
Goodwill | 1,306 | |||||||
Property and equipment | 148 | |||||||
Prepaid rental | 44 | |||||||
Other current liabilities | (374 | ) | ||||||
Total | 1,172 | |||||||
F-40
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
5. | SHORT TERM INVESTMENTS |
Costs | Maturity dates | |||||
Floating rate notes | 4,271 | January 15, 2010 to May 18, 2010 | ||||
Corporate notes | 7,851 | January 15, 2010 to September 27, 2010 | ||||
Total | 12,122 | |||||
6. | ACCOUNTS RECEIVABLE |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Billed accounts receivable | 16,900 | 26,077 | ||||||
Unbilled accounts receivable | 20,514 | 35,465 | ||||||
Less: allowance for doubtful accounts | (587 | ) | (1,018 | ) | ||||
Total accounts receivable, net | 36,827 | 60,524 | ||||||
F-41
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Advances to employees | 536 | 853 | ||||||
Prepaid rentals | 1,054 | 1,090 | ||||||
Receivable from transfer agent | — | 966 | ||||||
Performance guarantee deposit | — | 734 | ||||||
Advance to suppliers | 89 | 280 | ||||||
Interests receivable | 68 | 291 | ||||||
Incentive from American Depositary Shares (“ADS”) depositary bank | 664 | 514 | ||||||
Prepaid insurance premium | — | 150 | ||||||
Assets resulted from change in fair value of foreign currency forward contract | — | 161 | ||||||
Other prepaid expenses | 673 | 987 | ||||||
Total | 3,084 | 6,026 | ||||||
F-42
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
7. | PREPAID EXPENSES AND OTHER CURRENT ASSETS — continued |
Unrealized gains recognized for effective portion | 145 | |||
Gains reclassified to earnings | (36 | ) | ||
Total | 109 | |||
Gains reclassified from other comprehensive income | 36 | |||
Gains recognized due to changes in spot-forward difference | 16 | |||
Total | 52 | |||
F-43
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
8. | PROPERTY AND EQUIPMENT, NET |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Furniture and office equipment | 2,300 | 3,820 | ||||||
Motor vehicles | 691 | 1,187 | ||||||
Computers and software | 8,241 | 12,037 | ||||||
Leasehold improvements | 5,802 | 7,783 | ||||||
17,034 | 24,827 | |||||||
Less: Accumulated depreciation and amortization | (5,774 | ) | (9,827 | ) | ||||
Property and equipment, net | 11,260 | 15,000 | ||||||
9. | ACQUIRED INTANGIBLE ASSETS, NET |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Intangible assets not subject to amortization: | ||||||||
Trade name | 732 | 2,376 | ||||||
Intangible assets subject to amortization: | ||||||||
Contract backlog | 156 | 900 | ||||||
Customer base and relationship | 4,524 | 6,708 | ||||||
Non-compete agreement | 594 | 949 | ||||||
Software Technology | — | 322 | ||||||
6,006 | 11,255 | |||||||
Less: Accumulated amortization Contract backlog | (156 | ) | (591 | ) | ||||
Customer base and relationship | (1,443 | ) | (2,405 | ) | ||||
Non-compete agreement | (249 | ) | (439 | ) | ||||
Software Technology | — | (81 | ) | |||||
(1,848 | ) | (3,516 | ) | |||||
Acquired intangible assets, net | 4,158 | 7,739 | ||||||
F-44
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
10. | GOODWILL |
As of December 31, | ||||||||
2008 | 2009 | |||||||
As of January 1, | 7,083 | 15,537 | ||||||
Goodwill recognized in connection with acquisitions of: | ||||||||
Further interest in VanceInfo Japan | 167 | — | ||||||
Chosen upon additional consideration payment | 4,616 | — | ||||||
Further interest in Solutions | 795 | — | ||||||
Megainfo upon additional consideration payment | 1,916 | — | ||||||
Tianchuang’s business upon initial consideration payment | 203 | — | ||||||
Tianchuang’s business upon additional consideration payment | 15 | — | ||||||
WIT upon initial consideration payment | 214 | — | ||||||
WIT upon additional consideration payment | — | 1,506 | ||||||
Kernel’s business | — | 173 | ||||||
TP | — | 6,277 | ||||||
Mobile services business | — | 1,306 | ||||||
Exchange differences | 528 | (16 | ) | |||||
As of December 31 | 15,537 | 24,783 | ||||||
11. | LONG-TERM INVESTMENT |
F-45
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
12. | DEPOSIT FOR LAND DEVELOPMENT PROJECT |
13. | ACCRUED EXPENSES AND OTHER PAYABLES |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Accrued payroll and employee welfare | 6,172 | 10,217 | ||||||
Accrued professional fees | 735 | 1,525 | ||||||
Accrued subcontracting costs and reimbursable operating costs | 1,788 | 5,963 | ||||||
Business tax payable | 1,238 | 1,789 | ||||||
Outstanding cash consideration in connection with business acquisitions | 3,105 | 1,686 | ||||||
Other taxes payable | 382 | 1,192 | ||||||
Advance from customers | 664 | 584 | ||||||
Short-term bank loan | 1,466 | — | ||||||
Other accrued liabilities | 902 | 1,244 | ||||||
Total | 16,452 | 24,200 | ||||||
F-46
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES |
F-47
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES — continued |
F-48
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES — continued |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Income taxes expenses: | ||||||||||||
Current | 57 | 2,078 | 3,533 | |||||||||
Deferred | 117 | (780 | ) | (1,444 | ) | |||||||
Total | 174 | 1,298 | 2,089 | |||||||||
F-49
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES — continued | |
The principal components of deferred income taxes are as follows: |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful accounts | 34 | 96 | ||||||
Accrued compensation related | 251 | 1,301 | ||||||
Net operating loss carry forwards | — | 76 | ||||||
285 | 1,473 | |||||||
Non-current deferred tax assets: | ||||||||
Net operating loss carry forwards | 219 | 172 | ||||||
Property and equipment | 70 | 130 | ||||||
Valuation allowance | (219 | ) | (172 | ) | ||||
70 | 130 | |||||||
Net deferred tax assets | 355 | 1,603 | ||||||
Non-current deferred tax liabilities: | ||||||||
Intangible assets | (673 | ) | (1,322 | ) | ||||
Property and equipment | (134 | ) | (136 | ) | ||||
(807 | ) | (1,458 | ) | |||||
Net deferred tax liabilities | (807 | ) | (1,458 | ) | ||||
F-50
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES — continued |
As of December 31, | ||||||||
2008 | 2009 | |||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful accounts | 34 | 96 | ||||||
Accrued compensation related | 251 | 1,301 | ||||||
Net operating loss carry forwards | — | 76 | ||||||
Total current deferred tax assets | 285 | 1,473 | ||||||
Non-current deferred tax assets: | ||||||||
Net operating loss carry forwards | 219 | 172 | ||||||
Property and equipment | 70 | 130 | ||||||
Valuation allowance | (219 | ) | (172 | ) | ||||
Total non-current deferred tax assets | 70 | 130 | ||||||
Non-current deferred tax liabilities: | ||||||||
Intangible assets acquired in business acquisitions | (673 | ) | (1,322 | ) | ||||
Property and equipment | (134 | ) | (136 | ) | ||||
Total non-current deferred tax liabilities | (807 | ) | (1,458 | ) | ||||
Non-current deferred tax liabilities, net | (737 | ) | (1,328 | ) | ||||
F-51
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
14. | INCOME TAXES — continued |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
% | % | % | ||||||||||
Statutory tax rate in PRC | 33.00 | 25.00 | 25.00 | |||||||||
Changes in valuation allowances | 2.05 | (0.45 | ) | (0.20 | ) | |||||||
Effect of income tax rate differences of subsidiaries operating with different tax jurisdictions | (12.32 | ) | (10.30 | ) | (8.57 | ) | ||||||
Effect of change in enacted tax rate in PRC | 1.32 | — | — | |||||||||
Effect of tax holidays enjoyed by PRC subsidiaries | (22.27 | ) | (6.79 | ) | (7.38 | ) | ||||||
Effective tax rate | 1.78 | 7.46 | 8.85 | |||||||||
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Increases in income tax expense | 2,181 | 1,180 | 1,735 | |||||||||
Reduction in net income per ordinary share-basic | 0.07 | 0.03 | 0.05 | |||||||||
Reduction in net income per Series A convertible redeemable preferred share-basic | 0.08 | N/A | N/A | |||||||||
Reduction in net income per Series B-1 convertible redeemable preferred share-basic | 0.08 | N/A | N/A | |||||||||
Reduction in net income per Series B-2 convertible redeemable preferred share-basic | 0.09 | N/A | N/A | |||||||||
Reduction in net income per Series B-3 convertible redeemable preferred share-basic | 0.07 | N/A | N/A | |||||||||
Reduction in net income per ordinary share-diluted | 0.06 | 0.03 | 0.04 | |||||||||
F-52
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
15. | NET INCOME PER SHARE |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Net income attributable to holders of ordinary shares | 8,937 | 16,173 | 21,508 | |||||||||
Deemed dividend on Series A convertible redeemable preferred shares-accretion of redemption premium | (632 | ) | — | — | ||||||||
Numerator used in basic and diluted net income per share: | ||||||||||||
Net income allocated for computing net income per ordinary share-basic | 2,558 | (i) | 16,173 | 21,508 | ||||||||
Net income allocated for computing net income per Series A convertible redeemable preferred share-basic | 2,716 | (i) | N/A | N/A | ||||||||
Net income allocated for computing net income per Series B-1 convertible redeemable preferred share-basic | 1,147 | (i) | N/A | N/A | ||||||||
Series B-2 convertible redeemable preferred share-basic | 3,131 | (i) | N/A | N/A | ||||||||
Series B-3 convertible redeemable preferred share-basic | 17 | (i) | N/A | N/A | ||||||||
Net income allocated for computing net income per ordinary share-diluted | 2,558 | 16,173 | 21,508 | |||||||||
Shares (denominator): | ||||||||||||
Weighted average ordinary shares outstanding used in computing net income per ordinary share-basic | 11,426,183 | 37,276,306(ii) | 38,389,495(ii) | |||||||||
Weighted average shares outstanding used in computing net income per Series A convertible redeemable preferred share-basic | 6,860,247 | N/A | N/A | |||||||||
Weighted average shares outstanding used in computing net income per Series B-1 convertible redeemable preferred share-basic | 2,867,123 | N/A | N/A | |||||||||
Weighted average shares outstanding used in computing net income per Series B-2 convertible redeemable preferred share-basic | 6,117,988 | N/A | N/A | |||||||||
Weighted average shares outstanding used in computing net income per Series B-3 convertible redeemable preferred share-basic | 77,704 | N/A | N/A | |||||||||
Weighted average ordinary shares outstanding used in computing net income per ordinary share-diluted | 13,446,087 | (iii) | 40,695,982 | (iii) | 41,576,217 | (iii) | ||||||
Net income per ordinary share-basic | 0.22 | 0.43 | 0.56 | |||||||||
Net income per Series A convertible redeemable preferred share-basic | 0.40 | N/A | N/A | |||||||||
Net income per Series B-1 convertible redeemable preferred share-basic | 0.40 | N/A | N/A | |||||||||
Net income per Series B-2 convertible redeemable preferred share-basic | 0.51 | N/A | N/A | |||||||||
Net income per Series B-3 convertible redeemable preferred share-basic | 0.22 | N/A | N/A | |||||||||
Net income per ordinary share-diluted | 0.19 | 0.40 | 0.52 | |||||||||
F-53
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
15. | NET INCOME PER SHARE — continued |
(i) | The net income attributable to holders of ordinary shares was allocated between ordinary shares and preferred shares on a pro rata basis on the dividend participating right. The net income allocated for computing net income per Series A convertible redeemable preferred share-basic also contained the deemed dividend for accretion of the redemption premium. |
(ii) | In June 2008, the Company issued 2,000,000 ordinary shares for future delivery to employees and non-employees upon exercise of vested stock options or grant of nonvested shares. 219,196 and 1,211,897 shares were transferred to the relevant employees in 2008 and 2009 respectively. Accordingly, the remaining shares outstanding during the years were excluded in computation of basic net income per share in 2008 and 2009. |
(iii) | The Group had securities outstanding which could potentially dilute basic net income per share in the future, but which were excluded from the computation of diluted net income per share in the years ended December 31, 2007, 2008 and 2009 as their effects would have been anti-dilutive. For year 2007, such outstanding securities consisted of Series A convertible redeemable preferred shares of a weighted average number of 6,860,247, Series B-1 and B-2 convertible redeemable preferred shares of a weighted average number of 8,985,111, warrants to purchase a weighted average number of 190,570 Series B-3 convertible redeemable preferred shares and stock options of a weighted average number of 1,045,027. For year 2008 and 2009, such outstanding securities consisted of stock options of a weighted average number of 562,717 and 661,234. |
F-54
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
16. | SHARES-BASED COMPENSATION |
F-55
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
16. | SHARES-BASED COMPENSATION — continued |
Weighted | Weighted | |||||||||||||||
average | average | |||||||||||||||
Weighted | fair value | intrinsic | ||||||||||||||
average | per ordinary | value per | ||||||||||||||
Options | exercise price | share at the | option at the | |||||||||||||
Quarter ended | granted | per option | grant dates | grant dates | ||||||||||||
March 31, 2007 | 777,570 | 3.32 | 1.65 | — | ||||||||||||
June 30, 2007 | 622,016 | 4.44 | 1.92 | — | ||||||||||||
September 30, 2007 | 631,464 | 7.22 | 3.87 | — | ||||||||||||
December 31, 2007 | 437,000 | 9.00 | 6.50 | — | ||||||||||||
March 31, 2008 | 540,000 | 5.44 | 5.44 | — | ||||||||||||
June 30, 2008 | 60,200 | 6.68 | 6.68 | — | ||||||||||||
September 30, 2008 | 162,000 | 8.58 | 8.58 | — | ||||||||||||
December 31, 2008 | 574,000 | 4.94 | 4.94 | — | ||||||||||||
March 31, 2009 | 48,000 | 4.58 | 4.58 | — | ||||||||||||
June 30, 2009 | 15,000 | 5.00 | 5.00 | — | ||||||||||||
September 30, 2009 | 39,500 | 11.00 | 11.00 | — | ||||||||||||
December 31, 2009 | 43,500 | 14.69 | 14.69 | — | ||||||||||||
Total | 3,950,250 | |||||||||||||||
Weighted | ||||||||||||
Weighted | average fair value | |||||||||||
average | per option | |||||||||||
Number of | exercise price | at the | ||||||||||
options | per option | grant dates | ||||||||||
Outstanding at January 1, 2007 | 2,875,350 | 0.86 | 0.76 | |||||||||
Granted | 2,468,050 | 5.61 | 0.78 | |||||||||
Forfeited | (217,843 | ) | 4.43 | 1.10 | ||||||||
Outstanding at December 31, 2007 | 5,125,557 | 3.00 | 0.73 | |||||||||
Granted | 1,336,200 | 5.70 | 1.70 | |||||||||
Forfeited | (307,018 | ) | 5.66 | 1.06 | ||||||||
Exercised | (215,696 | ) | 1.40 | 0.80 | ||||||||
Outstanding at December 31, 2008 | 5,939,043 | 3.51 | 0.93 | |||||||||
Granted | 146,000 | 9.37 | 3.32 | |||||||||
Forfeited | (482,868 | ) | 5.60 | 0.98 | ||||||||
Exercised | (1,204,280 | ) | 3.49 | 0.93 | ||||||||
Outstanding at December 31, 2009 | 4,397,895 | 3.49 | 1.01 | |||||||||
F-56
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
16. | SHARES-BASED COMPENSATION — continued |
Options outstanding | Options exercisable | |||||||||||||||||||||||||||
Weighted | Weighted | Aggregate | Weighted | Aggregate | ||||||||||||||||||||||||
average | average | intrinsic | average | intrinsic | ||||||||||||||||||||||||
remaining | exercise | value as of | exercise | value as of | ||||||||||||||||||||||||
Number | contractual | price per | December 31, | Number | price per | December 31, | ||||||||||||||||||||||
outstanding | life | option | 2009 | exercisable | option | 2009 | ||||||||||||||||||||||
Ordinary shares | 4,397,895 | 5.40 | 3.49 | 69,155 | 2,523,605 | 2.19 | 42,962 | |||||||||||||||||||||
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Options | 0.25-2.48 | 1.43-2.55 | 1.60-5.30 |
For the year ended December 31, | ||||||||||||
2007 | 2008 | 2009 | ||||||||||
Risk-free interest rate of return | 4.39%-5.36 | % | 3.18%-4.15 | % | 2.62%-3.62 | % | ||||||
Expected term | 4.1-6.1 years | 2.72-3.61 years | 3.61 years | |||||||||
Volatility | 38.9%-50.3 | % | 36.0%-40.8 | % | 40.8%-44.7 | % | ||||||
Dividend yield | — | — | — |
(1) | Volatility |
(2) | Risk-free interest rate |
F-57
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
16. | SHARES-BASED COMPENSATION — continued |
(3) | Expected term |
(4) | Dividend yield |
(5) | Exercise price |
(6) | Fair value of underlying ordinary shares |
F-58
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
16. | SHARES-BASED COMPENSATION — continued |
Weighted | ||||||||
Weighted | average fair value | |||||||
number of | per ordinary | |||||||
nonvested | share at the | |||||||
shares | grant dates | |||||||
Outstanding at January 1, 2007 | — | — | ||||||
Granted | 20,000 | 8.73 | ||||||
Outstanding at December 31, 2007 | 20,000 | 8.73 | ||||||
Granted | 17,480 | 5.83 | ||||||
Vested | (3,500 | ) | 8.56 | |||||
Forfeited | (6,000 | ) | 9.15 | |||||
Outstanding at January 1, 2009 | 27,980 | 7.80 | ||||||
Granted | 89,874 | 7.89 | ||||||
Vested | (7,617 | ) | 7.08 | |||||
Forfeited | �� | (2,167 | ) | 9.80 | ||||
Outstanding at December 31, 2009 | 108,070 | 7.64 | ||||||
F-59
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
17. | ORDINARY SHARES ISSUANCE AND REPURCHASE |
F-60
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
17. | ORDINARY SHARES — continued |
F-61
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
18. | CONVERTIBLE REDEEMABLE PREFERRED SHARES |
F-62
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
18. | CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued |
F-63
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
18. | CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued |
F-64
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
18. | CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued |
19. | WARRANTS |
As of | ||||
date of grant | ||||
Risk-free rate of return | 5.24 | % | ||
Expected remaining life of the warrants | 2.17 year | |||
Volatility | 38.0 | % | ||
Expected dividend yield | 0 | % |
F-65
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
19. | WARRANTS — continued |
(1) | Volatility |
(2) | Risk-free rate of return |
(3) | Expected remaining life of the warrants |
(4) | Expected dividend yield |
(5) | Exercise price |
(6) | Fair value of underlying ordinary shares |
F-66
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
20. | MAINLAND CHINA CONTRIBUTION PLAN |
21. | STATUTORY RESERVES |
22. | CONTINGENT CONSIDERATIONS FOR BUSINESS ACQUISITIONS |
F-67
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
23. | LITIGATION THREAT AGAINST THE COMPANY |
• | Mr. Jiang is a shareholder of Octiga, Inc., or Octiga, a dissolved California corporation; Octiga owns more than a 40% interest in the joint venture, Beijing Heteng Software Technology Co., Ltd (“Heteng”); and Heteng owns 100% of Wensi Chuangyi, the predecessor of the Company. |
• | Valuable (but unspecified) proprietary information owned by Wensi Chuangyi and/or its subsidiaries as well as all its employees were transferred to VanceInfo Beijing not in good faith and without adequate consideration to Heteng and its joint venture partners. This unspecified proprietary information allegedly has been utilized by VanceInfo California and continues to be used by a Delaware subsidiary of the Company. |
• | In connection with these transactions, Chris Chen was an officer, director, beneficial owner or in control of the relevant entities that caused the transfer to be executed not in good faith and without adequate consideration or the receiving entity that obtained the valuable proprietary information not in good faith and without adequate consideration, all in breach of his fiduciary responsibilities to Octiga, Heteng and their shareholders and/or joint venture partners. |
• | The letter also alleges that Mr. Jiang will be able to demonstrate the role and responsibility of various other parties in these alleged improper transactions, including Wensi Chuangyi and/or its subsidiaries, VanceInfo Beijing, VanceInfo California and other subsidiaries of the Company. |
F-68
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
23. | LITIGATION THREAT AGAINST THE COMPANY — continued |
24. | COMMITMENTS |
(i) | Operating lease commitments |
2010 | 5,129 | |||
2011 | 3,536 | |||
2012 | 1,956 | |||
2013 | 1,042 | |||
2014 | 337 | |||
2015 | 168 | |||
12,168 | ||||
(ii) | Purchase commitments |
F-69
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(In U.S. dollars in thousands, except share, share related data and otherwise stated)
25. | RELATED PARTY TRANSACTIONS |
26. | SUBSEQUENT EVENTS |
F-70