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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 |
Date of event requiring this shell company report |
(Translation of Registrant’s Name Into English)
(Jurisdiction of Incorporation or Organization)
(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 representing one ordinary share, par value US$0.001 per share | New York Stock Exchange |
None
(Title of Class)
None
(Title of Class)
Yesþ Noo
Large accelerated filerþ | Accelerated filero | Non-accelerated filero |
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Exhibit 4.7 | ||||||||
Exhibit 4.8 | ||||||||
Exhibit 8.1 | ||||||||
Exhibit 12.1 | ||||||||
Exhibit 12.2 | ||||||||
Exhibit 13.1 | ||||||||
Exhibit 13.2 | ||||||||
Exhibit 15.1 | ||||||||
Exhibit 15.2 | ||||||||
Exhibit 15.3 |
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• | “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; |
• | “DCM Funds” refers to DCM IV, L.P. and DCM Affiliates Fund IV, L.P.; |
• | “Greater China” refers to the People’s Republic of China, including, for purposes of this annual report only, Taiwan, Hong Kong and Macau; |
• | “Huawei” refers to Huawei Technologies Co., Ltd. and certain of its affiliates; |
• | “IBM” refers to International Business Machines China Company Limited, IBM Global Services (China) Company Limited and IBM Solution and Services (Shenzhen) Co., Ltd.; |
• | “Microsoft” refers to Microsoft Corporation, Microsoft (China) Co., Ltd., and Microsoft Development Co., Ltd.; |
• | “professionals”, with respect to an IT service company, refer to employees executing IT services for its clients; |
• | “Sequoia Funds” refers to 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.; |
• | “TIBCO” refers to TIBCO Software Inc.; |
• | “US$,” “U.S. dollar” or “$” refers to the legal currency of the United States; |
• | “we,” “us,” “our company,” “our” and “VanceInfo” refer to VanceInfo Technologies Inc., a Cayman Islands company, its predecessor, the IT services business of Beijing Wensi Chuangyi Software Technology Co., Ltd., its subsidiaries and its variable interest entity, Shanghai Megainfo Tech Co., Ltd., or Megainfo, before its liquidation in January 2009; |
• | all shares and per share data have been adjusted to reflect a 100-for-1 split that became effective on March 10, 2005 and a further 10-for-1 split that became effective on November 3, 2005; and |
• | all discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding. |
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• | our expansion plans; |
• | our anticipated growth strategy; |
• | our plans to recruit more employees; |
• | our plans to invest in research and development to enhance our service lines; |
• | our future business development, results of operations and financial condition; |
• | expected changes in our net revenues and certain cost or expense items; |
• | our ability to attract and retain clients; and |
• | trends and competition in the offshore IT services industry. |
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ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
ITEM 3. | KEY INFORMATION |
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VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | ||||||||||||||||||
(as adjusted) | (as adjusted) | (as adjusted) | 2009 | 2010 | ||||||||||||||||
(in US$ thousands, except percentage, share, per share and per ADS data) | ||||||||||||||||||||
Consolidated Statement of Operations Data | ||||||||||||||||||||
Net revenues | 29,051 | 62,714 | 102,663 | 148,066 | 211,550 | |||||||||||||||
Cost of revenues(1) | (17,961 | ) | (38,544 | ) | (62,911 | ) | (92,171 | ) | (132,984 | ) | ||||||||||
Gross profit | 11,090 | 24,170 | 39,752 | 55,895 | 78,566 | |||||||||||||||
Selling, general and administrative expenses(1) | (6,821 | ) | (16,180 | ) | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||||||
Total operating expenses(1) | (6,821 | ) | (16,180 | ) | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||||||
Change in fair value of contingent consideration payable for business acquisitions | — | — | — | (62 | ) | 221 | ||||||||||||||
Other operating income | 54 | 860 | 858 | 1,754 | 4,985 | |||||||||||||||
Income from operations | 4,323 | 8,850 | 14,705 | 22,877 | 31,871 | |||||||||||||||
Net income | 4,411 | 9,621 | 16,089 | 21,508 | 29,863 | |||||||||||||||
Net (income)/loss attributable to noncontrolling interest | (35 | ) | (52 | ) | 84 | — | — | |||||||||||||
Deemed dividend on Series A convertible redeemable preferred shares — accretion of redemption premium | (611 | ) | (632 | ) | — | — | — | |||||||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 3,765 | 8,937 | 16,173 | 21,508 | 29,863 | |||||||||||||||
Income per ordinary share: | ||||||||||||||||||||
Basic | $ | 0.08 | $ | 0.22 | $ | 0.43 | $ | 0.56 | $ | 0.74 | ||||||||||
Diluted | $ | 0.07 | $ | 0.19 | $ | 0.40 | $ | 0.52 | $ | 0.69 | ||||||||||
Income per ADS: | ||||||||||||||||||||
Basic | $ | 0.08 | $ | 0.22 | $ | 0.43 | $ | 0.56 | $ | 0.74 | ||||||||||
Diluted | $ | 0.07 | $ | 0.19 | $ | 0.40 | $ | 0.52 | $ | 0.69 | ||||||||||
Weighted average ordinary shares used in calculating net income per ordinary share: | ||||||||||||||||||||
Basic | 9,605,507 | 11,426,183 | 37,276,306 | 38,389,495 | 40,298,060 | |||||||||||||||
Diluted | 10,205,449 | 13,446,087 | 40,695,982 | 41,576,217 | 43,406,080 |
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VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | ||||||||||||||||||
(as adjusted) | (as adjusted) | (as adjusted) | 2009 | 2010 | ||||||||||||||||
Other Consolidated Financial Data | ||||||||||||||||||||
Gross margin(2) | 38.2 | % | 38.5 | % | 38.7 | % | 37.8 | % | 37.1 | % | ||||||||||
Operating margin(3) | 14.9 | 14.1 | 14.3 | 15.5 | 15.1 | |||||||||||||||
Net margin(4) | 15.2 | % | 15.3 | % | 15.7 | % | 14.5 | % | 14.1 | % |
(1) | Includes share-based compensation expenses as follows: |
VanceInfo | ||||||||||||||||||||
For the Year Ended December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Share-based compensation expenses included in: | ||||||||||||||||||||
Cost of revenues | (45 | ) | (111 | ) | (265 | ) | (313 | ) | (492 | ) | ||||||||||
Selling, general and administrative expenses | (668 | ) | (885 | ) | (1,126 | ) | (1,252 | ) | (2,755 | ) | ||||||||||
Total operating expenses | (668 | ) | (885 | ) | (1,126 | ) | (1,252 | ) | (2,755 | ) |
(2) | Gross margin represents gross profit as a percentage of net revenues. | |
(3) | Operating margin represents income from operations as a percentage of net revenues. | |
(4) | Net margin represents net income as a percentage of net revenues. |
As of December 31, | ||||||||||||||||||||
2006 | 2007 | 2008 | ||||||||||||||||||
(as adjusted) | (as adjusted) | (as adjusted) | 2009 | 2010 | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | 20,565 | 76,835 | 79,963 | 64,057 | 161,265 | |||||||||||||||
Term deposits and short-term investments | — | 1,371 | 1,466 | 22,122 | 18,208 | |||||||||||||||
Accounts receivable | 11,815 | 24,708 | 36,827 | 60,524 | 85,437 | |||||||||||||||
Total assets | 42,044 | 129,076 | 155,451 | 205,191 | 351,639 | |||||||||||||||
Total liabilities | 5,583 | 18,068 | 23,948 | 42,629 | 55,472 | |||||||||||||||
Convertible redeemable preferred shares | 31,648 | — | — | — | — | |||||||||||||||
Shareholders’ equity | 4,813 | 110,008 | 131,503 | 162,562 | 296,167 | |||||||||||||||
Total liabilities, convertible redeemable preferred shares and shareholders’ equity | 42,044 | 129,076 | 155,451 | 205,191 | 351,639 |
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• | other China-based IT services companies, such as, Chinasoft International Ltd., or Chinasoft International, HiSoft Technology International Limited, or Hisoft, Neusoft Group Ltd., or Neusoft, SinoCom Software Group Limited, or SinoCom, iSoftStone Holdings Limited, or iSoftStone, and Camelot Information Systems Inc., or Camelot; |
• | 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. |
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• | 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. |
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• | 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. |
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• | 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. |
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ITEM 4. | INFORMATION ON THE COMPANY |
• | 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, a China-based company providing IT outsourcing services to multinational financial institutions, from A-IT Software Services PTE Ltd. In July 2010, we completed the purchase of the remaining 67% equity interest in Link Result from other shareholders. Approximately 170 professionals of Link Result joined us in connection with this transaction. |
• | In October 2008, we completed the acquisition of 100% of the equity interest in Wireless Info Tech, Ltd., or 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. |
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• | In February 2010, we made a strategic investment in Beijing 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 Beijing 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 January 2011, we acquired 100% equity interest in Beijing Viatt. Over 80 professionals of Beijing Viatt joined us in connection with the transaction. |
• | 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. |
• | In September 2010, we entered into certain investment agreements to acquire equity interest in Salsatec Corporation Pty. Ltd., or Salsatec, an Australia-based IT services and solution provider for Australian telecommunication and technology companies. Pursuant to the investment agreements, we made a payment of US$0.2 million in cash for an initial equity interest of 20% of Salsatec in convertible redeemable preference shares, with an exclusive option right to acquire the remaining 80% of the equity interest in the next 12 months after the execution date of the investment agreements at our sole discretion. |
• | In March 2011, we entered into an acquisition agreement with Think Consulting Limited to acquire certain businesses of its wholly owned subsidiary, Bright Consulting (Beijing) Limited, or Beijing Bright, a China-based IT services company providing Oracle consulting and implementation services to Chinese domestic clients. This acquisition was completed in April 2011. |
• | In April 2011, we acquired 100% equity interest in Lifewood Companies which provide business process outsourcing services. |
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Year Ended December 31, | ||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
R&D Outsourcing Services | ||||||||||||||||||||||||
R&D services | 60,808 | 59.2 | % | 90,581 | 61.2 | % | 124,181 | 58.7 | % | |||||||||||||||
Globalization and localization | 4,259 | 4.2 | 5,118 | 3.5 | 6,060 | 2.9 | ||||||||||||||||||
IT Services | ||||||||||||||||||||||||
Enterprise solutions | 13,542 | 13.2 | 14,429 | 9.7 | 19,725 | 9.3 | ||||||||||||||||||
ADM | 17,061 | 16.6 | 26,373 | 17.8 | 43,825 | 20.7 | ||||||||||||||||||
Quality assurance and testing | 6,717 | 6.5 | 7,807 | 5.3 | 13,003 | 6.2 | ||||||||||||||||||
Other Solutions and Services | 276 | 0.3 | 3,758 | 2.5 | 4,756 | 2.2 | ||||||||||||||||||
Total net revenues | 102,663 | 100.0 | % | 148,066 | 100 | % | 211,550 | 100 | % | |||||||||||||||
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• | 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. |
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• | packaged evaluation and selection; |
• | packaged implementation; |
• | customization; | |
• | regional rollout; |
• | enhancement, maintenance and product support; |
• | version upgrades; and |
• | business intelligence/data warehouse, or BI/DW. |
• | be familiar with its complicated organizational structure and internal procedures, and characteristics of its operations in a tight timeframe; |
• | provide cost-effective solutions to meet its demand for high-quality services; and |
• | seamlessly integrate the upgraded system with its manufacturing execution system, or MES, and other systems. |
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• | extensive experience in testing; |
• | solid knowledge of financial services industry practice; |
• | clear understanding of relevant local regulations; and |
• | cost-effective, flexible and timely delivery capabilities. |
• | has extensive experience in testing, especially in the mobile area; |
• | is experienced in human resource hiring and management; |
• | is good at offshore project management; |
• | has the capability to build up competence and conduct quality management; and |
• | has cost-effective, flexible and timely delivery capabilities. |
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• | software and content localization; | |
• | localization engineering; |
• | localization testing; |
• | internationalization engineering; and |
• | internationalization testing. |
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• | providing effective onshore and offshore engagement model; |
• | providing agile development methodology; |
• | designing and implementing this client’s e-commerce core platform with service-oriented architecture, or SOA, and system migration; |
• | providing project-based end-to-end deliverables in data warehouse, websites, back-end system, internal tools, customer care, etc.; |
• | establishing dedicated development team to provide universal automation platform for test and providing professional test automation for all lines of business for this client; and |
• | providing professional performance analysis and tuning; |
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For the Year Ended December 31, | ||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Greater China(1) | 22,045 | 21.5 | % | 59,373 | 40.1 | % | 95,481 | 45.1 | % | |||||||||||||||
United States(1) | 56,175 | 54.7 | 56,634 | 38.3 | 70,955 | 33.6 | ||||||||||||||||||
Europe(1) | 14,991 | 14.6 | 23,148 | 15.6 | 32,178 | 15.2 | ||||||||||||||||||
Japan(1) | 9,157 | 8.9 | 8,466 | 5.7 | 9,889 | 4.7 | ||||||||||||||||||
Others | 295 | 0.3 | 445 | 0.3 | 3,047 | 1.4 | ||||||||||||||||||
Total net revenues | 102,663 | 100.0 | % | 148,066 | 100.0 | % | 211,550 | 100.0 | % | |||||||||||||||
(1) | Countries or regions where the headquarters of our clients are located. |
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• | China-based IT services companies, such as Chinasoft International, Hisoft, Neusoft, SinoCom, iSoftStone, and Camelot; | |
• | 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. |
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• | 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. |
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(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. | |
(9) | Beijing Viatt Information Technology Co. Ltd., or Beijing Viatt, a Chinese limited liability company, 100% owned by VanceInfo Beijing. | |
(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. |
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(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. | |
(19) | Link Result Limited, or Link Result, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(20) | A-IT (Shanghai) Software Services Co., Ltd., or A-IT Shanghai, a Chinese limited liability company, 100% owned by Link Result. | |
(21) | Lifewood Technology Limited, or Lifewood Technology, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(22) | Lifewood Data Technology Limited, or Lifewood Data, a company incorporated under the laws of Hong Kong, 100% owned by VanceInfo BVI. | |
(23) | Lifewood Data Technology (Shenzhen) Limited, or Lifewood Shenzhen, a Chinese limited liability company, 100% owned by Lifewood Data. | |
(24) | Lifewood Data Technology (Dongguan) Limited, or Lifewood Dongguan, a Chinese limited liability company, 100% owned by Lifewood Data. |
Space | ||||||
Location | (in square meters) | Usage of Property | ||||
Beijing | 26,368 | * | Headquarters, General Administration | |||
Globalization and Localization | ||||||
ADM, R&D Services | ||||||
Shanghai | 16,797 | * | ADM, Quality Assurance and Testing, R&D Services | |||
Nanjing | 14,181 | * | R&D Services, Training | |||
Hangzhou | 5,000 | R&D Services | ||||
Shenzhen | 14,800 | * | General Administration, ADM, R&D Services | |||
Chengdu | 1,300 | R&D Services | ||||
Hong Kong | 1,081 | * | ADM, R&D Services | |||
Xi’an | 1,134 | R&D Services | ||||
U.S. | 753 | * | R&D Service and Sales Office |
* | The sum of space under multiple leases. |
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ITEM 4A | UNRESOLVED STAFF COMMENTS |
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
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• | 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. |
Year Ended December 31, | ||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
R&D Outsourcing Services | ||||||||||||||||||||||||
R&D services | 60,808 | 59.2 | % | 90,581 | 61.2 | % | 124,181 | 58.7 | % | |||||||||||||||
Globalization and localization | 4,259 | 4.2 | 5,118 | 3.5 | 6,060 | 2.9 | ||||||||||||||||||
IT Services | �� | |||||||||||||||||||||||
Enterprise solutions | 13,542 | 13.2 | 14,429 | 9.7 | 19,725 | 9.3 | ||||||||||||||||||
ADM | 17,061 | 16.6 | 26,373 | 17.8 | 43,825 | 20.7 | ||||||||||||||||||
Quality assurance and testing | 6,717 | 6.5 | 7,807 | 5.3 | 13,003 | 6.2 | ||||||||||||||||||
Other Solutions and Services | 276 | 0.3 | 3,758 | 2.5 | 4,756 | 2.2 | ||||||||||||||||||
Total net revenues | 102,663 | 100.0 | % | 148,066 | 100 | % | 211,550 | 100 | % | |||||||||||||||
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For the Year Ended December 31, | ||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Clients accounting for 10% or more of our net revenues | 39,880 | 38.8 | % | 69,633 | 47.0 | % | 79,921 | 37.8 | % | |||||||||||||||
Top five clients | 55,240 | 53.8 | 83,300 | 56.3 | 117,478 | 55.5 | ||||||||||||||||||
Top 10 clients | 70,449 | 68.6 | 99,936 | 67.5 | 140,606 | 66.5 |
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For the Year Ended December 31, | ||||||||||||||||||||||||
2008 | 2009 | 2010 | ||||||||||||||||||||||
(in US$ thousands, except for percentages) | ||||||||||||||||||||||||
Greater China(1) | 22,045 | 21.5 | % | 59,373 | 40.1 | % | 95,481 | 45.1 | % | |||||||||||||||
United States(1) | 56,175 | 54.7 | 56,634 | 38.3 | 70,955 | 33.6 | ||||||||||||||||||
Europe(1) | 14,991 | 14.6 | 23,148 | 15.6 | 32,178 | 15.2 | ||||||||||||||||||
Japan(1) | 9,157 | 8.9 | 8,466 | 5.7 | 9,889 | 4.7 | ||||||||||||||||||
Others | 295 | 0.3 | 445 | 0.3 | 3,047 | 1.4 | ||||||||||||||||||
Total net revenues | 102,663 | 100.0 | % | 148,066 | 100.0 | % | 211,550 | 100.0 | % | |||||||||||||||
(1) | Countries or regions where the headquarters of our clients are located. |
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For the Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(in US$ thousands) | ||||||||||||
Share-based compensation expenses: | ||||||||||||
Cost of revenues | 265 | 313 | 492 | |||||||||
Selling, general and administrative expenses | 1,126 | 1,252 | 2,755 | |||||||||
Total | 1,391 | 1,565 | 3,247 | |||||||||
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As of December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(in US$ thousands) | ||||||||||||
Period in days | ||||||||||||
0-90 | 35,351 | 47,505 | 59,105 | |||||||||
91-180 | 1,066 | 11,893 | 14,912 | |||||||||
More than 180 | 410 | 1,126 | 11,420 | |||||||||
Total | 36,827 | 60,524 | 85,437 | |||||||||
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For the Year Ended December 31, | ||||||||||||
2008 | ||||||||||||
(as adjusted) | 2009 | 2010 | ||||||||||
(in US$ thousands) | ||||||||||||
Consolidated Statement of Operations Data | ||||||||||||
Net revenues | 102,663 | 148,066 | 211,550 | |||||||||
Cost of revenues | (62,911 | ) | (92,171 | ) | (132,984 | ) | ||||||
Gross profit | 39,752 | 55,895 | 78,566 | |||||||||
Selling, general and administrative expenses | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||
Total operating expenses | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||
Change in fair value of contingent consideration payable for business acquisitions | — | (62 | ) | 221 | ||||||||
Other operating income | 858 | 1,754 | 4,985 | |||||||||
Income from operations | 14,705 | 22,877 | 31,871 | |||||||||
Interest income | 2,028 | 856 | 782 | |||||||||
Interest expense | (69 | ) | (86 | ) | (85 | ) | ||||||
Exchange differences | 703 | (119 | ) | (950 | ) | |||||||
Gain on re-measurement of fair value of noncontrolling equity investment in connection with business acquisition | — | — | 612 | |||||||||
Income before income taxes and earnings in equity method investment | 17,367 | 23,528 | 32,230 | |||||||||
Income tax expense | (1,298 | ) | (2,089 | ) | (2,518 | ) | ||||||
Income before earnings in equity method investment | 16,069 | 21,439 | 29,712 | |||||||||
Earnings in equity method investment | 20 | 69 | 151 | |||||||||
Net income | 16,089 | 21,508 | 29,863 | |||||||||
Net loss attributable to noncontrolling interest | 84 | — | — | |||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 16,173 | 21,508 | 29,863 | |||||||||
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For the Year Ended December 31, | ||||||||||||
2008 | ||||||||||||
(as adjusted) | 2009 | 2010 | ||||||||||
Consolidated Statement of Operations Data | ||||||||||||
Net revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of revenues | (61.3 | ) | (62.2 | ) | (62.9 | ) | ||||||
Gross profit | 38.7 | 37.8 | 37.1 | |||||||||
Selling, general and administrative expenses | (25.2 | ) | (23.4 | ) | (24.5 | ) | ||||||
Total operating expenses | (25.2 | ) | (23.4 | ) | (24.5 | ) | ||||||
Change in fair value of contingent consideration payable for business acquisitions | — | (* | ) | 0.1 | ||||||||
Other operating income | 0.8 | 1.2 | 2.4 | |||||||||
Income from operations | 14.3 | 15.5 | 15.1 | |||||||||
Interest income | 2.0 | 0.6 | 0.4 | |||||||||
Interest expense | (0.1 | ) | (0.1 | ) | (* | ) | ||||||
Exchange differences | 0.7 | (0.1 | ) | (0.4 | ) | |||||||
Gain on re-measurement of fair value of noncontrolling equity investment in connection with business acquisition | — | — | 0.3 | |||||||||
Income before income taxs and earnings in equity method investment | 16.9 | 15.9 | 15.3 | |||||||||
Income tax expense | (1.2 | ) | (1.4 | ) | (1.2 | ) | ||||||
Income before earnings in equity method investment | 15.7 | 14.5 | 14.1 | |||||||||
Earnings in equity method investment | * | * | * | |||||||||
Net income | 15.7 | 14.5 | 14.1 | |||||||||
Net loss attributable to noncontrolling interest | 0.1 | — | — | |||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 15.8 | % | 14.5 | % | 14.1 | % | ||||||
* | less than 0.1% |
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For the Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(in US$ thousands) | ||||||||||||
Net cash provided by operating activities | 15,404 | 11,925 | 11,554 | |||||||||
Net cash used in investing activities | (10,128 | ) | (30,483 | ) | (11,339 | ) | ||||||
Net cash provided by (used in) financing activities | (2,826 | ) | 2,673 | 96,225 | ||||||||
Effect of exchange rate changes | 678 | (21 | ) | 768 | ||||||||
Net increase (decrease) in cash and cash equivalents | 2,450 | (15,885 | ) | 96,440 | ||||||||
Cash and cash equivalents at the beginning of the year | 76,835 | 79,963 | 64,057 | |||||||||
Cash and cash equivalents at the end of the year | 79,963 | 64,057 | 161,265 |
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Payment Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | ||||||||||||||||
(in US$ thousands) | ||||||||||||||||||||
Operating leases | $ | 24,471 | $ | 8,476 | $ | 12,646 | $ | 3,349 | — | |||||||||||
Purchase obligations | 278 | 278 | — | — | — | |||||||||||||||
Total contractual obligations | $ | 24,749 | $ | 8,754 | $ | 12,646 | $ | 3,349 | — | |||||||||||
• | 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. |
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ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
Directors and Executive Officers | Age | Position/Title | ||||
Chris Shuning Chen | 47 | Chairman and Chief Executive Officer | ||||
David Lifeng Chen | 42 | Executive Vice Chairman and Co-President | ||||
Hao Chen | 44 | Director | ||||
Ruby Rong Lu | 40 | Director | ||||
Kui Zhou | 43 | Director | ||||
Daniel Mingdong Wu | 44 | Director | ||||
Samuelson S.M. Young | 59 | Director | ||||
Sidney Xuande Huang | 45 | Co-President and Chief Financial Officer | ||||
Frances Zhang | 40 | Chief Operating Officer | ||||
Junbo Liu | 48 | Executive Vice President and Chief Business Development Officer | ||||
Howard Hao Yu | 39 | Executive Vice President | ||||
Jeff Jian Wu | 43 | Executive Vice President and Chief Globalization Officer | ||||
Stanley Ying Zhou | 48 | Executive Vice President and Chief Administrative Officer |
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• | 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. |
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Restricted Shares | End of Vesting | |||||||
Name | Units Granted | Grant Date | Period | |||||
Chris Shuning Chen | 7,961 | February 23, 2010 | February 23, 2014 | |||||
David Lifeng Chen | 5,789 | February 23, 2010 | February 23, 2014 | |||||
10,000 | December 16, 2010** | December 16, 2014 | ||||||
Hao Chen | * | February 23, 2010 | February 23, 2014 | |||||
Ruby Rong Lu | * | February 23, 2010 | February 23, 2014 | |||||
Kui Zhou | * | February 23, 2010 | February 23, 2014 | |||||
Sidney Xuande Huang | * | February 23, 2010 | February 23, 2014 | |||||
* | December 16, 2010** | December 16, 2014 | ||||||
Frances Hong Zhang | * | February 23, 2010 | February 23, 2014 | |||||
Junbo Liu | * | February 23, 2010 | February 23, 2014 | |||||
Howard Hao Yu | * | February 23, 2010 | February 23, 2014 | |||||
* | December 16, 2010** | December 16, 2014 | ||||||
Jeff Jian Wu | * | February 23, 2010 | February 23, 2014 | |||||
* | December 16, 2010** | December 16, 2014 | ||||||
Stanley Ying Zhou | 3,474 | February 23, 2010 | February 23, 2014 | |||||
10,000 | December 16, 2010** | December 16, 2014 | ||||||
Directors and Executive officers as a group | 132,420 |
* | Upon exercising of all options that are exercisable with 60 days after March 31, 2011 and vesting of all restricted shares unites that are to be vested within 60 days after March 31, 2011, would beneficially owns less than 1% of our outstanding ordinary shares. | |
** | On December 16, 2010, we granted certain restricted share units to several executives at a discount purchase price of US$22.00 per share, which is lower than the market closing price of US$34.13 on December 15, 2010, the day before the grant date, by US$12.13. |
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Ordinary Shares | Exercise | |||||||||||
Underlying | Price | Expiration | ||||||||||
Name | Outstanding Options | (US$/Share) | Grant Date | Date | ||||||||
Chris Shuning Chen | 80,000 | 28.70 | March 14, 2011 | March 14, 2016 | ||||||||
David Lifeng Chen | 10,000 | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Hao Chen | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Ruby Rong Lu | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Kui Zhou | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Sidney Xuande Huang | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Frances Hong Zhang | * | 35.50 | November 23, 2010 | November 23, 2015 | ||||||||
* | 34.13 | December 16, 2010 | December 16, 2016 | |||||||||
Junbo Liu | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Jeff Jian Wu | * | 34.13 | December 16, 2010 | December 16, 2016 | ||||||||
Directors and Executive officers as a group | 365,000 |
* | Upon exercising of all options that are exercisable with 60 days after March 31, 2011 and vesting of all restricted shares unites that are to be vested within 60 days after March 31, 2011, would beneficially owns less than 1% of our outstanding ordinary shares. |
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• | 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. |
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• | 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; |
• | 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. |
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• | 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) | 3,852,908 | 8.6 | ||||||
David Lifeng Chen(4) | 297,934 | 0.7 | ||||||
Hao Chen(5) | * | * | ||||||
Ruby Rong Lu(6) | * | * | ||||||
Kui Zhou(7) | 1,156,184 | 2.6 | ||||||
Daniel Mingdong Wu(8) | * | * | ||||||
Samuelson S.M. Young(9) | * | * | ||||||
Sidney Xuande Huang(10) | * | * | ||||||
Frances Hong Zhang(11) | * | * | ||||||
Junbo Liu(12) | * | * | ||||||
Howard Hao Yu(13) | * | * | ||||||
Jeff Jian Wu(14) | * | * | ||||||
Stanley Ying Zhou(15) | 361,776 | 0.8 | ||||||
All Directors and Executive Officers as a Group(16) | 6,147,343 | 13.7 | ||||||
Principal Shareholders: | ||||||||
Lone Spruce, L.P. and affiliates(17) | 4,192,821 | 9.4 | ||||||
Button Software Ltd.(18) | 3,830,420 | 8.6 | ||||||
FMR LLC and affiliates(19) | 2,581,153 | 5.8 | ||||||
Maverick Capital, Ltd. and affiliates(20) | 2,496,238 | 5.6 |
* | Less than 1% |
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(1) | Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment owner with respect to the securities. | |
(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 44,556,910, being the number of ordinary shares outstanding as of March 31, 2011, the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after March 31, 2011, and the number of ordinary shares underlying restricted share units held by such person or group that are to be vested within 60 days after March 31, 2011. | |
(3) | Represents 2,517,920 ordinary shares held by Button Software Ltd., a British Virgin Islands company, and 84,988 ordinary shares issuable upon exercise of options within 60 days after March 31, 2011 and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 beneficially owned by Mr. Chris Shuning Chen. In addition, Button Software Ltd. entered into certain agreements with Credit Suisse Capital LLC (the “Button VPF”). Pursuant to the Button VPF, Button Software Ltd. pledged and monetized 712,500 ADSs beneficially owned by it. TAIRON INVESTMENT LIMITED entered into certain agreements with Credit Suisse Capital LLC (the “Tairon VPF”). Pursuant to the Tairon VPF, TAIRON INVESTMENT LIMITED pledged and monetized 537,500 ADSs beneficially owned by it. Button Software Ltd. and TAIRON INVESTMENT LIMITED are ultimately owned by Mr. Chris Shuning Chen’s family trust. Mr. Chen is the sole director of Button Software Ltd. and TAIRON INVESTMENT LIMITED. 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 259,400 ADSs, 38,534 ordinary shares issuable upon exercise of options within 60 days after March 31, 2011 and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 beneficially owned by Mr. David Lifeng 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 ADSs held by LC Fund II, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 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 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, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 held by Ms. Ruby Rong Lu. The business address for Ms. Lu is 2420 Sand Hill Road, Suite 200 Menlo Park, CA 94025, United States of America. |
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(7) | Represents 87,651 ADSs held by Kui Zhou, 600,515 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., 467,080 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., and 938 ordinary shares issuable upon exercise of options within 60 days after March 31, 2011 and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 held by Mr. Kui Zhou. 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, 2011 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, 2011 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, 2011 and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 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, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 beneficially owned by Ms. Frances Hong Zhang. The business address for Ms. Zhang is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(12) | Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 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. | |
(13) | Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 beneficially owned by Dr. Howard Hao Yu. The business address for Dr. Yu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China. | |
(14) | Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 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. |
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(15) | Represents 325,865 ordinary shares held by Charlene Limited, a British Virgin Islands company wholly owned and controlled by Mr. Stanley Ying Zhou, 35,911 ordinary shares issuable upon exercise of options within 60 days after March 31, 2011 and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 beneficially owned 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, ordinary shares issuable upon exercise of options within 60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be vested within 60 days after March 31, 2011 held by all of our directors and executive officers as a group. | |
(17) | Based on Schedule 13G/A jointly filed by Lone Spruce, L.P., Lone Balsam, L.P., Lone Sequoia, L.P., Lone Dragon Pine, L.P., Lone Pine Associates LLC, Lone Pine Members LLC, Lone Pine Capital LLC, and Stephen F. Mandel, Jr. on February 14, 2011. | |
(18) | Represents 2,517,920 ordinary shares held by Button Software Ltd., a British Virgin Islands company, and 62,500 ordinary shares ordinary shares issuable upon exercise of options within 60 days after March 31, 2011 held by TAIRON INVESTMENT LIMITED. In addition, pursuant to the Button VPF, Button Software Ltd. pledged and monetized 712,500 ADSs beneficially owned by it. Pursuant to the Tairon VPF, TAIRON INVESTMENT LIMITED pledged and monetized 537,500 ADSs beneficially owned by it. Button Software Ltd. and TAIRON INVESTMENT LIMITED are ultimately owned by Mr. Chris Shuning Chen’s family trust. The registered address for Button Software Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin Islands. | |
(19) | Based on Schedule 13G/A jointly filed by FMR LLC and Edward C. Johnson 3d on February 14, 2011. | |
(20) | Based on Schedule 13G jointly filed by Maverick Capital, Ltd., Maverick Capital Management, LLC and Lee S. Ainslie III on February 14, 2011. |
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ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
ITEM 8. | FINANCIAL INFORMATION |
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• | Jiang was a minority shareholder of Octiga, Inc., a dissolved California Corporation. Octiga, Inc. allegedly owned “more than 30% interest in a joint venture” in Beijing Heteng Software Technology Company, Ltd., or Heteng, a company incorporated in China. |
• | Heteng owned 95% of Wensi Chuangyi. |
• | Jiang owned 220,000 common shares of Octiga, Inc. for which compensation was not appropriately provided. |
• | The transfer of assets of Wensi Chuangyi from Heteng to us occurred without proper compensation to Octiga, Inc. |
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ITEM 9. | THE OFFER AND LISTING |
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 | ||||||
2010 | 41.06 | 14.79 | ||||||
First quarter | 23.85 | 14.79 | ||||||
Second quarter | 26.48 | 18.21 | ||||||
Third quarter | 33.30 | 22.11 | ||||||
Fourth quarter | 41.06 | 30.55 | ||||||
November | 38.43 | 32.37 | ||||||
December | 41.06 | 33.51 | ||||||
2011 | ||||||||
First quarter | 37.99 | 27.55 | ||||||
January | 37.99 | 31.86 | ||||||
February | 36.56 | 28.32 | ||||||
March | 33.99 | 27.55 | ||||||
April | 34.90 | 28.40 | ||||||
May (through May 9, 2011) | 33.08 | 30.10 |
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ITEM 10. | ADDITIONAL INFORMATION |
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• | banks; |
• | financial institutions; |
• | insurance companies; |
• | regulated investment companies; |
• | real estate investment trusts; |
• | 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 |
• | partnerships or pass through entities, or persons holding ADSs or ordinary shares through such entities. |
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• | 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. |
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• | 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. |
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• | the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares; | |
• | 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. |
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ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
According to the deposit agreement between us and the depositary, JPMorgan Chase Bank N.A., our ADR holders may have to pay the following fees and charges to JPMorgan Chase Bank N.A. in connection with ownership of the ADR: |
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: | US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs issued | ||
• Share distributions, stock dividend, stock split, merger | ||||
• Exchange of securities or any other transaction or event affecting the ADSs or the deposited securities | ||||
(b) Receiving or distributing dividends | Distribution of cash dividends | US$0.02 or less per ADS | ||
(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) | ||
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Category | Depositary actions | Associated fee | ||
(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: | 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 | ||
• 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 |
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ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
• | approximately US$31.0 million to establish new offices, to fund other capital expenditures and to make the payment for the land use right we are going to acquire in Beijing; and |
• | approximately US$11.1 million to fund strategic acquisitions. |
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ITEM 15. | CONTROLS AND PROCEDURES |
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ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
ITEM 16B. | CODE OF ETHICS |
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
2009 | 2010 | |||||||
(in US$ thousands) | ||||||||
Audit fees(1) | 1,120 | 1,178 | ||||||
Audit-related fees | — | — | ||||||
Tax fees(2) | — | 25 | ||||||
All other fees | — | — |
(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 offerings in 2009 and 2010 and filing of various registration statements. | |
(2) | “Tax fees” means fees billed for tax compliance, tax advice, and tax planning services. |
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
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ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. |
Total Number of | Approximate | |||||||||||||||
ADSs Purchased | Dollar Value of | |||||||||||||||
Total Number of | as Part of Publicly | ADSs that May | ||||||||||||||
ADS | Average Price | Announced | Yet Be Purchased | |||||||||||||
Period | 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 – 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. |
Total Number of | Approximate | |||||||||||||||
ADSs Purchased | Dollar Value of | |||||||||||||||
Total Number of | as Part of Publicly | ADSs that May | ||||||||||||||
ADS | Average Price | Announced | Yet Be Purchased | |||||||||||||
Period | Purchased(1) | Paid Per ADS | Program(2) | Under the Program(1) | ||||||||||||
March 21, 2011 – March 31, 2011 | 0 | N/A | 0 | $ | 40,000,000 | |||||||||||
April 1, 2011 – April 30, 2011 | 68,277 | $ | 29.2723 | 68,277 | $ | 38,001,376 | ||||||||||
May 1, 2011 – May 9, 2011 | 0 | N/A | 0 | $ | 38,001,376 | |||||||||||
Total | 68,277 | $ | 29.2723 | 68,277 | $ | 38,001,376 |
(1) | Each of our ADS represents one ordinary share. | |
(2) | We publicly announced a share repurchase program on March 21, 2011, pursuant to which we are authorized to repurchase up to US$40 million worth of our outstanding ADSs within the next 12 months following March 21, 2011 (the program’s approval date). |
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
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ITEM 16G. | CORPORATE GOVERNANCE |
ITEM 17. | FINANCIAL STATEMENTS |
ITEM 18. | FINANCIAL STATEMENTS |
ITEM 19. | EXHIBITS |
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). |
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Exhibit | ||||
Number | Description of Document | |||
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). | |||
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. | ||
4.8 | * | English Translation of Form of Employment Contract between VanceInfo Creative Software Technology Ltd., formerly named Worksoft Creative Software Technology Ltd., and a Senior Executive Officer of it. | ||
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). |
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Exhibit | ||||
Number | Description of Document | |||
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). | |||
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. |
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Exhibit | ||||
Number | Description of Document | |||
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. |
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VANCEINFO TECHNOLOGIES INC. | ||||
By: | /s/ Chris Shuning Chen | |||
Name: Chris Shuning Chen | ||||
Title: Chairman and Chief Executive Officer |
Table of Contents
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
CONTENTS | PAGE(S) | |||
F-1 | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-7 | ||||
F-59 |
Table of Contents
OF VANCEINFO TECHNOLOGIES INC.
/s/ Deloitte Touche Tohmatsu CPA Ltd. | ||
Beijing, the People’s Republic of China | ||
May 11, 2011 |
F-1
Table of Contents
(In U.S. dollars in thousands, except share data)
As of December 31, | ||||||||
2009 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 64,057 | 161,265 | ||||||
Term deposit | 10,000 | 5,000 | ||||||
Restricted cash | — | 679 | ||||||
Held-to-maturity securities-current | 12,122 | 13,208 | ||||||
Available-for-sale investment | — | 1,302 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,018 and $1,956 as of December 31, 2009 and 2010, respectively | 60,524 | 85,437 | ||||||
Prepaid expenses and other current assets | 6,026 | 4,860 | ||||||
Deferred income tax assets-current | 1,473 | 2,441 | ||||||
Total current assets | 154,202 | 274,192 | ||||||
Rental deposits and prepaid rentals | 1,658 | 2,393 | ||||||
Property and equipment, net | 15,000 | 20,344 | ||||||
Acquired intangible assets, net | 7,739 | 6,836 | ||||||
Goodwill | 24,783 | 28,072 | ||||||
Long-term investment | 930 | 193 | ||||||
Held-to-maturity securities, non-current | — | 1,558 | ||||||
Prepaid land use right | 879 | 18,009 | ||||||
Deferred income tax assets, non-current | — | 42 | ||||||
Total assets | 205,191 | 351,639 | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Short-term bank loan | — | 3,020 | ||||||
Accounts payable | 702 | 823 | ||||||
Accrued expenses and other payables | 24,200 | 36,377 | ||||||
Income tax payable | 4,863 | 7,720 | ||||||
Deferred income-current | 260 | 462 | ||||||
Deferred revenue-current | 2,634 | 1,276 | ||||||
Total current liabilities | 32,659 | 49,678 | ||||||
Deferred income tax liabilities-non current | 1,328 | 1,220 | ||||||
Deferred income-non-current | 1,778 | 1,305 | ||||||
Deferred revenue-non-current | 97 | — | ||||||
Long-term payable for business acquisition-non current | 6,767 | 3,269 | ||||||
Total liabilities | 42,629 | 55,472 | ||||||
Commitments and contingencies (Notes 24 and 25) | ||||||||
Equity: | ||||||||
Ordinary shares ($0.001 par value, 70,000,000 shares authorized; 39,888,092 and 44,556,910 shares issued and outstanding as of December 31, 2009 and 2010, respectively) | 40 | 45 | ||||||
Additional paid-in capital | 111,680 | 208,431 | ||||||
Shares issuable in connection with business acquisitions | 520 | 3,594 | ||||||
Accumulated other comprehensive income | 4,924 | 8,836 | ||||||
Statutory reserves | 2,307 | 3,478 | ||||||
Retained earnings | 43,091 | 71,783 | ||||||
Total equity | 162,562 | 296,167 | ||||||
Total liabilities and equity | 205,191 | 351,639 | ||||||
F-2
Table of Contents
(In U.S. dollars in thousands, except share and share related data)
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Revenues | 105,556 | 152,065 | 216,492 | |||||||||
Business tax | (2,893 | ) | (3,999 | ) | (4,942 | ) | ||||||
Net revenues | 102,663 | 148,066 | 211,550 | |||||||||
Cost of revenues (including share-based compensation of $265, $313 and $492 in 2008, 2009 and 2010, respectively) | (62,911 | ) | (92,171 | ) | (132,984 | ) | ||||||
Gross profit | 39,752 | 55,895 | 78,566 | |||||||||
Selling, general and administrative expenses (including share-based compensation of $1,126, $1,252 and $2,755 in 2008, 2009 and 2010, respectively) | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||
Total operating expenses | (25,905 | ) | (34,710 | ) | (51,901 | ) | ||||||
Change in fair value of contingent consideration payable for business acquisition | — | (62 | ) | 221 | ||||||||
Other operating income | 858 | 1,754 | 4,985 | |||||||||
Income from operations | 14,705 | 22,877 | 31,871 | |||||||||
Interest income | 2,028 | 856 | 782 | |||||||||
Interest expense | (69 | ) | (86 | ) | (85 | ) | ||||||
Exchange differences | 703 | (119 | ) | (950 | ) | |||||||
Gain on re-measurement of fair value of noncontrolling equity investment in connection with business acquisition | — | — | 612 | |||||||||
Income before income taxes and earnings in equity method investment | 17,367 | 23,528 | 32,230 | |||||||||
Income tax expense | (1,298 | ) | (2,089 | ) | (2,518 | ) | ||||||
Income before earnings in equity method investment | 16,069 | 21,439 | 29,712 | |||||||||
Earnings in equity method investment | 20 | 69 | 151 | |||||||||
Net income | 16,089 | 21,508 | 29,863 | |||||||||
Net loss attributable to noncontrolling interest | 84 | — | — | |||||||||
Income attributable to VanceInfo Technologies Inc. shareholders | 16,173 | 21,508 | 29,863 | |||||||||
Net income | 16,089 | 21,508 | 29,863 | |||||||||
Other comprehensive income, net of tax: | ||||||||||||
Foreign currency translation adjustments | 2,578 | (48 | ) | 3,722 | ||||||||
Unrealized gains (loss) on foreign currency exchange forward contract | — | 145 | (506 | ) | ||||||||
(Gains) loss on foreign currency exchange forward contract transfer to statements of operations | — | (36 | ) | 202 | ||||||||
Net unrealized gain on available-for-sale investment, net tax effect of $87 | — | — | 494 | |||||||||
Total other comprehensive income, net of tax | 2,578 | 61 | 3,912 | |||||||||
Comprehensive income | 18,667 | 21,569 | 33,775 | |||||||||
Comprehensive income attributable to the noncontrolling interest | 84 | — | — | |||||||||
Comprehensive income attributable to Vanceinfo Technologies Inc. | 18,751 | 21,569 | 33,775 | |||||||||
Net income per share | ||||||||||||
Basic-ordinary share | 0.43 | 0.56 | 0.74 | |||||||||
Diluted-ordinary share | 0.40 | 0.52 | 0.69 | |||||||||
Weighted average shares used in calculating net income per share | ||||||||||||
Basic-ordinary share | 37,276,306 | 38,389,495 | 40,298,060 | |||||||||
Diluted-ordinary share | 40,695,982 | 41,576,217 | 43,406,080 | |||||||||
F-3
Table of Contents
(In U.S. dollars in thousands, except share data)
Shares issuable | Accumulated | |||||||||||||||||||||||||||||||||||
in connection | other | |||||||||||||||||||||||||||||||||||
Ordinary shares | Additional | with business | comprehensive | Statutory | Retained | Noncontrolling | Total | |||||||||||||||||||||||||||||
Shares | Amount | paid-in capital | acquisitions | income | reserves | earnings | interest | shareholders’ equity | ||||||||||||||||||||||||||||
Balance as of January 1, 2008 | 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 | ||||||||||||||||||||||||||
Noncontrolling interest acquired in business combination | (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 | — | 4208 | — | — | — | — | — | 4,208 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 1,565 | — | — | — | — | — | 1,565 | |||||||||||||||||||||||||||
Provision for statutory reserve | — | 991 | (991 | ) | — | — | ||||||||||||||||||||||||||||||
Unrealized gain on foreign currency exchange forward contract | — | — | — | — | 145 | — | — | — | 145 | |||||||||||||||||||||||||||
Gain on foreign currency exchange forward contract transfer to statements of operations | — | — | — | — | (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 | |||||||||||||||||||||||||||
Issuance of ordinary shares in connection with business acquisitions | 26,442 | — | 520 | (520 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Shares issuable in connection with TP acquisition (Note 4) | — | — | — | 1,978 | — | — | — | — | 1,978 | |||||||||||||||||||||||||||
Shares issuable in connection with AIT acquisition (Note 4) | — | — | — | 1,616 | — | — | — | — | 1,616 | |||||||||||||||||||||||||||
Ordinary shares returned from an employee (Note 20) | (27,772 | ) | — | (537 | ) | — | — | — | — | — | (537 | ) | ||||||||||||||||||||||||
Issuance of ordinary shares upon share offering | 2,530,000 | 3 | 89,223 | — | — | — | — | — | 89,226 | |||||||||||||||||||||||||||
Ordinary shares issued for share-based compensation | 2,140,148 | 2 | 4,508 | — | — | — | — | — | 4,510 | |||||||||||||||||||||||||||
Share-based compensation | — | — | 3,037 | — | — | — | — | — | 3,037 | |||||||||||||||||||||||||||
Provision for statutory reserve | — | — | — | — | 1,171 | (1,171 | ) | — | — | |||||||||||||||||||||||||||
Unrealized loss on foreign currency exchange forward contract | — | — | — | — | (506 | ) | — | — | — | (506 | ) | |||||||||||||||||||||||||
Loss on foreign currency exchange forward contract transfer to statements of operations | — | — | — | — | 202 | — | — | — | 202 | |||||||||||||||||||||||||||
Net unrealized gain on available-for-sale investment, net tax effect of $87 | — | — | — | — | 494 | — | — | — | 494 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 3,722 | — | — | — | 3,722 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 29,863 | — | 29,863 | |||||||||||||||||||||||||||
Balance as of December 31, 2010 | 44,556,910 | 45 | 208,431 | 3,594 | 8,836 | 3,478 | 71,783 | — | 296,167 | |||||||||||||||||||||||||||
F-4
Table of Contents
(In U.S. dollars in thousands)
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | 16,089 | 21,508 | 29,863 | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Share-based compensation | 1,391 | 1,565 | 3,247 | |||||||||
Depreciation and amortization of property and equipment | 2,896 | 4,078 | 6,397 | |||||||||
Amortization of intangible assets | 823 | 1,668 | 2,023 | |||||||||
Loss (gain) on foreign currency exchange forward contracts transfer to statements of operations | — | (52 | ) | 578 | ||||||||
Loss (gain) on disposal of property and equipment | 219 | 282 | (298 | ) | ||||||||
Allowance for doubtful accounts | 210 | 445 | 685 | |||||||||
Change in fair value of contingent consideration payable for acquisition | — | 62 | (221 | ) | ||||||||
Earnings from equity method investment | (20 | ) | (69 | ) | (151 | ) | ||||||
Gain on remeasurement of fair value of noncontrolling equity investment in connection with business acquisition | — | — | (612 | ) | ||||||||
Accrued interest income of available-for-sale investment | — | — | (41 | ) | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Rental deposits and prepaid rentals | (1,321 | ) | 430 | (475 | ) | |||||||
Accounts receivable | (9,580 | ) | (22,446 | ) | (22,156 | ) | ||||||
Accrued interest income of loan to shareholders | (100 | ) | — | — | ||||||||
Prepaid expenses and other current assets | (323 | ) | (1,063 | ) | 945 | |||||||
Deferred income tax assets-current | (257 | ) | (1,156 | ) | (901 | ) | ||||||
Deferred income tax assets-non current | — | — | (41 | ) | ||||||||
Accounts payable | 192 | (2,485 | ) | 74 | ||||||||
Deferred revenue | — | 30 | (1,495 | ) | ||||||||
Accrued expenses and other payables | 4,258 | 7,016 | 8,810 | |||||||||
Income tax payable | 1,470 | 2,479 | 2,643 | |||||||||
Deferred income | — | 757 | (270 | ) | ||||||||
Deferred income tax liabilities-current | (145 | ) | — | — | ||||||||
Prepaid for land use rights | — | (879 | ) | (16,727 | ) | |||||||
Deferred income tax liabilities-non current | (398 | ) | (245 | ) | (323 | ) | ||||||
Net cash provided by operating activities | 15,404 | 11,925 | 11,554 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (6,144 | ) | (6,416 | ) | (11,680 | ) | ||||||
Purchase of non-current investment-held-to-maturity securities | (841 | ) | — | (1,560 | ) | |||||||
Purchase of current investment-held-to-maturity securities | — | (12,104 | ) | (15,213 | ) | |||||||
Proceeds from maturity of investments | — | — | 13,648 | |||||||||
Purchase of long-term investment | — | — | (200 | ) | ||||||||
Purchase of available-for-sale | — | — | (661 | ) | ||||||||
Repayments from shareholders for loans advanced | 3,579 | — | — | |||||||||
Consideration paid for business acquisitions (net of cash acquired of $891, $1,730 and $824 in 2008, 2009 and 2010, respectively) | (6,738 | ) | (3,462 | ) | (127 | ) | ||||||
Proceeds from disposal of property and equipment | 15 | 34 | 501 | |||||||||
Purchase of term deposit | (1,463 | ) | (10,000 | ) | — | |||||||
Cash received upon maturity of term deposit | 1,464 | 1,465 | 5,000 | |||||||||
Restricted cash | — | — | (659 | ) | ||||||||
Payment for settlement of foreign currency forward exchange contracts | — | — | (388 | ) | ||||||||
Net cash used in investing activities | (10,128 | ) | (30,483 | ) | (11,339 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of options | 302 | 3,625 | 5,011 | |||||||||
Repayments of loans assumed in business acquisitions | (200 | ) | (2,386 | ) | — | |||||||
Payment for issuance costs in connection with upon initial public offering | (1,054 | ) | — | — | ||||||||
Repurchase of ordinary shares | (2,020 | ) | (13 | ) | — | |||||||
Proceeds from issuance of ordinary shares upon share offering in 2009 | — | 3,624 | — | |||||||||
Payment for issuance costs in connection with share offering in 2009 | — | (712 | ) | (220 | ) | |||||||
Proceeds from issuance in connection with share offering in 2010 | — | — | 89,816 | |||||||||
Payment for issuance costs of ordinary shares upon share offering in 2010 | — | — | (507 | ) | ||||||||
Consideration paid for business acquisitions | — | — | (814 | ) |
F-5
Table of Contents
(In U.S. dollars in thousands)
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Proceeds from short-term bank loan | 1,463 | — | 2,939 | |||||||||
Repayments of short-term bank loan | (1,317 | ) | (1,465 | ) | — | |||||||
Net cash (used in) provided by financing activities | (2,826 | ) | 2,673 | 96,225 | ||||||||
Effect of exchange rate changes | 678 | (21 | ) | 768 | ||||||||
Net increase (decrease) in cash and cash equivalents | 2,450 | (15,885 | ) | 96,440 | ||||||||
Cash and cash equivalents at beginning of year | 76,835 | 79,963 | 64,057 | |||||||||
Cash and cash equivalents at end of year | 79,963 | 64,057 | 161,265 | |||||||||
Supplemental disclosures of cash flow information | ||||||||||||
Income tax paid | 343 | 1,055 | 1,331 | |||||||||
Interest paid | 96 | 80 | 79 | |||||||||
Non-cash investing activities: | ||||||||||||
Acquisition of businesses: | ||||||||||||
Ordinary shares issued and to be issued | 2,701 | 549 | 1,616 | |||||||||
Outstanding consideration payable for acquisitions during the year | 3,106 | 8,187 | 1,633 | |||||||||
Change in payable for purchase of property and equipment | 181 | 1,233 | (510 | ) | ||||||||
Non-cash financing activities: | ||||||||||||
Accrued issuance costs related to share offerings | — | 264 | 127 | |||||||||
F-6
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 (“VIE”), 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, 2010, 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 Creative Software Technology Ltd. (“VanceInfo BVI”) | August 6, 2004 | BVI | 100 | % | ||||
VanceInfo Japan Inc. (“VanceInfo Japan”) | November 25, 2004 | Japan | 99.9 | % | ||||
VanceInfo Technologies Inc. (“VanceInfo US”) | November 29, 2005 | United States of America (“US”) | 100 | % | ||||
VanceInfo Technologies Limited | March 27, 2007 | Hong Kong | 100 | % | ||||
Shanghai VanceInfo Technologies Limited (“Shanghai Vanceinfo”, formerly name “Solutions” ) | May 29, 2007 | PRC | 100 | % | ||||
Beijing Chosen Technology Co., Ltd. (“Chosen”) | July 31, 2007 | PRC | 100 | % | ||||
VanceInfo Technologies Limited | November 15, 2007 | PRC | 100 | % | ||||
Shanghai VanceInfo Creative Software Technology Limited (“Vanceinfo Shanghai Creative”) | September 9, 2008 | PRC | 100 | % | ||||
VanceInfo Malaysia Inc. Sdn. Bhd | October 9, 2008 | Malaysia | 100 | % | ||||
Shenzhen VanceInfo Creative Software Technology Limited (“Vanceinfo Shenzhen”) | October 28, 2008 | PRC | 100 | % | ||||
Nanjing VanceInfo Creative Software Technology Limited (“Nanjing Vanceinfo”) | 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 | % | ||||
Link Result Limited (“Link Result”) | July 2, 2010 | Hong Kong | 100 | % | ||||
A-IT (Shanghai) Software Services Co., Ltd. (“AIT”) | July 2, 2010 | PRC | 100 | % |
F-7
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 VIE. 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 allowance for doubtful accounts, useful lives and impairment of property and equipment, impairment of goodwill and indefinite-lived intangible assets, economic lives of intangible assets, purchase price allocation in business combinations, contingent consideration for business acquired, fair value of hedging, valuation allowance for deferred tax assets, and stock-based compensation expense. 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. | ||
Restricted cash |
Restricted cash represents a term deposit pledged for a short-term loan. Cash held in such accounts is restricted for a period of twelve months. |
F-8
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 securities, accounts receivable, short-term bank loan and accounts payable, the carrying values of which approximate their fair value due to their short-term maturities. |
The Group’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2010 include the foreign currency exchange forward contracts based on Level 2 inputs, available-for-sale investment and contingent consideration payable in connection with a business acquisition based on Level 3 inputs. |
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 long-term investment because of lack of quoted market prices and the inability to estimate fair value without incurring excessive costs. |
F-9
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Held-to-maturity securities | ||
The Group’s held-to-maturity securities are classified as held-to-maturity securities-current and held-to-maturity securities-non current on the consolidated balance sheets based on their contractual maturity dates and are stated at their amortized costs. | ||
Available-for-sale investment |
Available-for-sale investment 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 investment is classified as current assets on the consolidated balance sheets because they are available for immediate sale. |
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance amending existing US GAAP relating to other than temporary impairment (“OTTI”) for debt securities to improve presentation and disclosure of OTTI on debt securities in the financial statements. The new guidance requires that an entity separates the amount of the OTTI into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings, which represents the difference between a security’s amortized cost basis and the discounted present value of expected future cash flows. The amount due to other factors is recognized in other comprehensive income if the entity neither intends to sell and will not more likely than not be required to sell the security before recovery. The difference between the amortized cost basis and the cash flows expected to be collected is accreted as interest income. The Group early adopted the new guidance on January 1, 2009. The adoption of the new guidance did not result in a cumulative-effective adjustment as of January 1, 2009. | ||
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. |
F-10
Table of Contents
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Derivatives and hedge accounting —continued | ||
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 statements 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 statements of operations when the forecasted revenue is recognized. | ||
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. | ||
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-11
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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, net |
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 based on specific estimated benefit pattern. 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 including tradename of $2,393 are carried at cost without amortization regularly 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-12
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 excess of the carrying amount over the fair value of the long-lived 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 intangible assets not subject to amortization consists of a comparison of the fair value of the intangible assets with their 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 determines the entities which have similar economic characteristics as a reporting unit and performs its annual goodwill and indefinite-lived intangible assets impairment test on the last day of each fiscal 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, 2008, 2009 or 2010. |
F-13
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 contracts 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 customers. Revenues recognized for time-and-material contracts amounted to $93,525, $107,866 and $134,019 for the years ended December 31, 2008, 2009 and 2010, 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 $12,031 $40,426 and $78,015 for the years ended December 31, 2008, 2009 and 2010, 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-14
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Revenue recognition— continued | ||
Other solutions |
The Group derives revenues from providing system integration solutions, which normally include 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 and on-site supports. |
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 IT services, software resale, and maintenance service which is considered PCS. Since the Group has not established the VSOE of the fair value of any 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. |
Revenue recognized in excess of billings is recorded as unbilled receivables and is included in accounts receivable. Amounts billed but not yet collected are recorded as billed receivables and are included in accounts receivable. All billed and unbilled amounts are expected to be collected within one year. Cash received from billings in excess of revenues recognized is 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 services contracts are exempted from business tax in accordance with the PRC tax laws. Business tax is recorded as a reduction in revenues when incurred. |
F-15
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 on 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 companies 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 $8, $62 and $31 for the years ended December 31, 2008, 2009 and 2010, 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-16
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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 VIE 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. Equity amounts are translated at historical exchange rates, and 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 years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
% | % | % | ||||||||||
Customer | ||||||||||||
A | 11 | 5 | 1 | |||||||||
B | 18 | 13 | 12 | |||||||||
C | 10 | 23 | 26 | |||||||||
D | 9 | 11 | 9 |
F-17
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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, | ||||||||
2009 | 2010 | |||||||
% | % | |||||||
Customer | ||||||||
A | 3 | 1 | ||||||
B | 6 | 5 | ||||||
C | 39 | 46 |
Share-based payments |
Share-based payment transactions with employees 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 are recognized through a cumulative catch-up adjustment in the period of change. | ||
Net income per share |
Basic net income per share is computed by dividing net income attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. |
The Group had stock options, 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 stock options and nonvested shares is computed using the treasury stock method. 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. |
F-18
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued | |
Recently issued accounting standards |
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 Group 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 on milestone method of revenue recognition. The scope of this pronouncement is limited to arrangements that include milestones relating to research or development deliverables. The pronouncement 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 consensus regardless of whether the arrangement is determined to have single or multiple deliverables or units of accounting. The pronouncement 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 Group does not expect the adoption of this guidance would have a significant effect on its consolidated financial position or results of operations. |
F-19
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued |
Recently issued accounting standards— continued |
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the guidance is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010. Early adoption will not be permitted. For nonpublic entities, the guidance is effective for impairment tests performed during entities’ fiscal years (and interim periods within those years) that begin after December 15, 2011. Early application for nonpublic entities is permitted; nonpublic entities that elect early application will use the same effective date as that for public entities. The Group does not expect the adoption of this guidance would have a significant effect on its consolidated financial position or results of operations. |
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro forma information for business combinations. The objective of this guidance is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments affect any public entity as defined by Topic 805 that enters into business combinations that are material on an individual or aggregate basis. The amendments will be effective for business combinations consummated in periods beginning after December 15, 2010, and should be applied prospectively as of the date of adoption. Early adoption is permitted. The Group does not expect the adoption of this guidance would have a significant effect on its consolidated financial position or results of operations. |
F-20
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
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’s major operating entities’ country of domicile is Greater China which refers to the PRC, including, for purposes of the accompanying financial statements only, Taiwan, Hong Kong and Macau. |
The following tables summarize the Group’s long-lived assets and net revenues in different geographic locations: |
Long-lived assets |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Greater China | 47,277 | 73,046 | ||||||
US | 2,388 | 2,228 | ||||||
Others | 1,324 | 573 | ||||||
Total | 50,989 | 75,847 | ||||||
F-21
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
3. | SEGMENT INFORMATION — continued |
Geographic information— continued |
Net revenues(1) |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
US | 56,175 | 56,634 | 70,955 | |||||||||
Greater China | 22,045 | 59,373 | 95,481 | |||||||||
Europe | 14,991 | 23,148 | 32,178 | |||||||||
Japan | 9,157 | 8,466 | 9,889 | |||||||||
Others | 295 | 445 | 3,047 | |||||||||
Total | 102,663 | 148,066 | 211,550 | |||||||||
(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. |
The following table summarizes the Group’s net revenues by service lines: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Research and Development | ||||||||||||
Outsourcing Services: | ||||||||||||
Research & development services | 60,808 | 90,581 | 124,181 | |||||||||
Globalization & localization | 4,259 | 5,118 | 6,060 | |||||||||
IT Services: | ||||||||||||
Enterprise solutions | 13,542 | 14,429 | 19,725 | |||||||||
Application development & maintenance | 17,061 | 26,373 | 43,825 | |||||||||
Quality assurance & testing | 6,717 | 7,807 | 13,003 | |||||||||
Other Solutions and Services | 276 | 3,758 | 4,756 | |||||||||
Total | 102,663 | 148,066 | 211,550 | |||||||||
F-22
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS | |
Acquisition of Solutions’ equity interest |
On April 1, 2007, the Group entered into an equity transfer agreement to acquire a 75% equity interest in Solutions, a professional outsourcing service provider, for an initial equity consideration of 913,393 ordinary shares of VanceInfo at a fair value of $1.71 per ordinary share on April 1, 2007, the date of the share issuance. The fair value of VanceInfo ordinary shares was determined by the Company after considering a number of factors, including the result of an appraisal by a third party appraiser. The transaction was considered as a business acquisition and accordingly the purchase method of accounting has been applied. The $394 of contingent consideration, which represents the lesser of the maximum amount of contingent consideration and the amount of negative goodwill, was recognized as of the date of acquisition. |
The transaction was closed on May 29, 2007, which was determined as the date of acquisition. |
The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate initial purchase price of $2,014 consisted of the following: |
Fair value of ordinary shares | 1,562 | |||
Contingent consideration recognized | 394 | |||
Cost of transaction | 58 | |||
Total | 2,014 | |||
The purchase price was allocated as follows: |
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-23
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of Solutions’ equity interest— continued |
Pursuant to the terms of original purchase agreement, an additional cash consideration was determined, based on the operating results of Solutions in 2007, to be $62, which was paid in 2008. Since $394, the contingent consideration recognized as of the date of acquisition was more than $62, the determined additional cash consideration, the excess of $332 was allocated as a pro rata reduction of the carrying amounts of acquired non-current assets. |
On July 23, 2008, the Group acquired an additional 10% equity interest in Solutions for a consideration of $58 in cash and 58,348 ordinary shares of Vanceinfo at a fair value of $7.06 per ordinary share. On August 13, 2008, the Group acquired the remaining 15% equity interest in Solutions for a consideration of $869 in cash which was paid in 2008. The aggregate purchase price of $1,348 consisted of the following: |
Cash consideration | 927 | |||
Fair value of ordinary shares | 412 | |||
Cost of transaction | 9 | |||
Total | 1,348 | |||
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 | |||||||
Acquisition of WIT’s equity interest |
On October 1, 2008, the Group acquired a 100% equity interest in Wireless Info Tech, Ltd. (“WIT”), a professional outsourcing service provider, for an initial consideration of $1,080 in cash. Additional cash and share contingent considerations were determined based on specified earnings objectives predefined for the six-month period ended March 31, 2009 and twelve-month period ended March 31, 2010, respectively. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. |
F-24
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of WIT’s equity interest— continued |
The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $1,147 consisted of the following: |
Cash consideration | 1,080 | |||
Cost of transaction | 67 | |||
Total | 1,147 | |||
The purchase price was allocated as follows: |
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 | |||||||
The additional contingent consideration based on earnings of WIT for the six-month period ended March 31, 2009 was determined to be $1,506 and recorded as an addition to the goodwill in 2009, of which $974 was settled in cash and $532 was settled in 95,590 ordinary shares of the Company at a fair value of $5.56 per share in 2009. |
The contingent consideration based on earnings of WIT for the twelve-month period ended March 31, 2010 was determined to be zero as the earnings of WIT did not reach the performance target predefined in the original purchase agreement. |
In December 2010, to simplify the corporate structure, the Group deregistered WIT, after integration of all the operating net assets and business of WIT into another operating entity of the Group. No significant gain or loss and cash flow were resulted from the transfer. |
F-25
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of WIT’s equity interest— continued |
The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2008 of the Group as if the acquisition had occurred on January 1, 2008. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results: |
For the year | ||||
ended December 31, | ||||
2008 | ||||
(unaudited) | ||||
Pro forma revenues | 106,115 | |||
Pro forma net income | 16,963 | |||
Pro forma net income per ordinary share-basic | 0.45 | |||
Pro forma net income per ordinary share-diluted | 0.42 |
Acquisition of TP’s equity interest |
On July 2, 2009, the Group acquired 100% equity interests in the operating subsidiaries of TP Corporation Limited, a provider of customer relationship management solutions and system integration. The acquisition has strengthened the Group’s position in software services. The transaction was considered an acquisition of a business. Accordingly, the purchase method of accounting has been applied. The fair value of additional contingent considerations, based on specified earnings objectives predefined for the six-month period ended December 31, 2009 and twelve-month period ended December 31, 2010 was determined to be $8,644 at the date of acquisition. The acquired net assets were recorded at their fair market value at the date of acquisition. The aggregate purchase price of $8,644 consisted of the following: |
Fair value of contingent consideration: | ||||
Cash consideration | 4,856 | |||
Fair value of equity consideration | 3,788 | |||
Total | 8,644 | |||
F-26
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of TP’s equity interest— continued |
The purchase price was preliminarily allocated as follows: |
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 loan | (2,386 | ) | ||||||
Total | 8,644 | |||||||
The first contingent consideration based on the earnings of TP for the six-month period ended December 31, 2009 was determined to be $1,337 when the contingency was resolved on December 31, 2009, of which $817 was settled in cash and $520 was settled in 26,442 ordinary shares of the Company at a fair value of $19.66 per share in 2010. |
The second contingent consideration based on earnings of TP for the twelve-month period ended December 31, 2010, was determined to be $3,989 when the contingency was resolved on December 31, 2010, of which $2,011 will be settled in cash and $1,978 will be settled in 55,944 ordinary shares of the Company at a fair value of $35.36 per share in 2011. |
The fair value of the third contingent consideration based on the attainment of the earnings objectives for the 12-month period ending December 31, 2011 was determined to be $3,269 as of December 31, 2010, of which is up to $2,000 will be settled in cash and $1,269 will be settled in ordinary shares. |
The change in fair value of the contingent consideration during the years ended December 31, 2009 and 2010 was a loss of $62 and a gain of $80, respectively, which were recognized in the consolidated statements of operations. |
F-27
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of TP’s equity interest— continued |
The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2008 and 2009 of the Group as if the acquisition had occurred on January 1, 2008 and 2009. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results: |
For the years | ||||||||
ended December 31, | ||||||||
2008 | 2009 | |||||||
(unaudited) | (unaudited) | |||||||
Pro forma net revenues | 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 |
Acquisition of mobile service business |
On October 1, 2009, Vanceinfo Beijing entered into a purchase agreement with a mobile service company to acquire its business of smart phone software testing for a cash consideration of $1,172. The transaction was considered an acquisition of a business and accordingly the purchase method of accounting has been applied. The acquired net assets were recorded at their fair value at the date of acquisition. |
The purchase price was preliminarily allocated as follows: |
Amortization | ||||||||
period | ||||||||
Intangible assets: | ||||||||
Customer base and relationship | 26 | 5 years | ||||||
Non-compete agreement | 22 | 2 years | ||||||
Goodwill | 1,306 | |||||||
Property and equipment | 148 | |||||||
Rental prepayment | 44 | |||||||
Other current liabilities | (374 | ) | ||||||
Total | 1,172 | |||||||
The unaudited pro forma information of the acquisition as if the acquisition had occurred on January 1, 2008 and 2009 is not presented because the Group believes it is impracticable to do so. |
F-28
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of Link Result’s equity interest |
On October 1, 2008, the Group completed the purchase of a 33% equity interest in Link Result Limited (“Link Result”), a China-based company providing IT outsourcing services to multinational financial institutions, with investment cost of $841, including $330 of cash consideration paid to selling shareholders, $495 of capital injection to the investee in the form of an indefinite-lived interest-free loan and $16 of acquisition costs. The Group accounted for the investment using equity method of accounting because the Group had the ability to exercise significant influence over the investee. |
In July 2010, VanceInfo acquired the remaining 67% equity interest in Link Result from other shareholders with initial consideration of $670 in cash. Contingent consideration is determined based on a multiple of the earnings of the acquired business. The acquired net assets were recorded at their fair value at the date of acquisition. The aggregate purchase price of $5,759 consisted of the following: |
Initial cash payment | 670 | |||
Fair value of contingent consideration: | ||||
Cash consideration | 1,555 | |||
Fair value of equity consideration | 1,834 | |||
Fair value of the 33% equity interest: | ||||
Carring amount | 1,088 | |||
Gain on remeasurement of fair value of noncontrolling equity investment | 612 | |||
Total | 5,759 | |||
The purchase price was preliminarily allocated as follows: |
Amortization | ||||||||
period | ||||||||
Cash | 824 | |||||||
Other current assets | 1,997 | |||||||
Property and equipment | 80 | |||||||
Rental deposits | 7 | |||||||
Intangible assets: | ||||||||
Customer base and relationship | 926 | 5.5 years | ||||||
Non-compete agreement | 40 | 2 years | ||||||
Goodwill | 2,490 | |||||||
Current liabilities | (401 | ) | ||||||
Deferred tax liabilities | (204 | ) | ||||||
Total | 5,759 | |||||||
F-29
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
4. | ACQUISITIONS — continued |
Acquisition of Link Result’s equity interest- continued |
The additional cash consideration, based on the earnings of Link Result for the six-month period ended December 31, 2010, was determined to be $3,249 when the contingency was resolved on December 31, 2010, of which $1,633 will be settled in cash and $1,616 will be settled in ordinary shares of the Company in 2011. The number of ordinary shares to be issued was determined based on the average closing market price of the Company’s ordinary shares over the last ten trading days in December 2010 and the first ten trading days in 2011, which was $35.36 per share. |
The change in fair value of the contingent consideration from the date of acquisition to December 31, 2010 was a gain of $141 and was recognized in the consolidated statements of operations. |
The following unaudited pro forma information summarizes the results of operations for the years ended December 31, 2009 and 2010 of the Group as if the acquisition had occurred on January 1, 2009 and 2010. The following pro forma financial information is not necessarily indicative of the results that would have occurred had the acquisition been completed at the beginning of the periods indicated, nor is it indicative of future operating results: |
For the years | ||||||||
ended December 31, | ||||||||
2009 | 2010 | |||||||
(unaudited) | (unaudited) | |||||||
Pro forma net revenues | 151,308 | 214,717 | ||||||
Pro forma net income | 21,720 | 30,383 | ||||||
Pro forma net income per ordinary share-basic | 0.57 | 0.75 | ||||||
Pro forma net income per ordinary share-diluted | 0.52 | 0.70 | ||||||
Fair value measurements in business acquisitions: |
The Group measured the fair value of the purchased intangible assets using the “cost”, “income approach-excess earnings” and “with & without” valuation method. The Group measured the fair value of the contingent consideration considering, among other factors, forecasted financial performance of the acquired business, market performance, and the market potential of the acquired business in China. These purchased intangible assets and contingent consideration are considered Level 3 assets and liabilities because the Group used unobservable inputs, reflecting the Group’s assessment of the assumptions market participants would use in valuing these assets and liabilities. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
5. | HELD-TO-MATURITY SECURITIES |
The Group’s marketable securities include floating rate notes and corporate notes as of December 31, 2009 and 2010. These securities are classified as held-to-maturity investments by the Group and carried at costs. |
The Company held the following held-to-maturity securities: |
As of | As of | |||||||
December 31 | December 31 | |||||||
2009 | 2010 | |||||||
Current: | ||||||||
Floating rate notes | 4,271 | — | ||||||
Corporate notes | 7,851 | 13,208 | ||||||
Sub-total | 12,122 | 13,208 | ||||||
Non-current: | ||||||||
Corporate notes | — | 1,558 | ||||||
Total | 12,122 | 14,766 | ||||||
As of December 31, 2010, the maturity dates of the notes ranged from March 1, 2011 to April 11, 2012. |
The Group’s floating rate notes were purchased from authorized financial institutions. |
The Group recognized interest income of $193 and $269 for the years ended December 31, 2009 and 2010, respectively. The Group did not hold any held-to-maturity securities in 2008. |
6. | AVAILABLE-FOR-SALE INVESTMENT |
In February 2010, the Company extended a loan with principal of $440 to Beijing Viatt Information Technology Co. Ltd (“Viatt”), a private company providing IT services and solutions for Chinese domestic financial institutions. The loan carries 8% annual interest rate with two-year term and is convertible into a 20% equity interest of Viatt. The investment was accounted for by the Company as available-for-sale investment which measured at fair value on a recurring basis. The Company recognized $32 interest income in the consolidated statements of operations. The Company remeasured the fair value of this available-for-sale investment at the end of December 31, 2010 using a binomial model based on certain key assumptions such as the probability of conversion to ordinary shares of Viatt and the fair value of the equity of Viatt, and $494 excess of fair value over the carrying amount as the unrecognized gains on the available-for-sale investment was recorded in other comprehensive income for the year ended December 31, 2010. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
6. | AVAILABLE-FOR-SALE INVESTMENT-continued |
In September 2010, the Company extended an additional loan with principal of $221 to Viatt. The loan carries 12% annual interest rate with two-year term. The Company determined that the fair value of the investment approximated the outstanding balance of the loan, including the principal and the interest receivable. The Company recognized an interest income of $9 in the consolidated statements of operations for the year ended December 31, 2010. |
7. | ACCOUNTS RECEIVABLE |
Accounts receivable consists of: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Billed accounts receivable | 26,077 | 27,052 | ||||||
Unbilled accounts receivable | 35,465 | 60,341 | ||||||
Less: allowance for doubtful accounts | (1,018 | ) | (1,956 | ) | ||||
Total accounts receivable, net | 60,524 | 85,437 | ||||||
Movement of allowance for doubtful accounts is as follows: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Balance at beginning of the period | 587 | 1,018 | ||||||
Charge to expenses | 445 | 685 | ||||||
Write off | — | (335 | ) | |||||
Provision in connection with the losses caused by an employee (Note 20) | — | 537 | ||||||
Exchange difference | (14 | ) | 51 | |||||
Balance at end of the period | 1,018 | 1,956 | ||||||
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
8. | PREPAID EXPENSES AND OTHER CURRENT ASSETS |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Prepaid rentals | 1,090 | 1,195 | ||||||
Advances to employees | 853 | 790 | ||||||
Performance security deposit | 734 | 757 | ||||||
Option exercise receivable | 966 | 642 | ||||||
Interests receivable | 291 | 347 | ||||||
Advance to suppliers | 280 | 136 | ||||||
Prepaid insurance premium | 150 | 85 | ||||||
Receivable from American Depositary Shares (“ADS”) depositary bank | 514 | — | ||||||
Foreign currency forward exchange contract | 161 | — | ||||||
Other prepaid expenses | 987 | 908 | ||||||
Total | 6,026 | 4,860 | ||||||
Option exercise receivable represented the Company’s stock option exercise price receivable from transfer agent. |
Performance security deposit represented an IT service contract performance deposit paid at the request of one of our customers, which is expected to be returned when the related contract is completed in 2011. |
Other prepaid expenses primarily consisted of prepaid miscellaneous selling, general and administrative expenses. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
9. | FOREIGN CURRENCY FORWARD EXCHANGE CONTRACT |
On September 30, 2009, the Group entered into a forward contract to purchase $5,000 for JPY448.75 million due on October 1, 2010 with nil consideration paid or received. The Group qualified for foreign currency cash flow hedge accounting with respect to this foreign currency forward exchange contracts to hedge, for accounting purposes, changes in the cash flow of forecasted JPY-denominated revenue transactions attributable to fluctuation in foreign currency exchange rate during the one year term of the forward contract. The notional amounts of the forward contract designated as cash flow hedge was JPY112.188 million as of December 31, 2009, JPY112.188 million as of March 31, 2010, JPY112.188 million as of June 30, 2010, and JPY112.188 million as of September 30, 2010. The estimated fair value of the forward contract was $161 as of December 31, 2009. The fair value of the foreign exchange forward was estimated with the consideration of, among other factors, discount rate, timing and amount of cash flow and counterparty credit risk and is reported under Level 2 of the fair value hierarchy. |
On July 10, 2010, the Group entered into a forward contract to purchase $5,000 for JPY432.50 million due on July 11, 2011 with nil consideration paid or received. The Group qualified for foreign currency cash flow hedge accounting with respect to this foreign currency forward exchange contracts, to hedge, for accounting purposes, changes in the cash flow of forecasted JPY-denominated revenue transactions attributable to fluctuation in foreign currency exchange rate during the one year term of the forward contract. The notional amounts of the forward contract designated as cash flow hedge was JPY43.25 million as of September 30, 2010, JPY129.75 million as of December 31, 2010, JPY129.75 million as of March 31, 2011, and JPY129.75 million as of June 30, 2010. The estimated fair value of the forward contract was $332 as of December 31, 2010. The fair value of the foreign exchange forward was estimated with the consideration of, among other factors, discount rate, timing and amount of cash flow and counterparty credit risk and is reported under Level 2 of the fair value hierarchy. |
During the year 2010, the Group recorded following gains in other comprehensive income related to the contract: |
For the year ended | ||||
December 31, | ||||
2010 | ||||
Unrealized gains recognized for effective portion | (506 | ) | ||
Gains transfer to statements of operations | 202 | |||
Total | (304 | ) | ||
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
9. | FOREIGN CURRENCY FORWARD EXCHANGE CONTRACT — continued |
During the year 2010, the Group recorded following loss in the exchange difference account in the consolidated statement of operations related to the contract: |
For the year ended | ||||
December 31, | ||||
2010 | ||||
Loss transfer from other comprehensive income | (202 | ) | ||
Loss recognized due to changes in spot-forward difference | (376 | ) | ||
Total | (578 | ) | ||
The unrealized loss of $195 for effective portion associated with the forward contract was recorded in other comprehensive income as of December 31, 2010. The full amount is expected to be reclassified into earnings within the next 12 months when the underlying forecasted revenue is recognized. All hedging relationships under cash flow hedges were evaluated to be highly effective as of December 31, 2010. The Company qualified for cash flow hedge accounting for a portion of the forward contracts entered into in 2009 with $109 unrealized loss associated with those forward contracts recorded in other comprehensive income as of December 31, 2009 was settled in 2010 and then recognized a loss of $388 in exchange difference, net. |
10. | PROPERTY AND EQUIPMENT, NET |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Furniture and office equipment | 3,820 | 5,230 | ||||||
Motor vehicles | 1,187 | 1,403 | ||||||
Computers and software | 12,037 | 16,019 | ||||||
Leasehold improvements | 7,783 | 11,314 | ||||||
24,827 | 33,966 | |||||||
Less: Accumulated depreciation and amortization | (9,827 | ) | (13,622 | ) | ||||
Property and equipment, net | 15,000 | 20,344 | ||||||
Depreciation and amortization expenses of property and equipment were recognized for the years ended December 31, 2008, 2009 and 2010 were $2,896, $4,078 and $6,397, respectively. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
11. | ACQUIRED INTANGIBLE ASSETS, NET |
The costs and accumulated amortization of these acquired intangible assets are as follows: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Intangible assets not subject to amortization: | ||||||||
Tradename | 2,376 | 2,393 | ||||||
Intangible assets subject to amortization: | ||||||||
Contract backlog | 900 | 902 | ||||||
Customer base and relationship | 6,708 | 7,821 | ||||||
Non-compete agreement | 949 | 1,036 | ||||||
Software Technology | 322 | 321 | ||||||
11,255 | 12,473 | |||||||
Less: Accumulated amortization | ||||||||
Contract backlog | (591 | ) | (902 | ) | ||||
Customer base and relationship | (2,405 | ) | (3,806 | ) | ||||
Non-compete agreement | (439 | ) | (688 | ) | ||||
Software technology | (81 | ) | (241 | ) | ||||
(3,516 | ) | (5,637 | ) | |||||
Acquired intangible assets, net | 7,739 | 6,836 | ||||||
The Group recorded amortization expenses of $823, $1,668 and $2,023 for the years ended December 31, 2008, 2009 and 2010, respectively. The Group expects to record amortization expenses of $1,553, $1,181, $878, $625, and $206 for 2011, 2012, 2013, 2014 and 2015, respectively. |
F-36
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
12. | GOODWILL |
The movement of the goodwill for the years ended December 31, 2009 and 2010 is as follows: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
As of January 1, | 15,537 | 24,783 | ||||||
Goodwill recognized in connection with the following: | ||||||||
Additional consideration payment for acquisition of WIT | 1,506 | — | ||||||
Acquisition of business from Guangzhou Kernel Technology Limited.(“Kernel”) | 173 | — | ||||||
Acquisition of TP | 6,277 | — | ||||||
Acquisition of business from a mobile services provider | 1,306 | — | ||||||
Acquisition of business from Mobi | — | 205 | ||||||
Acquisition of Link Result(Note 4) | — | 2,490 | ||||||
Exchange differences | (16 | ) | 594 | |||||
As of December 31 | 24,783 | 28,072 | ||||||
The Company performed its annual goodwill impairment test on the last day of each fiscal year, and did not incur any impairment loss on goodwill for the years ended December 31, 2008, 2009 or 2010. |
13. | LONG-TERM INVESTMENT |
Equity method investment |
On October 1, 2008, the Company completed the purchase of 33% equity interest in Link Result, a China-based company providing IT outsourcing services to multinational financial institutions, with an investment cost of $841, including $330 of cash consideration paid to selling shareholders, $495 of capital injection to the investee in the form of an indefinite-lived interest-free loan and $16 of acquisition costs. The Company accounted for the investment using equity method of accounting because the Company has the ability to exercise significant influence over the investee. On July 2, 2010, the Company acquired the remaining equity interest of Link Result as set out in Note 4. |
In September 2010, VanceInfo BVI, through one of its subsidiaries, made a strategic investment in Salsatec Corporation Pty. Ltd. (“Salsatec”), an Australia-based IT services and solution provider for Australian telecom and technology companies. Under the terms of the agreement, the Company made a payment of $200 in cash for an initial equity interest of 20% of Salsatec in convertible redeemable preferred stock, with an exclusive option right to acquire the remaining 80% of the equity within the next 12 months. As the Group has significant influence over Salsatec, the investment has been recorded using the equity method of accounting. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
13. | LONG-TERM INVESTMENT — continued |
Equity method investment — continued |
The investment earnings generated from two equity method investments for the years ended December 31, 2008, 2009 and 2010 was $20, $69 and $151, respectively. |
14. | PREPAID LAND USE RIGHTS |
The Company commenced the process to obtain land use rights for two pieces of land in Beijing in 2009, on which the Company plans to construct its new corporate headquarters and research and development center. In November 2009, the Company entered into an agreement with Zhongguancun Software Park Development Co., Ltd. (“ZSPD”), pursuant to which ZSPD agreed to develop the land in preparation for construction by the Company. Based on the agreement with ZSPD, the Company will be eligible to enter into a land transfer agreement with relevant PRC government authorities in order to obtain land use rights with respect to such land. As of December 31, 2010, the Company had paid approximately $18,009 pursuant to the agreement with ZSPD and recorded as a prepaid land use rights on its consolidated balance sheets as of December 31, 2010. The Company has not obtained the access to the land use rights; therefore, the land use rights have not been amortized in 2010. The Company expects to report land use rights at cost less accumulated amortization and to amortize the cost of the land use rights on a straight-line basis over the term of the land use rights to be authorized, which is expected to be 50 years. |
15. | SHORT-TERM BANK LOAN |
Short-term bank loan, amounting to $3,020 as of December 31, 2010, was borrowed from a PRC bank with the guarantee provided by China National Investment & Guaranty Co., Ltd. and the pledge deposit of a term $679 which was recorded as restricted cash in the consolidated balance sheet. The loan had an annual interest rate of 5.31% and will be due in June or July 2011. |
F-38
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
16. | ACCRUED EXPENSES AND OTHER PAYABLES |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Accrued payroll and employee welfare | 4,019 | 6,069 | ||||||
Accrued bonus | 6,198 | 8,693 | ||||||
Accrued subcontract costs and reimbursable operating costs | 4,445 | 8,203 | ||||||
Payable for business acquisition-current | 1,686 | 3,919 | ||||||
Business tax payable | 1,789 | 2,782 | ||||||
Other taxes payable | 1,192 | 1,252 | ||||||
Professional fee | 1,525 | 1,184 | ||||||
Advance from customer | 584 | 1,173 | ||||||
Payable for purchase of property and equipment | 1,518 | 925 | ||||||
Foreign currency forward exchange contract | — | 332 | ||||||
Payable for share offering costs | 264 | 127 | ||||||
Other accrued liabilities | 980 | 1,718 | ||||||
Total | 24,200 | 36,377 | ||||||
17. | INCOME TAXES |
VanceInfo and VanceInfo BVI are tax exempted companies incorporated in the Cayman Islands and the British Virgin Islands, respectively. |
In 2008, the income tax provision of the Group was made for the operations of the subsidiaries located in the PRC, VanceInfo Japan, VanceInfo US and WIT. In 2009, the income tax provision of the Group was made for the operations of the subsidiaries located in the PRC, VanceInfo Japan, VanceInfo US, WIT, TP HK, TP Taiwan and TP Teleservices. In 2010, the income tax provision of the Group was made for the operations of the subsidiaries located in the PRC, Vanceinfo Japan, TP HK, TP Taiwan, TP Teleservices and AIT. |
Pursuant to the relevant tax rules and regulations applicable to VanceInfo Japan, VanceInfo Japan was required to provide income tax of $26, $1 and $5 for the years of 2008, 2009 and 2010, respectively, |
VanceInfo US and WIT were subject to a progressive federal income tax rate from 15% to 35% depending on the income level and a state income tax rate at 8.84% for the years of 2008, 2009 and 2010. |
TP HK, TP Taiwan and TP Teleservices were subject to profit tax rate of 16.5% for the year of 2009 and 2010. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
17. | INCOME TAXES — continued |
On March 16, 2007, the National People’s Congress of China enacted a new EIT law, which has taken into effect from January 1, 2008. Under the new EIT law, foreign invested enterprises, or FIEs, such as VanceInfo Beijing, and Chinese domestic companies are subject to EIT at a uniform rate of 25%. In addition, certain enterprises may still benefit from a preferential tax rate of 15% under the new EIT law if they qualify as “high and new technology enterprises strongly supported by the State”. According to the new EIT law and relevant implementation rules, the “high and new technology enterprises strongly supported by the State” shall refer to an enterprise that owns the core proprietary intellectual property rights and fulfills all of the conditions stipulated therein. |
VanceInfo Beijing obtained the certificate on high and new technology enterprises in 2008 and is entitled to the preferential tax rate of 7.5% from 2008 to 2010. Shanghai VanceInfo was qualified as a “high and new technology enterprise” in December 2008, which entitled it to a 15% preferential income tax rate in 2008, and was further recognized as a “key software enterprise under the State plan” in December 2009, which entitled it to a 10% preferential income tax rate in 2009. Shanghai Vanceinfo obtained the certificate of high and new technology enterprise and was subject to 15% in 2010. TP Shanghai obtained the certificate of high and new technology enterprise and was subject to 15% in 2009 and 2010. Nanjing VanceInfo obtained the certificate of new setup software enterprise in 2009 and was entitled to an exemption of EIT from 2009 to 2010 and 50% reduction for the subsequent three years at the preferential tax rate of 12.5% from 2011 to 2013. AIT was acquired in 2010 which was incorporated in 2002. AIT was recognized as a qualified “Software enterprises” in 2007, and was entitled to enjoy tax exemption in 2007 and 2008, and 50% tax reduction from 2009 to 2011 at the effective rate of 10%, 11%, 12%, respectively. |
The applicable EIT rate for other PRC subsidiaries was 25% in 2008, 2009 and 2010. |
Due to the changes in the new EIT law in March 2007, the Group’s deferred tax balances were calculated based on the newly enacted tax rate to be effective January 1, 2008. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
17. | INCOME TAXES — continued |
The high and new technology enterprise status is valid for three years and the qualified enterprises can then apply to renew for an additional three years provided the company’s business operations continue to qualify for high and new technology enterprise status. The Group believes it is highly likely that its qualifying entities will continue to obtain the renewal in the future. Accordingly, in calculating deferred tax assets and liabilities, the Group has assumed its qualifying entities will continue to renew the high and new technology enterprise status at the conclusion of the initial three year period. If the Group’s qualifying entities failed to obtain such renewals, then the net deferred tax assets balance would increase by $892 and the net deferred liability balance would increase by $216, as of December 31, 2010, which would result in the decrease of the income tax expenses. |
Uncertainties exist with respect to how the current income tax law in the PRC applies to the Group’s overall operations, and more specifically, with regard to tax residency status. New EIT law includes a provision specifying that legal entities organized outside of the PRC will be considered residents for Chinese income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the new EIT law provide that non-resident legal entities will be considered China tax residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc, occurs within the PRC. Despite the present uncertainties resulting from the limited PRC tax guidance on the issue, the Group does not believe that the legal entities organized outside of the PRC within the Group should be treated as Chinese tax residents for the new EIT law purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiaries registered outside the PRC should be deemed as tax resident enterprises, the Company and its subsidiaries registered outside the PRC will be subject to the PRC income tax at a rate of 25%. |
If the Company and its subsidiaries registered outside the PRC were to be non-resident for PRC tax purpose, dividends paid to them out of profits earned by the Company’s subsidiaries located in the PRC, which are tax resident in the PRC, after January 1, 2008 would be subject to a withholding tax of 10%. |
Aggregate undistributed earnings of the Company’s subsidiaries located in the PRC available for distribution to the Company are $77,775 as of December 31, 2010. The Group does not have any present plan to pay any cash dividends on its ordinary shares in the foreseeable future. It intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. As such, the undistributed earnings of the Company’s PRC subsidiaries are considered to be indefinitely reinvested and accordingly, no provision has been made for the Chinese dividend withholding taxes as of December 31, 2010. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
17. | INCOME TAXES — continued |
Income tax expenses are as follows: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Income taxes expenses: | ||||||||||||
Current | 2,078 | 3,533 | 3,772 | |||||||||
Deferred | (780 | ) | (1,444 | ) | (1,254 | ) | ||||||
Total | 1,298 | 2,089 | 2,518 | |||||||||
The principal components of deferred income taxes are as follows: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful accounts | 96 | 227 | ||||||
Accrued compensation related | 1,301 | 2,214 | ||||||
Net operating loss carry forwards | 76 | — | ||||||
1,473 | 2,441 | |||||||
Non-current deferred tax assets: | ||||||||
Net operating loss carry forwards | 172 | 100 | ||||||
Property and equipment | 130 | 140 | ||||||
Valuation allowance | (172 | ) | (100 | ) | ||||
130 | 140 | |||||||
Net deferred tax assets | 1,603 | 2,581 | ||||||
Non-current deferred tax liabilities: | ||||||||
Intangible assets | (1,322 | ) | (1,217 | ) | ||||
Property and equipment | (136 | ) | (101 | ) | ||||
(1,458 | ) | (1,318 | ) | |||||
Net deferred tax liabilities | (1,458 | ) | (1,318 | ) | ||||
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
17. | INCOME TAXES — continued |
For the purpose of balance sheet presentation, certain deferred tax assets and liabilities attributable to the same tax-paying components of the Group and within the same tax jurisdictions have been offset. The following is the analysis of the deferred tax balances for financial reporting purposes: |
As of December 31, | ||||||||
2009 | 2010 | |||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful accounts | 96 | 227 | ||||||
Accrued compensation related | 1,301 | 2,214 | ||||||
Net operating loss carry forwards | 76 | — | ||||||
Total current deferred tax assets | 1,473 | 2,441 | ||||||
Non-current deferred tax assets: | ||||||||
Net operating loss carry forwards | 172 | 100 | ||||||
Property and equipment | — | 42 | ||||||
Valuation allowance | (172 | ) | (100 | ) | ||||
Net non-current deferred tax assets | — | 42 | ||||||
Non-current deferred tax liabilities: | ||||||||
Intangible assets acquired in business acquisitions | (1,322 | ) | (1,217 | ) | ||||
Property and equipment | (6 | ) | (3 | ) | ||||
Non-current deferred tax liabilities, net | (1,328 | ) | (1,220 | ) | ||||
A valuation allowance has been recognized for net operating losses carry forward of certain subsidiaries of the Group, because the Group does not believe these entities can generate future taxable income to recognize the income tax benefit. Net operating losses totaled $1,265 and $399 as of December 31, 2009 and 2010, respectively, which included $1,265 as of December 31, 2009 expiring on various dates throughout 2014, $399 as of December 31, 2010 expiring on various dates throughout 2015. |
F-43
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
17. | INCOME TAXES — continued |
A reconciliation between the statutory PRC enterprise income tax rate and the effective tax rate is as follows: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
% | % | % | ||||||||||
Statutory tax rate in PRC | 25.00 | 25.00 | 25.00 | |||||||||
Changes in valuation allowances | (0.45 | ) | (0.20 | ) | (0.22 | ) | ||||||
Effect of income tax rate differences of subsidiaries operating with different tax jurisdictions | (10.30 | ) | (8.57 | ) | (8.34 | ) | ||||||
Effect of tax holidays enjoyed by PRC subsidiaries | (6.79 | ) | (7.38 | ) | (8.63 | ) | ||||||
Effective tax rate | 7.46 | 8.85 | 7.81 | |||||||||
During the years ended December 31, 2008, 2009 and 2010, if the Company’s subsidiaries in the PRC were neither in the tax holiday period nor had they been specifically allowed special tax concessions, income tax expense and net income per share amounts would be as follows: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Increase in income tax expense | 1,180 | 1,735 | 2,780 | |||||||||
Decrease in net income per ordinary share-basic | (0.03 | ) | (0.04 | ) | (0.07 | ) | ||||||
Decrease in net income per ordinary share-diluted | (0.03 | ) | (0.04 | ) | (0.07 | ) |
The Group did not identify any significant unrecognized tax benefits or incur any interest or penalties related to potential underpaid income tax expenses for each of the three years ended December 31, 2008, 2009 and 2010. The Group does not expect to have a significant increase or decrease on unrecognized tax benefits within 12 months from December 31, 2010. |
The Group has various tax years from 2004 to 2010 which remain open in various tax jurisdictions. |
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
18. | NET INCOME PER SHARE |
The calculation of the net income per share is as follows: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Net income attributable to holders of ordinary share | 16,173 | 21,508 | 29,863 | |||||||||
Shares (denominator): | ||||||||||||
Weighted average ordinary shares outstanding used in computing net income per ordinary share-basic | 37,276,306 | (i) | 38,389,495 | (i) | 40,298,060 | (i) | ||||||
Weighted average ordinary shares outstanding used in computing net income per ordinary share-diluted | 40,695,982 | (ii) | 41,576,217 | (ii) | 43,406,080 | (ii) | ||||||
Net income per ordinary share-basic | 0.43 | 0.56 | 0.74 | |||||||||
Net income per ordinary share-diluted | 0.40 | 0.52 | 0.69 | |||||||||
(i) | In 2008 and 2010, the Company issued 2,000,000, 2,140,148 ordinary shares for future delivery to employees and non-employees upon exercise of vested stock options or grant of nonvested shares. 219,196, 1,211,897 and 1,824,660 shares were transferred to the relevant employees in 2008, 2009 and 2010, respectively. Accordingly, the remaining shares outstanding during the years were excluded in computation of basic net income per share in 2008, 2009 and 2010. | |
The ordinary shares issuable in connection with business acquisitions were also include in computation of basic net income per share. | ||
(ii) | 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, 2008, 2009 and 2010 as their effects would have been anti-dilutive. For the years of 2008, 2009 and 2010, such outstanding securities consisted of stock options of a weighted average number of 562,717, 661,234 and 91,684, respectively. | |
A weighted average number of 319,584, 36,493 and 146,344 contingently issuable ordinary shares and nonvested shares in connection with business acquisitions were included in the computation of diluted net income per share in the years of 2008, 2009 and 2010, respectively. | ||
The calculation of the weighted average number of ordinary shares in 2008, 2009 and 2010 for the purpose of diluted net income per share has included the effect of stock options and nonvested shares of a weighted average number of 4,909,091, 4,406,820 and 3,677,197 which gives rise to an incremental weighted average number of 3,100,092, 3,150,229 and 2,961,677 ordinary shares from the assumed conversion of these stock options and nonvested shares using the treasury stock method, respectively. |
F-45
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
19. | SHARES-BASED COMPENSATION |
On November 3, 2005, the Group adopted the 2005 Stock Option Plan, which allows the Group to grant options to its employees and directors to purchase 1,867,500 ordinary shares subject to vesting requirement. In April and May 2006, additional options to purchase 2,400,000 ordinary shares were authorized with the approval from shareholders. No options shall be exercisable after ten years from the date of grant. The options will vest first 1/4 on a date specified in the option award agreement, which is usually a date approximately 9 months or one year from the date of grant, and thereafter, 1/48 on each of the monthly anniversaries or 1/16 on each of the quarterly anniversaries from the first vesting date. |
On July 30, 2007, the Board of Directors and shareholders adopted the 2007 Share Incentive Plan as amended on August 1, 2007, which authorizes to grant to employees and non-employees options to purchase ordinary shares or nonvested shares up to a total of 1,100,000 ordinary shares of the Company with an annual increase up to 3% of the number of ordinary shares outstanding as of the first day of each year beginning 2008. The plan will expire on the tenth anniversary of the effective date of the plan. The term of any option granted under the 2007 Share Incentive Plan shall not exceed ten years. The options and nonvested shares will vest first 1/4 on the first anniversary of the date of grant and thereafter, 1/16 on each of the quarterly anniversaries from of the first vesting date. | ||
I. Stock Options | ||
Termination of option |
If the grantee ceases to be employed by or ceases to provide services to the Group, (a) the grantee will have until the date that is 30 days after his or her severance date to exercise the options (or portion thereof) to the extent that they were vested on the severance date; (b) the options to the extent not vested on the severance date, shall terminate on the severance date; (c) the options, to the extent exercisable for the 30-day period following the severance date and not exercised during such period, shall terminate at the close of the business on the last day of the 30-day period. | ||
Option exercise |
The option shall be exercisable by the delivery of a written notice to the Company, in the form approved by the Company, stating the number of ordinary shares to be purchased pursuant to the option and payment in full for the exercise price of the shares to be purchased in cash, by check or by electronic funds transfer to the Company. |
F-46
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
19. | SHARES-BASED COMPENSATION — continued |
I. Stock Options— continued | ||
Options to employees and non-employee directors |
During the years ended December 31, 2008, 2009 and 2010, the Company granted a total of 1,336,200, 146,000 and 776,340 share options to employees and non-employee directors at an exercise price ranging from $4.70 to $8.92 per share, $4.58 to $14.69 and $16.90 to $35.50 per share, respectively. |
The following table summarizes information regarding the stock options granted: |
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, 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 | — | ||||||||||||
March 31, 2010 | 123,000 | 16.90 | 16.90 | — | ||||||||||||
June 30, 2010 | 97,500 | 21.70 | 21.70 | — | ||||||||||||
December 31, 2010 | 555,840 | 34.50 | 34.50 | — | ||||||||||||
Total | 2,258,540 | |||||||||||||||
Weighted | ||||||||||||
Weighted | average fair value | |||||||||||
average | per ordinary | |||||||||||
Number of | exercise price | share at the | ||||||||||
options | per option | grant dates | ||||||||||
Outstanding as of January 1, 2010 | 4,397,895 | 3.49 | 2.84 | |||||||||
Granted | 776,340 | 30.11 | 30.11 | |||||||||
Forfeited | (65,199 | ) | 8.06 | 6.53 | ||||||||
Exercised | (1,786,408 | ) | 2.53 | 2.11 | ||||||||
Outstanding as of December 31, 2010 | 3,322,628 | 10.13 | 9.54 | |||||||||
F-47
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
19. | SHARES-BASED COMPENSATION — continued |
I. Stock Options— continued |
Options to employees and non-employee directors— continued |
The following table summarizes information with respect to stock options outstanding as of December 31, 2010: |
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 | 2010 | exercisable | option | 2010 | ||||||||||||||||||||||
Ordinary shares | 3,322,628 | 4.38 | 10.13 | 81,244 | 1,765 | 3.08 | 55,527 |
The total intrinsic value of options exercised during the years ended December 31, 2008, 2009 and 2010 was $1,617, $12,760 and $47,703, respectively. |
The range of fair value of the options as of their respective grant dates is as follows: |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Options | 1.43-2.55 | 1.60-5.30 | 6.09-12.13 |
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the applicable periods. |
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Volatility | 36.0%-40.8 | % | 40.8%-44.7 | % | 41.5%-44.7 | % | ||||||
Risk-free interest rate of return | 3.18%-4.15 | % | 2.62%-3.62 | % | 1.89%-2.62 | % | ||||||
Expected term | 2.72-3.61 years | 3.61 years | 3.61-4.11 years | |||||||||
Dividend yield | — | — | — |
(1) | Volatility |
The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of listed comparable companies over a period comparable to the expected term of the options. |
(2) | Risk-free interest rate of return |
Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the expected term of the options. |
F-48
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
19. | SHARES-BASED COMPENSATION — continued |
I. Stock Options— continued |
Options to employees and non-employee directors— continued |
(3) | Expected term | ||
As the Company did not have sufficient historical share option exercise experience, it estimated the expected term as the average between the vesting term of the options and the original contractual term. | |||
(4) | Dividend yield | ||
The dividend yield was estimated by the Company based on its expected dividend policy over the expected term of the options. | |||
(5) | Exercise price | ||
The exercise price of the options was determined by the Company’s board of directors. | |||
(6) | Fair value of underlying ordinary shares | ||
When estimating the fair value of the ordinary shares on the grant dates before the Initial Public Offering (the “IPO”) of the Company, management considered a number of factors, including the result of equity transactions of the Company, while taking into account standard valuation methods and the achievement of certain events. After the IPO, the closing market price of the ordinary shares of the Company as of the grant date was used as the fair value of the ordinary shares on that date. |
The Group recorded share-based compensation of $1,308, $1,311 and $1,482 for options granted to employees and non-employee directors for the years ended December 31, 2008, 2009 and 2010, respectively, using the graded vesting attribution method. |
There was total unrecognized compensation expense of $5,487 related to unvested share options granted as of December 31, 2010. The expense is expected to be recognized over a weighted-average period of 1.40 years according to the graded vesting schedule. |
F-49
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
19. | SHARES-BASED COMPENSATION — continued |
In December 2008, 2009 and 2010, the Company granted 17,480, 89,874 and 298,874 nonvested ordinary shares, respectively, to employees under 2007 Share Incentive Plan. The nonvested shares will vest first 1/4 on the first anniversary of the vesting commencement date and thereafter the remaining 3/4 will vest on a pro-rata basis after the expiration of each of the 12 quarters after the first vesting date. |
A summary of the nonvested shares activity is as follows: |
Weighted | ||||||||
Weighted | average fair value | |||||||
number of | per ordinary | |||||||
nonvested | share at the | |||||||
shares | grant dates | |||||||
Outstanding as of January 1, 2010 | 108,070 | 7.64 | ||||||
Granted | 298,874 | 23.66 | ||||||
Vested | (38,252 | ) | 7.36 | |||||
Forfeited | (10,785 | ) | 7.20 | |||||
Outstanding as of December 31, 2010 | 357,907 | 21.06 | ||||||
In December 2010, the Company granted 85,000 nonvested shares to certain executives at a discount purchase price of $22.00 per share, which is lower than the market closing price of $34.13 on December 15, 2010, the day before the grant date, by $12.13. 25% of the 850,000 nonvested shares will vest on the first anniversary of the grant date and 6.25% will vest each of the following 12 quarter. The total purchase price of $1,870,000 will be recorded as a liability when the amount is paid by the relevant executives. This liability will be eliminated with a corresponding increase in equity upon the vesting of nonvested shares over the vesting period. |
The total fair value of nonvested shares vested during the years ended December 31, 2008, 2009 and 2010 was $18, $128 and $959, respectively. |
The Company recorded compensation expenses based on the fair value of nonvested shares on the grant dates over the requisite service period of award using the graded vesting attribution method. The fair value of the nonvested shares on the grant date was the closing market price of the ordinary shares as of the date. For nonvested share granted in 2008, 2009 and 2010, the fair value at the date of grant ranged from $4.75 to $35.50. The related compensation expense of $83, $254 and $1,765 is recorded in 2008, 2009 and 2010, respectively. |
There was total unrecognized compensation expense of $2,656 related to nonvested shares granted as of December 31, 2010. The expense is expected to be recognized over a weighted-average period of 3.23 years according to the graded vesting schedule. |
F-50
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
20. | ORDINARY SHARES ISSUANCE AND REPURCHASE |
In June 2008, the Company issued 2,000,000 ordinary shares for future delivery to the employees and non-employees upon exercise of vested stock options or grant of nonvested shares as set out in Note 18. |
In June 2008, the Company issued 58,348 ordinary shares to NEC System Technology Limited as part of the consideration for the acquisition of the additional equity interest of Solutions. |
In September 2008, the Company repurchased and cancelled 172,919 and 53,703 ordinary shares from Airland and Bizexpress, respectively, at a total consideration of $2,020. The excess, amounting to $1,633, of repurchase price over the initial issuance price was recorded as a reduction in retained earnings of the Group. These ordinary shares were cancelled upon repurchase. |
In September 2008, the Company issued 87,045 ordinary shares to One Silver Development Limited as a part of the additional consideration for the acquisition of Shanghai Megainfo Tech Co., Ltd. |
In September 2008, the Company issued 3,201 ordinary shares to Global Mission Limited as a part of the additional consideration for the acquisition of VanceInfo Japan. |
On February 21, 2009, the Company’s Board of Directors approved a share repurchase program authorizing the Company to acquire up to $10,000 worth of the Company’s outstanding ADSs within the next 12 months. |
In March 2009, 2,800 shares were repurchased for a total consideration of $13 from the open market under this program. The repurchased shares, represented in the form of ADSs, and were to be used for future delivery to the employees and non-employees upon exercise of vested stock options or grant of nonvested shares. |
In July 2009, the Company completed a public offering of 345,000 ordinary shares for total proceeds of $3,624, net of offering costs of $976. |
In October 2009, the Company issued 106,820, 106,820, 106,820 ordinary shares to Cypress Hill Holdings Limited, Fortune Sea International Limited and Million International Limited respectively, as a part of the additional consideration for the acquisition of Chosen. |
In October 2009, the Company issued 95,590 ordinary shares to Wireless Info Tech Limited as a part of the additional consideration for the acquisition of WIT. |
F-51
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
20. | ORDINARY SHARES ISSUANCE AND REPURCHASE — continued |
In October 2009, the Company issued 6,163 ordinary shares to Xiang Liu as a part of the consideration for the acquisition of Kernel. |
In January 2010, one of our employees was suspected to be in violation of the non-compete agreement (signed with the Company in connection with an acquisition in 2007) and his employment with the Company was terminated. This caused certain potential losses to the Group relating to certain accounts receivable balance. As a result, the employee entered into a settlement agreement with the Company in March 2010 and agreed to return his ordinary shares of 27,772 to the Group as compensation. The fair value of the ordinary shares was $537 as of the settlement date, and was recorded in the consolidated statements of operations to net off a related $537 provision for doubtful accounts. The shares were canceled immediately after they were returned to the Company. |
In June 2010, the Company issued 51,084 ordinary shares for future delivery to the employees and non-employees upon exercise of vested stock options or grant of nonvested shares as set out in Note 18. |
In July 2010, the Company issued 1,089,064 ordinary shares for future delivery to the employees and non-employees upon exercise of vested stock options or grant of nonvested shares as set out in Note 18. |
In November 2010, the Company issued 1,000,000 ordinary shares for future delivery to the employees and non-employees upon exercise of vested stock options or grant of nonvested shares as set out in Note 18. |
In November 2010, the Company issued 26,442 ordinary shares to Hui Wing Han Christina Wendy & Wong Kit Cheung Paul as a part of the consideration for the acquisition of TP as set out in Note 4. |
In November 2010, the Company completed a public offering of 2,530,000 ordinary shares for total proceeds of $89,223, net of offering costs of $590. |
F-52
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
21. | FAIR VALUE MEASUREMENTS |
Measured on recurring basis |
The Group’s financial assets/(liabilities) measured at fair value on a recurring basis as of December 31, 2009 and 2010 include a foreign currency exchange forward contract (Note 8) based on Level 2 inputs, the contingent consideration payable in connection with business acquisitions consummated in 2009 and 2010 and an available-for-sale investment in convertible loan based on Level 3 inputs. |
The following table summarizes the Group’s financial assets/(liabilities) measured at fair value on recurring basis. |
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Market for | Observable | Unobservable | ||||||||||||||
December 31, | Identical Liabilities | Inputs | Inputs | |||||||||||||
Description | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Contingent consideration | $ | (7,370 | ) | $ | — | $ | — | $ | (7,370 | ) | ||||||
Forward contract | 161 | — | 161 | — | ||||||||||||
Total | $ | (7,209 | ) | $ | — | $ | 161 | $ | (7,370 | ) | ||||||
Fair Value Measurement at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Market for | Observable | Unobservable | ||||||||||||||
December, | Identical Liabilities | Inputs | Inputs | |||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Available-for-sale investment | $ | 1,302 | $ | — | $ | — | $ | 1,302 | ||||||||
Contingent consideration | (3,269 | ) | — | — | (3,269 | ) | ||||||||||
Forward contract | (332 | ) | — | (332 | ) | — | ||||||||||
Total | $ | (2,299 | ) | $ | — | $ | (332 | ) | $ | (1,967 | ) | |||||
F-53
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
21. | FAIR VALUE MEASUREMENTS — continued |
Measured on recurring basis — continued |
The following table summarizes the movement of the balances of the Group’s financial assets/(liabilities) measured at fair value on a recurring basis based on level 3 inputs: |
Amounts | ||||
Balance as of January 1, 2010 | (7,370 | ) | ||
Initial recognition of contingent consideration in connection with acquisition of Link Result | (3,389 | ) | ||
Change in fair value of contingent considerations | 221 | |||
Settlement of contingent considerations for business acquisitions | 7,238 | |||
Available-for-sale investment | 661 | |||
Accrued interest on the available-for-sale investment | 41 | |||
Unrecognized gain on available-for-sale investment | 581 | |||
Exchange difference | 50 | |||
Balance as of December 31, 2010 | (1,967 | ) | ||
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. |
22. | EMPLOYEE BENEFIT PLAN |
Full time employees of the Group in the PRC participate in a government-mandated defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. The Group accrues for these benefits based on certain percentages of the employees’ salaries. The total provisions for such employee benefits were $4,780, $7,219 and $11,258 for the years ended December 31, 2008, 2009 and 2010, respectively. |
23. | STATUTORY RESERVES |
PRC legal restrictions permit payments of dividends by the Group’s PRC entities only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Foreign Investment Enterprises, the Group’s PRC subsidiaries must make appropriations from after-tax profit to non-distributable reserve funds as determined by the board of directors of the Company’s PRC subsidiaries. These reserve funds include one or more of the following (i) a general reserve (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under accounting principles generally accepted in the PRC at each year-end), and the other fund appropriations are at the management’s discretion. These statutory reserve funds can only be used for purposes of general enterprise expansion and staff bonus and welfare and are not distributable as cash dividends. Appropriations to these reserves by the Company’s PRC subsidiaries were $392, $991 and $1,171 for the years ended December 31, 2008, 2009 and 2010, respectively. |
F-54
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
24. | LITIGATION THREAT AGAINST THE COMPANY |
In August 2004, through VanceInfo Beijing, a wholly owned subsidiary of the Company, the Company acquired the IT services business and related assets of Wensi Chuangyi and its subsidiaries, the predecessor of the Company. On December 3, 2007, Chris Chen, chairman and chief executive officer of the Company, and David Chen, chief operating officer of the Company received a letter from a law firm in California purporting to set forth a notice of claim on behalf of Mr. Jonathan Jianguo Jiang against Chris Chen, David Chen, the Company, and two subsidiaries of the Company and VanceInfo Creative Software Technology Ltd., or VanceInfo California, a dissolved California corporation controlled by Wensi Chuangyi. The letter alleges the following: |
• | 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-55
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
24. | LITIGATION THREAT AGAINST THE COMPANY — continued |
The letter states that Mr. Jiang is considering commencing litigation on all legal theories available to him as well as for the benefit of other investors in Heteng, including Long March Launch Vehicle Technology Co., Ltd., or Long March, to recover the value of the assets that were allegedly improperly transferred by Wensi Chuangyi and its subsidiaries to VanceInfo Beijing as well as other damages and costs. The Company believes that Long March owned a 70% equity interest in Heteng in August 2004. |
In November 2010, Jiang filed an action naming the Company, its subsidiary VanceInfo Technologies Inc., a Delaware corporation, or VanceInfo US, and its executives Chris Shuning Chen and David Lifeng Chen as defendants in the Superior Court of California, County of San Mateo captioned Jonathan Jiang v. VanceInfo Technologies, et al., CIV 500979. An amended complaint filed January 21, 2011 alleges: |
• | Jiang was a minority shareholder of Octiga, Inc., a dissolved California Corporation. Octiga, Inc. allegedly owned “more than 30% interest in a joint venture” in Beijing Heteng Software Technology Company, Ltd., or Heteng, a company incorporated in China. |
• | Heteng owned 95% of Wensi Chuangyi. |
• | Jiang owned 220,000 ordinary shares of Octiga, Inc. for which compensation was not appropriately provided. |
• | The transfer of assets of Wensi Chuangyi from Heteng to us occurred without proper compensation to Octiga, Inc. |
These matters are scheduled to be heard in the next few months. Jiang has submitted theories for claims of damages in an unknown range of values. Jiang’s claims are brought on his own behalf, and Jiang also seeks to assert the claims derivatively on behalf of Octiga, Inc. The Company believes that Jiang’s factual allegations are flawed and his legal theories unsound, and there are meritorious defenses to the claims. On March 10, 2011, the Company filed a motion to quash service on it and a demurrer to the amended complaint on behalf of VanceInfo US. |
25. | COMMITMENTS |
(i) | Operating lease commitments | ||
The Group has entered into operating lease agreements principally for its office spaces. These leases expire through 2016 and are renewable upon negotiation. Rental expense under operating leases was $4,865, $6,573 and $8,889 for the years ended December 31, 2008, 2009 and 2010, respectively. |
F-56
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
2011 | 8,476 | |||
2012 | 5,543 | |||
2013 | 4,222 | |||
2014 | 2,881 | |||
2015 and after | 3,349 | |||
24,471 | ||||
(ii) | Purchase commitments | ||
As of December 31, 2010, $278 was contractually committed by the Group for purchases of equipment and leasehold improvements, $278 will be paid in 2011. |
26. | RELATED PARTY TRANSACTIONS |
The Group had the following significant transactions with related parties in addition to the disclosures in Notes 19 and 20: |
The Group provided various IT services to Lenovo (Beijing) Co., Ltd., Lenovo (Shanghai) Co., Ltd., Lenovo (Shanghai) Electronic Technology Co., Ltd., Lenovo Mobile Communications Co., Ltd., Beijing Lenovo Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd., Sunny Information Technology Service, Inc., and Lenovo (Dalian) Technologies Service Co., Ltd. (collectively “Lenovo”), affiliates of LC Fund II, a principal shareholder of the Company. The Group recognized $1,750, $2,357 and $3,977 revenue for these transactions for the years ended December 31, 2008, 2009 and 2010, respectively. The accounts receivable balances from Lenovo were $1,043 and $1,533 as of December 31, 2009 and 2010, respectively. The advance from customer balances from Lenovo was $7 and $48 as of December 31, 2009 and 2010, respectively. |
27. | SUBSEQUENT EVENTS |
In January 2011, the Group acquired 100% equity interest in Viatt. Under the terms of the acquisition agreement, the Group paid an initial consideration of approximately $1.5 million in cash. Contingent consideration will be determined up to $4.9 million based on Viatt’s financial performance in 2011 and 2012. The acquisition is expected to strengthen the Group’s position in China’s domestic financial services sector. Over 80 professionals from Viatt joined the Company in connection with the acquisition transaction. |
F-57
Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
27. | SUBSEQUENT EVENTS — continued |
In March 2011, the Group entered an acquisition agreement with Think Consulting Limited to acquire certain businesses of its wholly owned subsidiary, Bright Consulting (Beijing) Limited (“Bright”), a China-based IT services company providing Oracle consulting and implementation services to Chinese domestic clients. This acquisition was completed in April 2011. The initial consideration was $0.7 million, of which $0.5 million was settled in cash and $0.2 million was settled in ordinary shares. The additional contingent considerations will be determined based on specified earnings objectives in the acquisition agreement for the first three years after the acquisition. |
In April 2011, the Group acquired 100% equity interest in the main operating subsidiaries of LW International Holdings Limited (“Lifewood”), a China-based company providing business process outsourcing services. Under the terms of the acquisition agreement, the Group will pay an initial consideration of approximately $5.6 million in cash and stock, with contingent consideration to be paid based on Lifewood’s financial performance over the next three years. |
In March 2011, the Group announced that its Board of Directors has approved a share repurchase program, effective March 2011. Under the program, VanceInfo has been authorized, but is not obligated, to repurchase up to $40 million worth of outstanding ADSs representing the ordinary shares of VanceInfo from time to time over the next 12 months, depending on market conditions, share price and other factors, as well as subject to the relevant rules under US securities regulations. In April 2011, 68,277 ordinary shares were repurchased for a total consideration of $1,999 from open market under this program. |
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Table of Contents
Financial Information of Parent Company
Balance Sheets
(in U.S. dollars in thousands, except share data)
As of December 31, | ||||||||
2009 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 42,277 | 102,832 | ||||||
Term deposit | 10,000 | 5,000 | ||||||
Held-to-maturity securities — current | 12,122 | 13,208 | ||||||
Prepaid expenses and other current assets | 1,972 | 602 | ||||||
Amount due from related parties | 45,254 | 35,802 | ||||||
Total current assets | 111,625 | 157,444 | ||||||
Held-to-maturity securities — non-current | — | 1,558 | ||||||
Investment in subsidiaries | 64,070 | 143,426 | ||||||
Total assets | 175,695 | 302,428 | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Amount due to related parties | 10,364 | 3,775 | ||||||
Accrued expenses and other payables | 731 | 719 | ||||||
Deferred income-current | 260 | 462 | ||||||
Total current liabilities | 11,355 | 4,956 | ||||||
Deferred income-non-current | 1,778 | 1,305 | ||||||
Total liabilities | 13,133 | 6,261 | ||||||
Equity: | ||||||||
Ordinary shares ($0.001 par value, 70,000,000 shares authorized; 39,888,092 and 44,556,910 shares issued and outstanding in 2009 and 2010, respectively) | 40 | 45 | ||||||
Additional paid-in capital | 111,680 | 208,431 | ||||||
Shares issuable in connection with business acquisitions | 520 | 3,594 | ||||||
Accumulated other comprehensive income | 4,924 | 8,836 | ||||||
Retained earnings | 45,398 | 75,261 | ||||||
Total equity | 162,562 | 296,167 | ||||||
Total liabilities and equity | 175,695 | 302,428 | ||||||
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Table of Contents
Statements of Operations
(In U.S. dollars in thousands, except share and share related data)
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Cost of revenues (including share-based compensation of $265, $313 and $492 in 2008, 2009 and 2010, respectively) | (265 | ) | (313 | ) | (492 | ) | ||||||
Selling, general and administrative expenses (including share-based compensation of $1,126, $1,252 and $2,755 in 2008, 2009 and 2010, respectively) | (2,154 | ) | (1,853 | ) | (3,073 | ) | ||||||
Other operating income | 132 | 196 | 331 | |||||||||
Income from operations | (2,287 | ) | (1,970 | ) | (3,234 | ) | ||||||
Equity in earnings of subsidiaries | 16,800 | 22,755 | 33,139 | |||||||||
Interest income | 1,528 | 672 | 432 | |||||||||
Exchange differences | 132 | 51 | (474 | ) | ||||||||
Net income attributable to VanceInfo Technologies Inc. shareholders | 16,173 | 21,508 | 29,863 | |||||||||
Net income attributable to VanceInfo Technologies Inc. shareholders | 16,173 | 21,508 | 29,863 | |||||||||
Other comprehensive income, net of tax: | ||||||||||||
Foreign currency translation adjustments | 2,578 | (48 | ) | 3,722 | ||||||||
Unrealized gains (loss) on foreign currency exchange forward contract | — | 145 | (506 | ) | ||||||||
(Gains) loss on foreign currency exchange forward contract transfer to statements of operations | — | (36 | ) | 202 | ||||||||
Net unrealized gain on available-for-sale investment, net tax effect of $87 | — | — | 494 | |||||||||
Total other comprehensive income, net of tax | 2,578 | 61 | 3,912 | |||||||||
Comprehensive income attributable to Vanceinfo Technologies Inc | 18,751 | 21,569 | 33,775 | |||||||||
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Parent Company Statements of Change in Equity and Comprehensive Income
(In U.S. dollars in thousands, except share data)
Shares issuable | Accumulated | |||||||||||||||||||||||||||
in connection | other | |||||||||||||||||||||||||||
Ordinary shares | Additional | with business | comprehensive | Retained | Total | |||||||||||||||||||||||
Shares | Amount | paid-in capital | acquisitions | income | earnings | shareholders’ equity | ||||||||||||||||||||||
Balance as of January 1, 2008 | 37,198,907 | 37 | 98,706 | — | 2,285 | 9,350 | 110,378 | |||||||||||||||||||||
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 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 2,578 | — | 2,578 | |||||||||||||||||||||
Net income | — | — | — | — | — | 16,173 | 16,173 | |||||||||||||||||||||
Balance as of December 31, 2008 | 39,120,879 | 39 | 101,184 | 1,527 | 4,863 | 23,890 | 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 | |||||||||||||||||||||
Unrealized gain on foreign currency exchange forward contract recognized | — | — | — | — | 145 | — | 145 | |||||||||||||||||||||
Gain on foreign currency exchange forward contract transfer to statements of operations | — | — | — | — | (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 | 45,398 | 162,562 | |||||||||||||||||||||
Issuance of ordinary shares in connection with business acquisitions | 26,442 | — | 520 | (520 | ) | — | — | — | ||||||||||||||||||||
Shares issuable in connection with TP acquisition (Note 4) | — | — | — | 1,978 | — | — | 1,978 | |||||||||||||||||||||
Shares issuable in connection with AIT acquisition (Note 4) | — | — | — | 1,616 | — | — | 1,616 | |||||||||||||||||||||
Ordinary shares returned from an employee (Note 20) | (27,772 | ) | — | (537 | ) | — | — | — | (537 | ) | ||||||||||||||||||
Issuance of ordinary shares upon share offering | 2,530,000 | 3 | 89,223 | — | — | — | 89,226 | |||||||||||||||||||||
Ordinary shares issued for share-based compensation | 2,140,148 | 2 | 4,514 | — | — | — | 4,516 | |||||||||||||||||||||
Share-based compensation | — | — | 3,031 | — | — | — | 3,031 | |||||||||||||||||||||
Unrealized loss on foreign currency exchange forward contract | — | — | — | — | (507 | ) | — | (507 | ) | |||||||||||||||||||
Loss on foreign currency exchange forward contract transfer to statements of operations | — | — | — | — | 202 | — | 202 | |||||||||||||||||||||
Net unrealized gain on available-for-sale investment, net tax effect of $87 | — | — | — | — | 494 | — | 494 | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 3,723 | — | 3,723 | |||||||||||||||||||||
Net income | — | — | — | — | — | 29,863 | 29,863 | |||||||||||||||||||||
Balance as of December 31, 2010 | 44,556,910 | 45 | 208,431 | 3,594 | 8,836 | 75,261 | 296,167 | |||||||||||||||||||||
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Statements of Cash Flows
(In U.S. dollars in thousands)
For the years ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | 16,173 | 21,508 | 29,863 | |||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||
Share-based compensation | 1,391 | 1,565 | 3,247 | |||||||||
Equity in earnings of subsidiaries | (16,800 | ) | (22,755 | ) | (33,139 | ) | ||||||
(Gain) loss on foreign currency exchange forward contracts recognized in statements of operations | — | (52 | ) | 578 | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Prepaid expenses and other current assets | (526 | ) | (552 | ) | 1,188 | |||||||
Amounts due from related parties | (14,444 | ) | (5,222 | ) | 12,666 | |||||||
Amounts due to related parties | 3,779 | 5,865 | (6,789 | ) | ||||||||
Accrued expenses and other payables | (299 | ) | 151 | (375 | ) | |||||||
Deferred income | 1,281 | 757 | (270 | ) | ||||||||
Net cash (used in) provided by operating activities | (9,445 | ) | 1,265 | 6,969 | ||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of non-current investment-held-to-maturity securities | — | — | (1,560 | ) | ||||||||
Purchase of current investment-held-to-maturity securities | — | (12,104 | ) | (15,213 | ) | |||||||
Proceeds from maturity of held-to-maturity securities | — | — | 13,648 | |||||||||
Purchase of businesses and increased investment in subsidiaries | (138 | ) | — | (42,001 | ) | |||||||
Payment for settlement of foreign currency forward exchange contracts | — | — | (388 | ) | ||||||||
Purchase of term deposit | — | (10,000 | ) | |||||||||
Cash received upon maturity of term deposit | — | — | 5,000 | |||||||||
Net cash used in investing activities | (138 | ) | (22,104 | ) | (40,514 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from exercise of options | 302 | 3,625 | 5,011 | |||||||||
Payment for issuance costs in connection with initial public offering | (847 | ) | — | |||||||||
Repurchase of ordinary shares | (2,020 | ) | (13 | ) | — | |||||||
Proceeds from issuance of ordinary shares upon share offering in 2009 | — | 3,624 | — | |||||||||
Payment for issuance costs in connection with share offering in 2009 | — | (712 | ) | (220 | ) | |||||||
Proceeds from issuance of ordinary shares upon share offering in 2010 | — | — | 89,816 | |||||||||
Payment for issuance costs in connection with share offering in 2010 | — | — | (507 | ) | ||||||||
Net cash (used in) provided by financing activities | (2,565 | ) | 6,524 | 94,100 | ||||||||
Net (decrease) increase in cash and cash equivalents | (12,148 | ) | (14,315 | ) | 60,555 | |||||||
Cash and cash equivalents, beginning of year | 68,740 | 56,592 | 42,277 | |||||||||
Cash and cash equivalents, end of year | 56,592 | 42,277 | 102,832 | |||||||||
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Table of Contents
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands)
1. | BASIS FOR PREPARATION |
The condensed financial information of the Company has been prepared using the same accounting policies as set out in the Group’s consolidated financial statements except that the Company used the equity method to account for investments in its subsidiaries. |
2. | INVESTMENTS IN SUBSIDIARIES |
The Company and its subsidiaries were included in the consolidated financial statements where inter-company balances and transactions were eliminated upon consolidation. For purpose of the Company’s stand- alone financial statements, its investments in subsidiaries were reported using the equity method of accounting. The Company’s share of income and losses from its subsidiaries were reported as equity in earnings of subsidiaries in the accompanying parent company financial statements. |
F-63