UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
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Registration statement pursuant to Section 12(b) or (g) of the Securities
Exchange Act of 1934
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or
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þ
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the fiscal year ended December 31, 2008.
or
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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or
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Shell company report
pursuant to Section 13
or 15(d) of the
Securities Exchange Act
of 1934
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Date of event requiring this shell company report
For the transition period from
to
Commission file number: 001-33857
VanceInfo Technologies Inc.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
3/F Building 8, Zhongguancun Software Park, Haidian District
Beijing 100193, People’s Republic of China
(Address of principal executive offices)
Sidney Xuande Huang, +86(10) 8282-5266,
shuang@vanceinfo.com,
3/F Building 8, Zhongguancun Software Park, Haidian District
Beijing 100193, People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class
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Name of each exchange on which registered
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American Depositary Shares, each
representing one ordinary share,
par value US$0.001 per share
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New York Stock Exchange
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common
stock as of the close of the period covered by the annual report.
39,120,879 ordinary shares, par value US$0.001 per share, as of December 31, 2008.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
o
No
þ
If this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
þ
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Non-accelerated filer
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Indicate by check mark which basis of accounting the registrant has been to prepare the
financial statements included in this filing:
U.S. GAAP
þ
International Financial Reporting Standards as issued by the International Accounting
Standards Board
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Other
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If “other” has been checked in response to the previous question, indicate by check mark which
financial statement item the registrant has elected to follow.
Item 17
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Item 18
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If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes
o
No
o
INTRODUCTION
In this annual report, except where the context otherwise requires and for purposes of this annual
report only:
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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;
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“China” or “PRC” refers to the People’s Republic of China, excluding, for purposes of this
annual report only, Taiwan, Hong Kong and Macau;
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“Huawei” refers to Huawei Technologies Co., Ltd. and certain of its affiliates;
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“IBM” refers to International Business Machine China Company Limited, IBM Global Services
(China) Company Limited and IBM Solution and Services (Shenzhen) Co., Ltd.;
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“Microsoft” refers to Microsoft Corporation and Microsoft (China) Co., Ltd.;
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“professionals”, with respect to an IT service company, refer to employees executing IT
services for its clients;
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“Sequoia” refers to Sequoia Capital China I, L.P. and Sequoia Capital Growth Fund III,
L.P., each of which is a holder of our ordinary shares, and their affiliates;
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“TIBCO” refers to TIBCO Software Inc.;
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“US$,” “U.S. dollar” or “$” refers to the legal currency of the United States; and
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“we,” “us,” “our company,” “our” and “VanceInfo” refer to VanceInfo Technologies Inc.
, a Cayman Islands company, its predecessor, the IT services business of
Beijing Wensi Chuangyi Software Technology Co., Ltd., its subsidiaries and its variable
interest entity, Shanghai Megainfo Tech Co., Ltd., before its liquidation in January 2009.
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Our financial statements are expressed in the U.S. dollar, which is our reporting and functional
currency. However, a majority of the revenues and expenses of our consolidated operating
subsidiaries and variable interest entity are denominated in Renminbi, or RMB, the legal currency
of China. This annual report contains translations of certain Renminbi amounts into U.S. dollars at
specified rates. With respect to amounts not recorded in our consolidated financial statements, all
translations from Renminbi to U.S. dollars were made at the noon buying rate in the City of New
York for cable transfers in Renminbi per U.S. dollar, as certified for customs purposes by the
Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi to U.S.
dollars have been made at a rate of RMB6.8225 to US$1.00, the noon buying rate in effect as of
December 31, 2008. We make no representation that any Renminbi or U.S. dollar amounts could have
been, or could be, converted to U.S. dollars or Renminbi, as the case may be, at any particular
rate, or at all. On May 8, 2009, the noon buying rate was RMB6.8200 to US$1.00.
This annual report on Form 20-F includes our audited consolidated statements of operations for the
years ended December 31, 2006, 2007 and 2008, and consolidated balance sheet data as of December
31, 2007 and 2008.
We and certain selling shareholders of our company completed the initial public offering of
8,797,500 ADSs, each representing one ordinary share, par value US$0.001 per share, on December 17,
2007. In December 2007, we listed our ADSs on the New York Stock Exchange, or NYSE, under the
symbol “VIT.”
1
FORWARD-LOOKING INFORMATION
This annual report on Form 20-F contains statements of a forward-looking nature. These statements
relate to events involving known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from those expressed or
implied by the forward-looking statements. These statements are made under the “safe harbor”
provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by terminology such as “may,” “will,” “expects,” “anticipates,”
“future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar
expressions. The accuracy of these statements may be impacted by a number of risks and
uncertainties that could cause actual results to differ materially from those projected or
anticipated. Such risks and uncertainties include, but are not limited to, the following:
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our anticipated growth strategy;
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our plans to recruit more employees;
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our plans to invest in research and development to enhance our service lines;
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our future business development, results of operations and financial condition;
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expected changes in our net revenues and certain cost or expense items;
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our ability to attract and retain clients; and
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trends and competition in the offshore IT services industry.
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These risks are not exhaustive. We operate in an emerging and evolving environment. New risk
factors emerge from time to time and it is impossible for our management to predict all risk
factors, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
This annual report on Form 20-F also contains estimates, projections and statistical data related
to the IT services market in China. You should not place undue reliance on these forward-looking
statements.
We would like to caution you not to place undue reliance on forward-looking statements and you
should read these statements in conjunction with the risk factors disclosed in Item 3 of this
annual report, “Key Information—Risk Factors.” We do not undertake any obligation to update or
revise the forward-looking statements except as required under applicable law.
PART I
ITEM 1
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2
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OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
A.
Selected Financial Data
2
The following table presents selected consolidated financial information for our company. You
should read the following information in conjunction with Item 5, “Operating and Financial Review
and Prospects” below.
We were incorporated in April 2004 and acquired our predecessor, the IT services business of
Beijing Wensi Chuangyi Technology Co., Ltd., or Wensi Chuangyi, in August 2004. The acquisition was
accounted for using the purchase accounting method with a new accounting basis. The summary
consolidated statement of operations data of our predecessor from January 1, 2004 to August 31,
2004 are presented below.
The selected consolidated statement of operations data for the years ended December 31, 2006, 2007
and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 have been derived
from our audited consolidated financial statements, which are included in this annual report. The
selected consolidated statement of operations data for the year ended December 31, 2005 has been
derived from our audited financial statements, which are not included in this annual report. The
selected consolidated balance sheet data as of December 31, 2005 and 2006 has been derived from our
audited financial statements for 2005 and 2006, which are not included in this annual report. Our
summary consolidated statement of operations data from January 1 to August 31, 2004 have been
derived from our unaudited consolidated management accounts, which are not included in this annual
report. Our summary consolidated statement of operations data from September 1 to December 31, 2004
and our consolidated balance sheet data as of December 31, 2004 have been derived from our
unaudited consolidated financial statements, which are not included in this annual report. We have
prepared the unaudited consolidated financial information on the same basis as our audited
consolidated financial statements. The unaudited financial information includes all adjustments,
consisting only of normal and recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for the periods presented. Our
consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The
historical results are not necessarily indicative of results to be expected in any future period.
3
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Predecessor
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VanceInfo
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Period from
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Period from
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January 1 to
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September 1 to
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For the Year Ended December 31,
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August 31,
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December 31,
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2004
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2004
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2004
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(Combined)
(1)
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2005
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2006
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2007
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2008
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(in US$ thousands, except percentage, share, per share and per ADS data)
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Consolidated Statement of
Operations Data
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Net revenues
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4,851
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3,312
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8,163
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15,481
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29,051
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62,714
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102,663
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Cost of revenues
(2)
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(2,566
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(1,980
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(4,546
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(9,125
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(17,961
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(38,544
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(62,911
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Gross profit
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2,285
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1,332
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3,617
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6,356
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11,090
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24,170
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39,752
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General and administrative
expenses
(2)
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(941
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(1,128
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(2,069
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(3,026
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(6,140
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(13,838
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(21,625
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Selling and marketing
expenses
(2)
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(70
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(68
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(138
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(270
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(681
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(2,342
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(4,280
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Total operating expenses
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(1,011
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(1,196
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(2,207
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(3,296
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(6,821
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(16,180
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(25,905
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Other operating income
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—
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—
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—
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102
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54
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860
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858
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Income from operations
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1,274
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136
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1,410
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3,162
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4,323
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8,850
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14,705
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Net income
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1,080
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42
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1,122
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3,235
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4,376
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9,569
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16,173
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Deemed dividend on Series A
convertible redeemable
preferred shares — accretion
of redemption premium
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—
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—
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—
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(462
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(611
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(632
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—
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Income attributable to
holders of ordinary shares
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1,080
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42
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1,122
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2,773
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3,765
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8,937
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16,173
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Income per ordinary share:
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Basic
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—
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0.00
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—
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0.13
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0.08
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0.22
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0.43
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Diluted
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—
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0.00
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—
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0.13
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0.07
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0.19
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0.40
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Income per ADS:
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Basic
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—
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0.00
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—
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0.13
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0.08
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0.22
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0.43
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Diluted
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—
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0.00
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—
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0.13
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0.07
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0.19
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0.40
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Weighted average ordinary
shares used in calculating
net income per ordinary
share:
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Basic
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—
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5,169,710
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—
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11,530,684
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9,605,507
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11,426,183
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37,276,306
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Diluted
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—
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5,169,710
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—
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11,530,684
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10,205,449
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13,446,087
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40,695,982
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Other Consolidated Financial
Data
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Gross margin
(3)
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47.1
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%
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40.2
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%
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44.3
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%
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41.1
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%
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38.2
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%
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38.5
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%
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38.7
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%
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Operating margin
(4)
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26.3
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4.1
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17.3
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20.4
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14.9
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14.1
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14.3
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Net margin
(5)
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22.3
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1.3
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13.7
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20.9
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15.1
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15.3
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15.8
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4
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(1)
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The 2004 full-year financial data presented in this section are the combination of the data
for the period from January 1 to August 31, 2004 and the period from September 1 to December
31, 2004. This aggregation of the results for certain periods should not be construed as a
measure of performance in conformity with U.S. GAAP because:
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the earnings of our predecessor for the period from January 1 to August 31, 2004 have
been determined using the historical cost method; and
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the earnings of VanceInfo from September 1 to December 31, 2004 have been determined
using the purchase accounting method in accordance with Statement of Financial
Accounting Standard, or SFAS, No. 141.
|
Nevertheless, although the presentation of the combined full year financial data for the year
ended December 31, 2004 is not in accordance with U.S. GAAP, we believe that this combination
is useful and can provide users with a more complete understanding of our results of
operations from year to year.
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(2)
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Includes share-based compensation expenses as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
VanceInfo
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
January 1
|
|
|
September 1
|
|
|
For the Year Ended December 31,
|
|
|
|
|
to August 31,
|
|
|
to December 31,
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2004
|
|
|
(Combined)
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Share-based compensation expenses
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45
|
)
|
|
|
(111
|
)
|
|
|
(265
|
)
|
|
General and administrative
expenses
|
|
|
—
|
|
|
|
(297
|
)
|
|
|
(297
|
)
|
|
|
(67
|
)
|
|
|
(632
|
)
|
|
|
(808
|
)
|
|
|
(950
|
)
|
|
Selling and marketing expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
(77
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
(3)
|
|
Gross margin represents gross profit as a percentage of net revenues.
|
|
|
|
(4)
|
|
Operating margin represents income from operations as a percentage of net revenues.
|
|
|
|
(5)
|
|
Net margin represents net income as a percentage of net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
721
|
|
|
|
4,437
|
|
|
|
20,565
|
|
|
|
76,835
|
|
|
|
79,963
|
|
|
Accounts receivable
|
|
|
3,377
|
|
|
|
5,774
|
|
|
|
11,815
|
|
|
|
24,708
|
|
|
|
36,827
|
|
|
Total assets
|
|
|
5,853
|
|
|
|
15,700
|
|
|
|
42,044
|
|
|
|
129,076
|
|
|
|
155,451
|
|
|
Total liabilities
|
|
|
2,382
|
|
|
|
2,171
|
|
|
|
5,583
|
|
|
|
18,068
|
|
|
|
23,948
|
|
|
Convertible redeemable preferred shares
|
|
|
—
|
|
|
|
7,226
|
|
|
|
31,648
|
|
|
|
—
|
|
|
|
—
|
|
|
Shareholders’ equity
|
|
|
3,359
|
|
|
|
6,165
|
|
|
|
4,640
|
|
|
|
110,378
|
|
|
|
131,503
|
|
|
Total liabilities, minority interest,
convertible redeemable preferred
shares and shareholders’ equity
|
|
|
5,853
|
|
|
|
15,700
|
|
|
|
42,044
|
|
|
|
129,076
|
|
|
|
155,451
|
|
5
B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
D.
Risk Factors
Risks Related to Our Company and Industry
Because our business depends significantly on clients headquartered in the United States, Europe,
Japan and China, any economic slowdown in these regions or other factors that affect IT offshore
outsourcing from the United States, Europe or Japan could have a material adverse effect on our
business and operating results.
As of December 31, 2008, substantially all of our net revenues were derived from clients
headquartered in the
United States, Europe, Japan and China. The global financial markets have experienced significant
disruptions recently, and most of the world’s major economies have entered into recession. Due to
the market conditions, our clients may suffer a reduced market share or their results of operations
and financial condition may otherwise be adversely affected. Some of our clients have reduced their
orders. In addition, some of our clients have pressured us to reduce our billing rates. During the
global economic downturn, our clients may cancel, reduce or defer their IT spending or change their
IT outsourcing strategy, and our utilization and billing rates for our professionals could decline,
which could have a material adverse effect on our business and operating results.
Furthermore, IT offshore outsourcing is becoming an increasingly politically sensitive issue in the
United States, Europe and Japan. For example, many organizations and public figures in the United
States and Europe have publicly expressed concern about a perceived association between offshore
outsourcing providers and the loss of jobs in their home countries. As a result, current or
prospective clients may elect to perform such services themselves or may be discouraged from
transferring these services from onshore to offshore providers. Any slowdown or reversal of
existing industry trends towards offshore outsourcing in response to political pressure would harm
our ability to compete effectively with competitors that operate out of onshore facilities and
adversely affect our business and financial results.
We depend on a limited number of clients for a significant portion of our revenues and any loss of
business from these clients could reduce our revenues and significantly harm our business.
We have derived, and believe that in the foreseeable future we will continue to derive, a
significant portion of our revenues from a limited number of clients. Microsoft and IBM, our top
two clients, each accounted for over 20% of our net revenues in 2006. In the aggregate, these two
clients accounted for 53.1% of our net revenues in 2006. In 2007, each of these two clients
accounted for 10% or more of our net revenues, and in the aggregate accounted for 34.6% of our net
revenues. In 2008, each of Microsoft, IBM and Huawei accounted for 10% or more of our net revenues,
and in the aggregate accounted for 38.8% of our net revenues. Our top five clients accounted for
approximately 69.3%, 53.7% and 53.8% of our net revenues in 2006, 2007 and 2008, respectively. Our
ability to maintain close relationships with these clients is essential to the growth and
profitability of our business. A number of factors other than our performance could cause the loss
of or reduction in business or revenue from a client and these factors are not predictable.
For example, a client may demand price reductions, change its outsourcing strategy, switch to
another IT outsourcing service provider or return work in-house. We generally do not have long-term
commitments from any of our clients to purchase our services. Although we usually enter into master
service agreements, or MSAs, with clients, these MSAs are not commitments to purchase our services,
and statements of work, or SOWs, from clients are required for specific orders to purchase our
services. In addition, the MSAs and SOWs typically may be terminated by our clients on short
notice. If we fail to enter into or renew MSAs with one or more of our major clients in any
particular period, if major clients reduce their service volumes under SOWs, or if any existing
MSAs or SOWs with major clients are terminated, some or all of the business of our major clients
could be lost or reduced, which could have a material adverse effect on our business, results of
operations and financial condition.
6
Our revenues are highly dependent on a limited number of industries and any decrease in demand for
outsourced services in these industries could reduce our revenues and adversely affect our results
of operations.
A substantial portion of our clients are concentrated in the technology and telecommunications
industries. For the years ended December 31, 2006, 2007 and 2008, a majority of our net revenues
were derived from clients in the technology and telecommunications industries. Our business growth
largely depends on continued demand for our services from clients in these industries and other
industries that we may target in the future, as well as on trends in these industries to outsource
research and development services, or R&D services, enterprise solutions, application development
and maintenance, or ADM, quality assurance and testing, globalization and localization and other IT
services. A downturn in any of our targeted industries, particularly the technology and
telecommunications industries, a slowdown or reversal of the trend to outsource IT services in any
of these industries or the introduction of regulations which restrict or discourage companies from
outsourcing could result in a decrease in the demand for our services and adversely affect our
results of operations.
Other developments may also lead to a decline in the demand for our services in these industries.
For example, consolidation in any of these industries or acquisitions, particularly involving our
clients, may decrease the potential number of buyers of our services.
Any significant reduction in or the elimination of the use of the services we provide within any of
these industries would result in reduced revenues and harm our business. Our clients may experience
rapid changes in their prospects, substantial price competition and pressure on their
profitability. This, in turn, may result in increasing pressure on us from clients in these key
industries to lower our prices, which could negatively affect our business, results of operations
and financial condition.
We face intense competition from onshore and offshore IT outsourcing companies and, if we are
unable to compete effectively, we may lose clients and our revenues may decline. Our clients may
also choose to use internal resources to provide the IT services they need, thereby causing us to
lose revenues.
The market for IT services is highly competitive and we expect competition to increase due to a
number of factors. We believe that the principal competitive factors in our markets are industry
experience, quality of the services offered, reputation, marketing and selling skills, as well as
price. We face significant competition from various competitors, including:
|
•
|
|
other Chinese IT services companies, such as Achievo Corporation, or Achievo, Chinasoft
International Ltd., or Chinasoft International, Dalian Hi-Think Computer Technologies Co. Ltd,
or DHC, HiSoft Technology International Limited, or Hisoft, Neusoft Group Ltd., or Neusoft,
and SinoCom Software Group Limited, or SinoCom;
|
|
•
|
|
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.
|
7
In addition, the trend towards offshore outsourcing, international expansion by foreign and
domestic competitors and continuing technological changes will result in new and different
competitors entering our markets. These competitors may include entrants from the communications,
software and data networking industries or entrants in geographic locations with lower costs than
those in which we operate. Some of these existing and future competitors have greater financial,
human and other resources, longer operating histories, greater technological expertise, more
recognizable brand names and more established relationships in the industries that we currently
serve or may serve in the future. In addition, some of our competitors may enter into strategic or
commercial relationships among themselves or with larger, more established companies in order to
increase their ability to address client needs, or enter into similar arrangements with potential
clients. Clients tend to engage multiple IT services outsourcing providers instead of using an
exclusive service provider, which could reduce our revenues to the extent that clients obtain
services from other providers. Clients may prefer service providers that have facilities located
globally or that are based in countries more cost-competitive than China.
Therefore, we cannot assure you that we will be able to retain our clients while competing against
such competitors. Increased competition, our inability to compete successfully against competitors,
pricing pressures or loss of market share could harm our business, financial condition and results
of operations.
We do not have long-term commitments from our clients, and our clients may terminate contracts
before completion or choose not to renew contracts, which could adversely affect our business and
reduce our revenues.
Our clients are not obligated for any long-term commitments to us. Many of our MSAs are either
renewable for one-year period or have no fixed terms, and our SOWs are typically project-based and
are generally valid for not more than one year. In addition, our clients can terminate many of our
MSAs and SOWs with or without cause, and in most cases without any cancellation charge. Some of our
MSAs specify that if a change of control of our company occurs during the term of the contract, the
client has the right to terminate the contract. If any future event triggers any change-of-control
provision in our client contracts, these contracts may be terminated, which would result in our
loss of revenues. Most of the MSAs we have entered into with our clients require us to purchase and
maintain specified insurance coverage during the terms of the MSAs, including commercial general
insurance or public liability insurance, umbrella insurance, product liability insurance, and
workmen’s compensation insurance. As the insurance industry in China is still in an early stage of
development, a number of these types of insurance are not available on reasonable terms in China.
We have purchased general commercial liability insurance for our facilities in China for the period
from February 2, 2009 to October 13, 2009, and we have also purchased information and network
technology errors or omissions liability insurance for our facilities in China for the period from
October 13, 2008 to October 13, 2009, but we still do not satisfy the contractual requirement of
certain of our key clients. Although to date no client has brought any claims against us for such
failure, our clients have the right to terminate these MSAs.
Failure to perform or observe any contractual obligations could result in cancellation or
non-renewal of a contract, which could cause us to experience a higher than expected number of
unassigned employees and an increase in our cost of revenue as a percentage of revenue, until we
are able to reduce or reallocate our headcount. The ability of our clients to terminate MSAs makes
our future revenues uncertain. We may not be able to replace any client that elects to terminate or
not renew its contract with us, which would adversely affect our business and revenues.
Furthermore, in some of our MSAs, our clients are also entitled to request us to transfer, to them
or their designees, the assets of our offshore development centers in China, or CDCs, that serve
them and all of the operating relationships, including leases for the premises of the CDCs,
employment relationships with the employees dedicated to the CDCs and contracts with
subcontractors, at a pre-agreed transfer price which is generally a multiple of our monthly service
fees from the relevant client for CDC services prior to the transfer. This transfer fee will either
be reduced ratably based on the elapsed operation term of the CDC or subject to a maximum amount.
In addition to the above amounts, the relevant client is also required to pay the lower of fair
market value or net book value for the assets to be transferred that have not already been charged
to the client. If our clients exercise these rights, we may lose some of our business and key
employees, or may be required to transfer our assets and employees to a third party, and our losses
may not be fully covered by the contractual payment.
8
Our quarterly operating results are difficult to predict and could fall below investor expectations
or estimates by securities research analysts, which may cause the trading price of our ADSs to
decline.
Our revenues and operating results can vary significantly from quarter to quarter due to a number
of factors, many of which are outside of our control, such as variations in the volume of business
from clients resulting from changes in our clients’ operations, the business decisions of our
clients regarding the use of our services, delays or difficulties in expanding our operational
facilities and infrastructure, changes to our pricing structure or that of our competitors,
inaccurate estimates of resources and time required to complete ongoing projects and currency
fluctuations. For example, some of our MSAs permit our clients to reduce or modify the volume of
services under any SOW at any time. As many of our employees take long vacations during the Chinese
New Year in the first quarter, our revenues in that quarter are relatively low compared to the
other quarters. Moreover, our results may vary depending on our clients’ business needs and IT
spending patterns. Due to the annual budget cycles of most of our clients, we may not be able to
estimate accurately the demand for our services beyond the immediate calendar year, which could
adversely affect our business planning and may have a material adverse effect on our business,
results of operations and financial condition. In addition, the volume of work performed for
specific clients is likely to vary from year to year, particularly since we typically are not
the exclusive outside service provider to our clients. Thus, a major client in one year may not
provide the same amount or percentage of our revenues in any subsequent year.
The long sales cycle for our services, which typically ranges from three to twelve months, and the
internal budget and approval processes of our prospective clients make it difficult to predict the
timing of new client engagements. Accordingly, the financial benefit of gaining a new client may be
delayed due to delays in the implementation of our services. In addition, some of our testing
projects and ADM projects last several months. Due to the foregoing and other factors, our
operating results have fluctuated significantly from quarter to quarter.
These fluctuations are likely to continue in the future and operating results for any period may
not be indicative of our performance in any future period. If our operating results for any
quarterly period fall below investor expectations or estimates by securities research analysts, the
trading price of our ADSs may decline.
We may face difficulties in offering new and existing service lines and managing increasingly large
and complex projects, which could lead to clients discontinuing their work with us, thereby
reducing our revenues and adversely affecting our ability to implement our growth plans.
We have been expanding the scope of our services by offering additional industry practices and
service lines. The success of these new and expanded practices and service lines is dependent, in
part, upon demand for such services by our existing and new clients and our ability to meet this
demand in a cost-competitive and effective manner. We cannot be certain that we will be able to
attract existing and new clients for such new services or effectively meet our clients’ needs.
We intend for the expansion of our practices and service lines to result in larger and more complex
projects for our clients. To achieve this result, we need to establish closer relationships with
our clients and develop a thorough understanding of their operations. Our ability to establish such
relationships will depend on the proficiency of our management personnel, professionals and, if
necessary, subcontractors, as well as other competitive factors such as our performance and
delivery capabilities. Larger and more complex projects may involve multiple engagements or stages,
and there is a risk that a client may choose not to retain us for additional stages or may cancel
or delay additional planned engagements. Such cancellations or delays make it difficult to plan for
project resource requirements, and failure to plan appropriately may have a negative impact on our
business, results of operations and financial condition.
9
We may be unable to effectively manage our rapid growth, which could place significant strain on
our management personnel, systems and resources. We may not be able to achieve anticipated growth,
which could materially and adversely affect our business and prospects.
We have experienced rapid growth and significantly expanded our business recently. Our net revenues
grew to 102.7 million in 2008 from US$8.2 million in 2004. Since 2004, we have completed a number
of acquisitions and established or acquired a number of offices in China, the United States, Japan,
Hong Kong and Malaysia. We have also set up a number of CDCs. As of March 31, 2009, we had over
5,400 professionals, as compared to 536 professionals as of December 31, 2004. We are actively
looking at additional locations to establish new offices and expand our current offices and CDCs.
We intend to continue expansion in the foreseeable future to pursue existing and potential market
opportunities.
This rapid growth places significant strain on our management personnel, systems and resources. To
accommodate our growth, we will need to implement a variety of new and upgraded operational and
financial systems, procedures and controls, including the improvement of our accounting, human
resources and other internal management systems, all of which require substantial management
efforts. We also will need to continue to expand, train, manage and motivate our workforce and
manage our client relationships. Moreover, as we introduce new services or enter into new markets,
we may face new market, technological and operational risks and challenges with which we are
unfamiliar. All of these endeavors will involve risks and require substantial management effort and
skill. As a result of any of these problems associated with expansion, our business, results of
operations and financial condition could be materially and adversely affected. Furthermore, we may
not be able to achieve anticipated growth, which could materially and adversely affect
our business and prospects.
If we fail to integrate acquired companies efficiently, or if the acquired companies do not perform
to our expectations, we may not be able to realize the benefits envisioned for such acquisitions,
and our overall profitability and growth plans may be adversely affected.
Historically, we have expanded our service capabilities and gained new clients through selective
acquisitions such as our acquisitions of Beijing Prosoft Software Technology Co., Ltd., or Prosoft,
Beijing Innovation Technology Co., Ltd., or ITC, Shanghai VanceInfo Technologies Limited, or
Shanghai VanceInfo, the international business unit of Beijing SureKAM Technologies Co., Ltd., or
SureKAM, Beijing Chosen Technology Co., Ltd., or Chosen, and Wireless Info Tech, Ltd., or WIT, in
the past several years. Our growth strategy involves gaining new clients and expanding our service
lines, both organically and through strategic acquisitions. Our ability to successfully integrate
an acquired entity and its operations may be adversely affected by a number of factors. These
factors include:
|
•
|
|
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.
|
Furthermore, the acquired companies may not perform to our expectations for various reasons,
including legislative or regulatory changes that affect the products or services in which a company
specializes, and the loss of key clients and personnel, any of which could have a material adverse
effect on our business and results of operations. If we are not able to realize the benefits
envisioned for such acquisitions, our overall profitability and growth plans may be adversely
affected.
10
We expect that a portion of our income may in the future be generated on a project basis with a
fixed price; we may fail to accurately estimate costs and determine resource requirements in
relation to our projects, which would reduce our margins and profitability.
We expect that a portion of our income may in the future be generated from fees we receive for our
projects with a fixed price. Our projects often involve complex technologies and must often be
completed within compressed timeframes and meet increasingly sophisticated client requirements. We
may be unable to accurately assess the time and resources required for completing projects and to
price our projects profitably. An underestimation of required time and resources may result in cost
overruns and mismatches in project staffing. Conversely, an overestimation of our costs may result
in our submitting uncompetitive bids and loss of business. Furthermore, any failure to complete a
project within the stipulated timeframe could also expose us to contractual or other liabilities
and may damage our reputation. These and other factors could adversely affect our business, results
of operations and financial condition.
Due to intense competition for highly skilled personnel, we may fail to attract and retain enough
sufficiently trained employees to support our operations; our ability to bid for and obtain new
projects may be negatively affected and our revenues could decline as a result.
The IT services industry relies on skilled employees, and our success depends to a significant
extent on our ability to attract, hire, train and retain qualified employees. The IT services
industry experiences high employee turnover. We may encounter higher attrition rates in the future.
There is significant competition in China for professionals with the skills necessary to perform
the services we offer to our clients. Increased competition for
these professionals, in the IT services industry or otherwise, could have an adverse effect on us.
A significant increase in the attrition rate among employees with specialized skills could decrease
our operating efficiency and productivity and could lead to a decline in demand for our services.
In addition, our ability to maintain and renew existing engagements and obtain new business will
depend, in large part, on our ability to attract, train and retain skilled personnel that enable us
to keep pace with growing demands for outsourcing, evolving industry standards and changing client
preferences. Our failure to attract, train and retain personnel with the qualifications necessary
to fulfill the needs of our existing and future clients or to assimilate new employees successfully
could have a material adverse effect on our business, financial condition and results of
operations. Our failure to retain our key personnel on client projects or find suitable
replacements of the key personnel upon their departure may lead to termination of some of our MSAs
or cancellation of some of our SOWs, which could materially adversely affect our business.
Increases in wages for professionals could prevent us from sustaining our competitive advantage and
could reduce our profit margins.
Wage costs for professionals in China are lower than comparable wage costs in more developed
countries and India. However, the wage costs in China’s IT services industry may increase at a
faster rate than in the past. In the long term, wage increases may make us less competitive unless
we are able to increase the efficiency and productivity of our professionals as well as the prices
we can charge for our services. Increases in wage costs, may reduce our profit margins. In
addition, the issuance of equity-based compensation to our professionals would also result in
additional dilution to our shareholders.
Our business depends substantially on the continuing efforts of our senior executives and other key
personnel, and our business may be severely disrupted if we lose their services.
Our future success heavily depends upon the continued services of our senior executives and other
key employees. In particular, we rely on the expertise and experience of Chris Shuning Chen, our
founder, chairman and chief executive officer. In addition, we rely on David Lifeng Chen, our
director and president, Sidney Xuande Huang, our chief operating officer and chief financial
officer, Stanley Ying Zhou, our chief administrative officer, and our four executive vice
presidents, Junbo Liu, Gerry Jianxin Lu, Jeff Jian Wu and Kevin Zhong Liu, to run our business
operations. If one or more of our senior executives or key employees are unable or unwilling to
continue in their present positions, we may not be able to replace them easily or at all. We may
incur additional expenses to recruit, train and retain personnel, our business may be severely
disrupted, and our financial condition and results of operations may be materially adversely
affected.
11
If any of our senior executives or key employees joins a competitor or forms a competing company,
we may lose clients, suppliers, know-how and key professionals and staff members to them. Also, if
any of our business development managers who keeps a close relationship with our clients joins a
competitor or forms a competing company, we may lose clients, and our revenues may be materially
adversely affected. Each of our senior executives has entered into employment agreements with us
that contain non-competition provisions. However, if any dispute arises between our executive
officers and us, such non-competition provisions may not be enforceable, especially in China, where
most of these executive officers and key employees reside, in light of the uncertainties with
China’s legal system. See “—Risks Related to Doing Business in China—Uncertainties with respect
to the PRC legal system could adversely affect us.”
The growth and success of our business depends on our ability to anticipate and respond in a timely
manner to the evolving demands for IT services.
The IT services market is characterized by rapid technological change, evolving industry standards,
changing customer preferences and new product and service introductions. Our future growth and
success depend significantly on our ability to anticipate developments in IT services, and offer
and develop new product and service lines to meet our clients’ evolving needs. We may not be
successful in anticipating or responding to these developments in a timely manner, or if we do
respond, the services or technologies we develop may not be successful in the marketplace. Further,
products, services or technologies that are developed by our
competitors may render our services non-competitive or obsolete.
Moreover, the emergence of new national and international industry standards could render our
products or those of our clients unmarketable or obsolete and may require us to incur substantial
unanticipated costs to comply with any such new standards. Should we fail to adapt to the rapidly
changing IT services market or if we fail to develop suitable services to meet the evolving and
increasingly sophisticated requirements of our clients in a timely manner, our business and
operating results could be materially and adversely affected.
Some of our client contracts contain provisions which, if triggered, could result in lower future
revenues and have an adverse effect on our results of operations.
Some of our MSAs provide that, if during the term of such MSAs, we offer or accept lower prices for
our services that are similar to those we provide under these MSAs, to or from any other clients
while all other terms and conditions are similar, we will be obligated to offer equally favorable
prices to the clients under these MSAs. Such provisions, if triggered, would result in lower future
revenues and profits to us under these MSAs. Certain other contracts of ours allow clients in
certain circumstances to request a semi- annual benchmarking report comparing our direct costs and
operating costs, measured as a percentage of revenues, with those of an agreed list of other
service providers for comparable services. Based on the results of the study and depending on the
reasons for any unfavorable variance, we may be required to make improvements to future services we
provide or there may be reduction in new business from the clients. The triggering of any of these
contractual provisions could have an adverse effect on our business, results of operations and
financial condition.
Our ability to expand our business and procure new contracts or enter into beneficial business
arrangements may be affected by non-competition clauses in our agreements with existing clients.
Certain of our existing MSAs and other agreements have non-competition clauses, which restrict us
from providing services to customers of our existing clients. Many of our MSAs contain clauses that
restrict our employees working for a particular client from providing services to a competitor of
that client. Such clauses may restrict our ability to offer services to different clients in a
specific industry or market.
Our MSAs with some of our clients provide that, during the term of the MSA and for a twelve-month
period thereafter and under specified circumstances, we may not accept any assignments from, or
render similar services to, those clients’ customers. Some of our contracts also provide that,
although we are free to render other services to clients’ customers prior to the receipt of SOWs
from our clients, such services may not create any conflicts of interest with the services we
provide to those clients, and we must obtain our clients’ prior written consent to continue
providing services to their customers before we begin rendering similar services to our clients.
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Moreover, we may not compete with our clients, or bid for or accept any assignment which our client
is bidding for or is negotiating. These restrictions may hamper our ability to compete for and
provide services to other clients in a specific industry or market in which we have expertise and
may adversely affect our revenues and future profitability.
If we cause disruptions to our clients’ businesses or provide inadequate service, our clients may
have claims for substantial damages against us, and as a result our profits may be substantially
reduced.
Most of our contracts with clients contain performance requirements. Failure to consistently meet
service requirements of a client or errors made by our professionals in the course of delivering
services to our clients could disrupt the client’s business and result in a reduction in revenues
or a claim for substantial damages against us. In addition, a failure or inability to meet a
contractual requirement could seriously damage our reputation and affect our ability to attract new
business.
The services we provide are often critical to our clients’ businesses, and any failure to provide
those services could result in a reduction in revenues or a claim for substantial damages against
us, regardless of whether we are responsible for that failure. Our CDC methodology requires us to
maintain active data and voice
communications between our main development centers in China and our international clients’
offices. Any significant failure of our equipment or systems, or any major disruption to basic
infrastructure like power and telecommunications in the locations in which we operate, could impede
our ability to provide services to our clients, have a negative impact on our reputation, cause us
to lose clients, reduce our revenues and harm our business.
Under our contracts with our clients, our liability for breach of our obligations is generally
limited to actual damages suffered by the client. To the extent that our contracts contain
limitations on liability, such limitations may be unenforceable or otherwise may not protect us
from liability for damages. In addition, certain liabilities, such as claims of third parties for
which we may be required to indemnify our clients, are generally not limited under our contracts.
Although we have purchased general commercial liability insurance for our facilities in China for
the period from February 2, 2009 to October 13, 2009, and we have also purchased information and
network technology errors or omissions liability insurance for our facilities in China for the
period from October 13, 2008 to October 13, 2009, the successful assertion of one or more large
claims against us could still have a material adverse effect on our business, reputation, results
of operations, financial condition and cash flows.
We may be liable to our clients for damages caused by unauthorized disclosure of sensitive and
confidential information, whether through our employees or otherwise.
We are typically required to manage, utilize and store sensitive or confidential client data in
connection with the services we provide. Under the terms of our client contracts, we are required
to keep such information strictly confidential. We seek to implement specific measures to protect
sensitive and confidential client data. We require our employees and subcontractors to enter into
non- disclosure arrangements to limit access to and distribution of our clients’ sensitive and
confidential information as well as our own trade secrets. We can give no assurance that the steps
taken by us in this regard will be adequate to protect our clients’ confidential information. If
our clients’ proprietary rights are misappropriated by our employees or our subcontractors or their
employees, in violation of any applicable confidentiality agreements or otherwise, our clients may
consider us liable for that act and seek damages and compensation from us. However, we currently do
not have any insurance coverage for mismanagement or misappropriation of such information by our
subcontractors or employees. Any litigation with respect to unauthorized disclosure of sensitive
and confidential information might result in substantial costs and diversion of resources and
management attention.
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We may not be able to prevent others from unauthorized use of intellectual property of our clients,
which could harm our business and competitive position.
We rely on software licenses from our clients with respect to certain individual projects. To
protect proprietary information and other intellectual property of our clients, we require our
employees, consultants, advisors and collaborators to enter into confidentiality agreements with
us. These agreements may not provide meaningful protection for trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation or disclosure of
such trade secrets, know-how or other proprietary information. Implementation of intellectual
property-related laws in China has historically been lacking, primarily because of ambiguities in
the PRC laws and difficulties in enforcement. Accordingly, protection of intellectual property
rights and confidentiality in China may not be as effective as that in the United States or other
developed countries. Policing unauthorized use of proprietary technology is difficult and
expensive. The steps we have taken may be inadequate to prevent the misappropriation of proprietary
technology of our clients. Reverse engineering, unauthorized copying or other misappropriation of
proprietary technologies of our clients could enable third parties to benefit from our or our
clients’ technologies without paying us for doing so, and our clients may hold us liable for that
act and seek damages and compensation from us, which could harm our business and competitive
position.
We may face intellectual property infringement claims that could be time-consuming and costly to
defend. If we fail to defend ourselves against such claims, we may lose significant intellectual
property rights and may be unable to continue providing our existing services.
It is critical that we use and develop our technology and services without infringing the
intellectual property
rights of third parties, including patents, copyrights, trade secrets and trademarks. Intellectual
property litigation is expensive and time-consuming and could divert management’s attention from
our business. A successful infringement claim against us, whether with or without merit, could,
among others things, require us to pay substantial damages, develop non-infringing technology, or
re-brand our name or enter into royalty or license agreements that may not be available on
acceptable terms, if at all, and cease making, licensing or using products that have infringed a
third party’s intellectual property rights. Protracted litigation could also result in existing or
potential clients deferring or limiting their purchase or use of our products until resolution of
such litigation, or could require us to indemnify our clients against infringement claims in
certain instances. Also, we may be unaware of intellectual property registrations or applications
relating to our services that may give rise to potential infringement claims against us. Parties
making infringement claims may be able to obtain an injunction to prevent us from delivering our
services or using technology containing the allegedly infringing intellectual property. Any
intellectual property litigation could have a material adverse effect on our business, results of
operations or financial condition.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could
impede our growth and negatively affect our revenues and net income.
We expect a portion of our future growth to come from acquisitions of high-quality IT services
companies. It is possible that in the future we may not succeed in identifying suitable acquisition
candidates. Even if we identify suitable candidates, we may not be able to consummate an
acquisition on terms commercially acceptable to us. Many of our competitors are likely to be
seeking to acquire the same targets that we are looking to acquire. Such competitors may have
substantially greater financial resources than we do and may be able to outbid us for the targets.
If we are unable to complete suitable acquisitions, our growth strategy may be impeded and our
revenues and net income could be negatively affected.
If we fail to maintain an effective system of internal control over financial reporting, we may
lose investor confidence in the reliability of our financial statements, which could adversely
affect the market price of our ADSs.
We are subject to the reporting obligations under the U.S. securities laws following our initial
public offering in December 2007. The Securities and Exchange Commission, or the SEC, as required
under Section 404 of the Sarbanes-Oxley Act, has adopted rules requiring every public company to
include a report of management on the effectiveness of such company’s internal control over
financial reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal control over financial reporting. In addition, an
independent registered public accounting firm must issue an attestation report on the effectiveness
of the company’s internal control over financial reporting. These requirements apply to this annual
report on Form 20-F for the fiscal year ending December 31, 2008.
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Our management has concluded that our internal control over financial reporting was effective as of
December 31, 2008. Our independent registered public accounting firm has issued an audit report,
which has concluded that we maintained, in all material aspects, effective internal control over
financial reporting as of December 31, 2008. See “Item 15. Controls and Procedures.” However, if we
fail to maintain effective internal control over financial reporting in the future, our management
and our independent registered public accounting firm may not be able to conclude that we have
effective internal control over financial reporting at a reasonable assurance level. This could
negatively affect the reliability of our financial information and result in the loss of investors’
confidence in our reported financial information, which in turn could negatively impact the trading
price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs, management time and other resources in an effort to comply with Section 404 and
other requirements of the Sarbanes-Oxley Act.
Failure to adhere to the regulations that govern our business could result in our being unable to
effectively perform our services. Failure to adhere to regulations that govern our clients’
businesses could result in breaches of contracts with our clients.
Our clients’ business operations are subject to certain rules and regulations in China or
otherwise. Our clients
may contractually require that we perform our services in a manner that would enable them to comply
with such rules and regulations. Some of our contracts concluded with clients headquartered in the
United States and elsewhere provide that we shall comply with the United States export regulations
while handling any information, process, product or service and that we shall adhere to regulations
that apply to our clients’ businesses. Some of our IT services provided to certain banking clients
for their Japanese operations are required to comply with the regulations promulgated by Japanese
regulators. Failure to perform our services in such a manner could result in breaches of contract
with our clients and, in some limited circumstances, civil fines and criminal penalties for us. In
addition, we are required under various Chinese laws to obtain and maintain permits and licenses
for the conduct of our business. If we do not maintain our licenses or other qualifications to
provide our services, we may not be able to provide services to existing clients or be able to
attract new clients and could lose revenues, which could have a material adverse effect on our
business and results of operations.
The financial soundness of our clients and vendors could affect our business and results of
operations.
As a result of the disruptions in the financial markets and other macro-economic challenges
currently affecting the economy of the United States and other parts of the world, our clients,
subcontractors, suppliers and other vendors may experience cash flow concerns. As a result, clients
may modify, delay or cancel plans to purchase our services and vendors may reduce their output,
change terms of sales, or stop providing goods or services to us. Additionally, if clients’ or
vendors’ operating and financial performance deteriorates, or if they are unable to make scheduled
payments or obtain credit, clients may not be able to pay, or may delay payment of, accounts
receivable owed to us and vendors may restrict credit or impose different payment terms, or stop
providing goods or services to us. Any inability of current or potential clients to pay us for our
services or any demands by vendors for different payment terms may adversely affect our earnings
and cash flow. Furthermore, if one or more of our vendors stops providing goods or services to us,
or interrupts its provision of goods or services to us, our business could be disrupted and we may
incur higher costs.
We may incur losses resulting from business interruptions resulting from occurrence of natural
disasters, health epidemics and other outbreaks or events, and we have limited insurance coverage.
Our CDCs and other operational facilities may be damaged in natural disasters such as earthquakes,
floods, heavy rains, sand storms, tsunamis and cyclones, or other events such as fires. Such
natural disasters or other events may lead to disruption of information systems and telephone
service for sustained periods. Damage or destruction that interrupts our provision of outsourcing
services could damage our relationships with our clients and may cause us to incur substantial
additional expenses to repair or replace damaged equipment or facilities.
We may also be liable to our clients for disruption in service resulting from such damage or
destruction. We have purchased general commercial liability insurance for our facilities in China
for the period from February 2, 2009 to October 13, 2009, and we have also purchased information
and network technology errors or omissions liability insurance for our facilities in China for the
period from October 13, 2008 to October 13, 2009, but our insurance coverage may not be sufficient.
Prolonged disruption of our services as a result of natural disasters or other events would also
entitle our clients to terminate their contracts with us.
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Our business could be adversely affected by the effects of H1N1, or swine flu, avian flu, severe
acute respiratory syndrome, or SARS, or another epidemic or outbreak. From 2005 to 2009, there have
been reports of avian flu in various parts of China and elsewhere in Asia, including a few
confirmed human cases and deaths. In 2009, there have been at least two confirmed cases of swine
flu in China. Any prolonged occurrence of swine flu, avian flu, SARS or other adverse public health
developments in China may have a material adverse effect on our business operations. Our operations
may be impacted by a number of health-related factors, including, among other things, quarantines
or closures of our facilities which could severely disrupt our operations, the sickness or death of
our key officers and employees, and a general slowdown in the Chinese economy. Any of the foregoing
events or other unforeseen consequences of public health problems could adversely affect our
business and results of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of swine flu, avian flu, SARS or any other
epidemic.
Fluctuations in exchange rates could adversely affect our business.
The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among
other things, changes in China’s political and economic conditions and China’s foreign exchange
policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value
of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate
within a narrow and managed band against a basket of certain foreign currencies. This change in
policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the
following three years. Since reaching a high against the U.S. dollar in July 2008, however, the
Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July
2008 high but never exceeding it. As a consequence, the Renminbi has fluctuated sharply since July
2008 against other freely traded currencies, in tandem with the U.S. dollar. For example, the
Renminbi depreciated approximately 9% against the Japanese Yen between July 2008 and November 2008.
During the same period, the Renminbi appreciated approximately 27% against the Euro. It is
difficult to predict how long the current situation may last and when and how it may change again.
As a majority of our costs and expenses are denominated in Renminbi, a resumption of the
appreciation of the Renminbi against the U.S. dollar would further increase our costs in U.S.
dollar terms. In addition, as our operating subsidiaries in China receive revenues primarily in
Renminbi, any significant depreciation of the Renminbi against the U.S. dollar may have a material
adverse effect on our revenues in U.S. dollar terms and financial condition, and the value of, and
any dividends payable on, our ordinary shares. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar
would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if
we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for
dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S.
dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
We also receive a portion of our revenues in Japanese Yen and Euro. Any significant depreciation of
the Japanese Yen or Euro against the Renminbi or U.S. dollar would adversely affect our revenues in
Renminbi or U.S. dollar terms, respectively.
We incurred net foreign exchange losses of US$32,000 and US$93,000 in 2005 and 2006, respectively.
As very limited types of hedging transactions are available in the PRC to reduce our exposure to
exchange rate fluctuations, we have not entered into any such hedging transactions. Accordingly, we
cannot predict the impact of future exchange rate fluctuations on our results of operations and may
incur net foreign exchange losses in the future. In addition, our foreign currency exchange losses
may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi
into foreign currencies. See “—Risks Related to Doing Business in China—Restrictions on currency
exchange may limit our ability to receive and use our revenues or financing effectively.”
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If tax benefits currently available to our subsidiaries are reduced or repealed, our business and
results of operations could suffer.
Prior to January 1, 2008, companies established in China were generally subject to a state and
local enterprise income tax, or EIT, at statutory rates of 30% and 3% respectively. Under the
applicable PRC rules and policies, an enterprise qualified as a “high and new technology
enterprise” located in the Beijing New Industry Development Pilot Zone was entitled to a
preferential EIT rate of 15% and was further entitled to a three-year EIT exemption from either its
first year of operation or, if it was incorporated in the second half of a calendar year, its
second year of operation if so selected, and a 50% reduction of its applicable EIT rate for the
succeeding three years. VanceInfo Creative Software Technology Ltd., or VanceInfo Beijing, Prosoft,
and ITC were qualified as “high and new technology enterprises” located in the Beijing New Industry
Development Pilot Zone, and enjoyed preferential tax treatment as a result of this status.
VanceInfo Beijing was incorporated in the second half of 2004, and elected to be exempted from EIT
from 2005 to 2007 and be subject to a 7.5% EIT rate from 2008 to 2010. Prosoft and ITC were
incorporated in June 2004, and had been entitled to be exempted from EIT from 2004 to 2006 and be
subject to a 7.5% EIT rate from 2007 to 2009. In addition, under the PRC rules and policies then
effective, an enterprise qualified as a “software enterprise” was entitled to an exemption from EIT
for the first two profitable years and a 50% reduction of its applicable EIT rate for the
subsequent three years. Shanghai VanceInfo, one of our subsidiaries, was incorporated in 2002 and
was recognized as a “software enterprise” in 2003, therefore, it was entitled to be exempted from
EIT in 2003 and
2004, and was subject to a 16.5% EIT rate from 2005 to 2007. Furthermore, Shanghai VanceInfo was
recognized as a “key software enterprise under the State plan” in 2007, which entitled it to a 10%
preferential income tax rate in 2007.
Megainfo was incorporated in 2001, and it was recognized as a “software enterprise” in 2001.
Therefore, it was exempted from EIT from 2002 to 2003 and was subject to an 18% EIT rate from 2004
to 2006. In 2007, a 33% EIT was applicable to Megainfo. Chosen was incorporated in 2006 and was
subject to a 33% EIT prior to January 1, 2008.
On March 16, 2007, the National People’s Congress of China enacted a new EIT Law, which took effect
beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing
Rules for the Enterprise Income Tax Law, or the Implementing Rules, which also took effect
beginning January 1, 2008. Moreover, on December 26, 2007, the State Council circulated the Notice
on Implementation of the Transitional Preferential Policies in respect of Enterprise Income Tax,
which took effect beginning December 26, 2007. On February 22, 2008, the Ministry of Finance and
the State Administration of Taxation issued the Notice of the Ministry of Finance and State
Administration of Taxation on Several Preferential Policies in respect of Enterprise Income Tax,
which took effect beginning February 22, 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%. Preferential tax treatments will continue to be granted to entities that are
classified as “high and new technology enterprises strongly supported by the State” or that conduct
business in encouraged sectors, whether FIEs or domestic companies. On April 14, 2008, Ministry of
Science and Technology, Ministry of Finance and State Administration of Taxation enacted the
Management Measures for Certifying High and New Technology Enterprises, which retroactively became
effective on January 1, 2008. Under the new EIT Law, enterprises that had been established and
already enjoyed then applicable preferential tax treatment prior to March 16, 2007 will continue to
enjoy it subject to the following qualifications: (i) in the case of preferential tax rates, for a
period of five years from January 1, 2008, or (ii) in the case of a preferential tax exemption or
reduction for a specified term, until the expiration of such term. In addition, certain qualified
high-technology companies may still benefit from a preferential tax rate of 15% if they own their
core intellectual properties and are classified into certain industries strongly supported by the
State to be set forth by the certain departments of the State Council. Because the new EIT Law and
relevant rules were recently promulgated, there is still uncertainty with respect to their
interpretation and implementation.
In December 2008, VanceInfo Beijing was qualified as a “high and new technology enterprise”.
Despite present uncertainties resulting from the limited PRC tax guidance, we believe it is more
likely than not that VanceInfo Beijing can continue to enjoy the preferential tax rate of 7.5%, a
50% reduction of its applicable EIT rate of 15%, 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 from 2008 to 2010. However, there is no assurance that our
subsidiaries will continue to meet the qualifications or that the relevant government authority
will not revoke our subsidiaries’ “high and new technology enterprises” statuses after January 1,
2009. Any increase in our PRC subsidiaries’ EIT rate pursuant to the new EIT law may have a
material adverse effect on our results of operations.
17
In addition, pursuant to relevant tax rules, each of VanceInfo Beijing, Shanghai VanceInfo,
VanceInfo Technologies Limited, or VanceInfo Tianjin, and Shanghai VanceInfo Creative Software
Technology Limited, or VanceInfo Shanghai Creative, may enjoy exemption from business tax with
respect to the software development business and related technology consultancy services that it
engages in, which falls under the definition of technology development business. Expiration of, or
changes to, these tax benefits or treatments will have a material adverse effect on our operating
results.
Restrictions on immigration may affect our ability to compete for and provide services to customers
in the United States or other countries, which could hamper our growth and cause our revenues to
decline.
The vast majority of our employees are Chinese nationals. Some of our projects require a portion of
the work to be undertaken at our clients’ facilities which are sometimes located outside China. The
ability of our professionals to work in the United States, Europe, Japan and other countries
outside China depends on their ability to obtain the necessary visas and work permits. Immigration
laws in the United States and in other
countries are subject to legislative change, as well as to variations in standards of application
and enforcement due to political forces and economic conditions. It is difficult to predict the
political and economic events that could affect immigration laws, or the restrictive impact they
could have on obtaining or monitoring business visas for our employees. Our reliance on visas for a
number of employees makes us vulnerable to such changes and variations as it affects our ability to
staff projects with professionals who are not citizens of the country where the work is to be
performed. As a result, we may not be able to obtain a sufficient number of visas for our employees
or we may encounter delays or additional costs in obtaining or maintaining such visas.
Our corporate actions are substantially controlled by our principal shareholders, who can cause us
to take actions in ways you may not agree with.
As of December 31, 2008, our principal shareholders and their affiliated entities own approximately
58.5% of our outstanding ordinary shares and voting power. These shareholders, acting individually
or as a group, could exert control and substantial influence over matters such as electing
directors and approving acquisitions, mergers or other business combination transactions. This
concentration of ownership and voting power may also discourage, delay or prevent a change in
control of our company, which could deprive our shareholders of an opportunity to receive a premium
for their shares as part of a sale of our company and might reduce the price of our ADSs. These
actions may be taken even if they are opposed by our other shareholders, including those who
purchase shares in our initial public offering.
Risks Related to Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could reduce the demand for our
services and materially and adversely affect our competitive position.
Substantially all of our business operations are currently conducted in China. Accordingly, our
business, financial condition, results of operations and prospects are affected significantly by
economic, political and legal developments in China. Since the late 1970s, the PRC government has
been reforming the economic system in China. These reforms have resulted in significant economic
growth. However, we cannot predict the future direction of economic reforms or the effects such
measures may have on our business, financial position or results of operations. Furthermore, while
the economy of China has experienced significant growth in the past twenty years, growth has been
uneven, both geographically and among various sectors of the economy. In addition, the looser
controls on credit recently adopted by the PRC government may cause rising inflation, which may
also have an adverse impact on our profitability. Furthermore, the current global economic crisis
is adversely affecting the economy in the U.S. and many other countries and regions around the
world. As the PRC economy has become increasingly linked with the global economy, China is affected
in various respects by downturns and recessions of major economies around the world. The various
economic and policy measures enacted by the PRC government to forestall economic downturns or
bolster China’s economic growth could materially affect our business. Any adverse change in the
economic conditions in China, in policies of the PRC government or in laws and regulations in
China, could have a material adverse effect on the overall economic growth of China and market
demand for our IT services. Such developments could adversely affect our businesses, lead to
reduction in demand for our services and adversely affect our competitive position.
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Uncertainties with respect to the PRC legal system could adversely affect us.
We are a holding company, and we conduct our business primarily through our subsidiaries
incorporated in China. The PRC legal system is based on written statutes. Prior court decisions may
be cited for reference but have limited precedential value. Since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various forms of foreign
investments in China. However, since the PRC legal system continues to rapidly evolve, the
interpretations of many laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit legal protections available to
us. In addition, any litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention.
Our global income and the dividends we receive from our PRC subsidiary may be subject to PRC tax
under the new EIT Law, which would have a material adverse effect on our results of operations.
Under the new EIT Law and the Implementing Rules, an enterprise established outside of the PRC with
“de facto management bodies” within the PRC is considered as a resident enterprise and will be
subject to a PRC income tax on its global income. According to the Implementing Rules, “de facto
management bodies” refer to “establishments that carry out substantial and overall management and
control over the manufacturing and business operations, personnel, accounting, properties, etc. of
an enterprise.” Accordingly, our holding company, VanceInfo Technologies Inc.
,
may be considered a resident enterprise and may therefore be subject to a PRC income tax on our
global income. We do not believe our holding company and our subsidiaries located outside of the
PRC are PRC resident enterprises. However, if we are considered a resident enterprise and earn
income other than dividends from our PRC subsidiary, such PRC income tax on our global income could
significantly increase our tax burden and materially and adversely affect our cash flow and
profitability.
Under the applicable PRC tax laws in effect before January 1, 2008, dividend payments to foreign
investors made by foreign-invested enterprises such as our PRC subsidiary, VanceInfo Beijing, are
exempt from PRC withholding tax. Pursuant to the new EIT Law and the Implementing Rules which are
effective as of January 1, 2008, however, dividends generated after January 1, 2008 and payable by
a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if
the foreign investors are considered as non-resident enterprises without any establishment or place
within China or if the dividends payable have no connection with the establishment or place of the
foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a different withholding arrangement. The Cayman
Islands, where our holding company is incorporated, does not have such a tax treaty with China.
VanceInfo Technologies Limited, or VanceInfo Hong Kong, our wholly owned subsidiary and the direct
holder of a 100% equity interest in VanceInfo Tianjin and Shenzhen VanceInfo Creative Software
Technology Limited, or VanceInfo Shenzhen, is incorporated in Hong Kong. According to the
Arrangement between Mainland China and Hong Kong Special Administrative Region on the Avoidance of
Double Taxation and Prevention of Fiscal Evasion in August 2006, or the Mainland and the Hong Kong
Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct
holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if
the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise).
Under the New EIT Law and the Implementing Rules, if VanceInfo Hong Kong is regarded as a resident
enterprise, the dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo
Shenzhen will be exempt from PRC income tax. If VanceInfo Hong Kong is regarded as a non-resident
enterprise and therefore is subject to a 5% withholding tax for any dividends payable to it from
VanceInfo Tianjin and VanceInfo Shenzhen, the amount of funds available to us to meet our cash
requirements, including the payment of dividends to our shareholders, could be materially reduced.
19
In addition, because there remains uncertainty regarding the interpretation and implementation of
the new EIT Law and its Implementation Rules, if we are regarded as a PRC resident enterprise, then
any dividends to be distributed by us to our non-PRC shareholders or any gains realized by non-PRC
shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC withholding
tax. If we are required under the new EIT Law to withhold PRC income tax on the above dividends or
gains, the investment in our shares or ADSs may be materially and adversely affected.
Restrictions on currency exchange may limit our ability to receive and use our revenues or
financing effectively.
A substantial portion of our revenues and expenses are denominated in Renminbi. If our revenues
denominated in Renminbi increase or expenses denominated in Renminbi decrease in the future, we may
need to convert a portion of our revenues into other currencies to meet our foreign currency
obligations, including, among others, payment of dividends declared, if any, in respect of our
ordinary shares or ADSs. Under China’s existing foreign exchange regulations, VanceInfo Beijing is
able to pay dividends in foreign currencies, without prior approval from the State Administration
of Foreign Exchange, or the SAFE, by complying with certain
procedural requirements. However, we cannot assure you that the PRC government will not take
further measures in the future to restrict access to foreign currencies for current account
transactions.
Foreign exchange transactions by our PRC subsidiaries under capital accounts continue to be subject
to significant foreign exchange controls and require the approval of, or registration with, PRC
governmental authorities. In particular, if our PRC subsidiaries borrow foreign currency loans from
us or other foreign lenders, these loans must be registered with or approved by the SAFE, and if we
finance them by means of additional capital contributions using, for instance, proceeds from a
public offering, these capital contributions must be approved or registered by certain government
authorities including the SAFE, the Ministry of Commerce or their local counterparts. These
limitations could affect the ability of our PRC subsidiaries to obtain foreign exchange through
debt or equity financing, and could affect our business and financial condition.
Our failure to obtain prior approval of the China Securities Regulatory Commission, or CSRC, of the
listing and trading of our ADSs on the New York Stock Exchange could have a material adverse effect
on our business, operating results, reputation and trading price of our ADSs.
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State
Assets Supervision and Administration Commission, the State Administration for Taxation, the State
Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective on
September 8, 2006. This regulation, among other things, includes provisions that purport to require
that an offshore special purpose vehicle formed for the purposes of overseas listing of equity
interests in PRC companies and controlled directly or indirectly by PRC companies or individuals
obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s
securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official
website procedures regarding its approval of overseas listings by special purpose vehicles. The
CSRC approval procedures require the filing of a number of documents with the CSRC and it would
take several months to complete the approval process.
The application of this new PRC regulation remains unclear with no consensus currently existing
among leading PRC law firms regarding the scope of the applicability of the CSRC approval
requirement.
20
We completed the initial listing and trading of our ADSs on the New York Stock Exchange in December
2007. We did not seek CSRC approval in connection with our initial public offering. Our PRC
counsel, Jun He Law Offices, has advised us that, based on their understanding of the current PRC
laws and regulations as well as the procedures announced on September 21, 2006:
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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;
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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
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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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However, if the CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required for our initial public offering, we may face regulatory actions or other sanctions
from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or
restrict the repatriation of the proceeds from our initial public offering into the PRC, or take
other actions that could have a material adverse effect on our business, financial condition,
results of operations, reputation and prospects, as well as the trading price of our ADSs. Also, if
later the CSRC requires that we obtain its approval, we may be unable to obtain a waiver of the
CSRC approval requirements, if and when procedures are established to obtain such a waiver. Any
uncertainties and/or negative publicity regarding this CSRC approval requirement could have a
material adverse effect on the trading price of our ADSs.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders and beneficial owners to personal liability and
limit our ability to inject capital into our PRC subsidiary, limit our subsidiary’s ability to
increase its registered capital, distribute profits to us, or otherwise adversely affect us.
On October 21, 2005, the SAFE issued the Notice on Issues Relating to the Administration of Foreign
Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents Conducted via
Offshore Special Purpose Companies, or Notice 75, which became effective as of November 1, 2005.
According to Notice 75, prior registration with the local SAFE branch is required for PRC residents
to establish or to control an offshore company for the purposes of financing that offshore company
with assets or equity interests in an onshore enterprise located in the PRC, or offshore special
purpose company. An amendment to registration or filing with the local SAFE branch by such PRC
resident is also required for the injection of equity interests or assets of an onshore enterprise
in the offshore special purpose company or overseas funds raised by such offshore company, or any
other material change involving a change in the capital of the offshore special purpose company.
Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or
acquired control of offshore special purpose companies that have made onshore investments in the
PRC in the past are required to have completed the relevant registration procedures with the local
SAFE branch by March 31, 2006. To further clarify the implementation of Notice 75, the SAFE issued
Notice 106 on May 29, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose
company are required to coordinate and supervise the filing of SAFE registrations by the offshore
holding company’s shareholders or beneficial owners who are PRC residents in a timely manner. If
these shareholders or beneficial owners fail to comply, the PRC subsidiaries are required to report
to the local SAFE branches.
We have urged our shareholders and beneficial owners who are PRC residents to make the necessary
applications and filings as required under Notice 75 and other related rules. However, due to
uncertainty concerning the reconciliation of Notice 75 with other approval or registration
requirements, it remains unclear how Notice 75, and any future legislation concerning offshore or
cross-border transactions, will be interpreted, amended and implemented by the relevant government
authorities. We will attempt to comply, and attempt to ensure that our shareholders and beneficial
owners who are subject to these rules comply, with the relevant requirements. However, we cannot
provide any assurances that all of our shareholders and beneficial owners who are PRC residents
will comply with our request to make or obtain any applicable registrations or comply with other
requirements required by Notice 75 or other related rules. In addition, certain of the holders of
options to purchase our ordinary shares and holders of our restricted share units (also known as
nonvested ordinary shares) are PRC residents, thus are required to make relevant registrations with
the SAFE.
21
The failure or inability of our PRC resident shareholders, holders of restricted share units,
beneficial owners or optionholders to make any required registrations or comply with other
requirements may subject such shareholders, holders of restricted share units, beneficial owners or
optionholders to fines and legal sanctions and may also limit our ability to contribute additional
capital into or provide loans to (including using the proceeds from our initial public offering)
our PRC subsidiary, VanceInfo Beijing, limit VanceInfo Beijing’s ability to pay dividends or
otherwise distribute profits to us, or otherwise adversely affect us.
New labor laws in the PRC may adversely affect our results of operations.
As of March 31, 2009, we had approximately 6,100 employees in the PRC. On June 29, 2007, the PRC
Government promulgated a new labour law, namely, the Labour Contract Law of the PRC (the “New
Labour Law”) which became effective on January 1, 2008.
The New Labour Law imposes greater liabilities on employers and significantly impacts the cost of
an employer’s decision to reduce its workforce. Further, it requires certain terminations to be
based upon seniority and not merit. In the event we decide to significantly change or decrease our
workforce in the PRC, the New Labor Law could adversely affect our ability to enact such changes in
a manner that is most advantageous to our circumstances or in a timely and cost effective manner,
thus our results of operations could be adversely
affected.
Risks Related to Our Shares and ADSs
The trading price of our ADSs has been volatile and may continue to be volatile regardless of our
operating results.
The trading price of our ADSs has been and may continue to be subject to wide fluctuations. During
the period from December 12, 2007, the first day on which our ADSs were traded on the NYSE, until
May 13, 2009, the trading price of our ADSs has ranged from US$13.98 to US$4.20 per ADS and the
closing sale price on May 13, 2009 was US$7.65 per ADS. The market price for our ADSs may continue
to be volatile and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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changes in the economic performance or market valuations of other IT services companies;
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announcements by us or our competitors of new services, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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technological breakthroughs in the IT services industry;
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potential litigation or administrative investigations;
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addition or departure of key personnel;
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fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;
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release of lock-up or other transfer restrictions on our outstanding ADSs or ordinary
shares or sales of additional ADSs; and
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general market conditions or other developments affecting us, our industry or the global
economy.
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In addition, the securities markets have from time to time experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our ADSs.
Substantial future sales of our ADSs or ordinary shares in the public market, or the perception
that these sales could occur, could cause the price of our ADSs to decline.
Additional sales of our ADSs or ordinary shares in the public market, or the perception that these
sales could occur, could cause the market price of our ADSs to decline. If our shareholders sell
substantial amounts of our ADSs, including those issued upon the exercise of outstanding options,
in the public market, the market price of our ADSs could fall. Such sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a time and price that
we deem appropriate. If any existing shareholder or shareholders sell a substantial amount of
ordinary shares, the prevailing market price for our ADSs could be adversely affected.
In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for
our future acquisitions in whole or in part with additionally issued ordinary shares or ADSs, your
ownership interests in our company would be diluted and this, in turn, could have a material
adverse effect on the price of our ADSs.
You may not have the same voting rights as the holders of our ordinary shares and may not receive
voting materials in time to be able to exercise your right to vote.
Except as described in this report, holders of our ADSs will not be able to exercise voting rights
attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will
appoint the depositary or its nominee as their representative to exercise the voting rights
attaching to the shares represented by the ADSs. You may not receive voting materials in time to
instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs
through brokers, dealers or other third parties, will not have the opportunity to exercise a right
to vote.
You may not be able to participate in rights offerings and may experience dilution of your holdings
as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our
securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to
ADS holders unless both the rights and the underlying securities to be distributed to ADS holders
are either registered under the Securities Act of 1933, as amended, or exempt from registration
under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a
registration statement with respect to any such rights or underlying securities or to endeavor to
cause such a registration statement to be declared effective. In addition, we may not be able to
take advantage of any exemptions from registration under the Securities Act. The depositary may,
but is not required to, sell such undistributed rights to third parties in this situation.
Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may
experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the
depositary may close its transfer books at any time or from time to time when it deems expedient in
connection with the performance of its duties. In addition, the depositary may refuse to deliver,
transfer or register transfers of ADSs generally when our books or the books of the depositary are
closed, or at any time if we or the depositary deem it advisable to do so because of any
requirement of law or of any government or governmental body, or under any provision of the deposit
agreement, or for any other reason.
23
You may face difficulties in protecting your interests, and your ability to protect your rights
through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands
law, conduct substantially all of our operations in China and most of our officers and directors
reside outside the United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China
through our wholly-owned subsidiaries in China. Most of our officers and directors reside outside
the United States and some or all of the assets of those persons are located outside of the United
States. It may be difficult or impossible for you to bring an original action against us or against
these individuals in a Cayman Islands or Chinese court in the event that you believe that your
rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are
successful in bringing an action of this kind, the laws of the Cayman Islands and of China may
render you unable to enforce a judgment against our assets or the assets of our directors and
officers. You would also find it difficult to enforce a U.S. court judgment based on the civil
liability provisions of the U.S. federal securities laws, in the United States, the Cayman Islands
or China, against us or our officers and directors.
Our corporate affairs are governed by our memorandum and articles of association and by the
Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) and common law of the Cayman
Islands. The rights of shareholders to take legal action against our directors and us, actions by
minority shareholders and the fiduciary responsibilities of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law
of the Cayman Islands is derived in part from comparatively limited judicial precedent in the
Cayman Islands as well as from English common law, which has persuasive, but not binding, authority
on a court in the Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly established as they
would be under statutes or judicial precedents in the United States. In particular, the Cayman
Islands has a less developed body of securities laws as compared to the United States, and provides
significantly less protection to investors. In addition, Cayman Islands companies may not have
standing to initiate a shareholder derivative action before the federal courts of the United
States.
As a result of all of the above, our public shareholders may have more difficulty in protecting
their interests through actions against our management, directors or major shareholders than would
shareholders of a corporation incorporated in a jurisdiction in the United States.
We may be classified as a passive foreign investment company, which could result in adverse U.S.
federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
Based on the market price of our ADSs, the value of our assets, and the composition of our income
and assets, we do not believe we were a passive foreign investment company, or PFIC, for U.S.
federal income tax purposes for our taxable year ended December 31, 2008. However, the application
of the PFIC rules is subject to uncertainty in several respects, including how the contractual
arrangements between us and our affiliated entities will be treated for purposes of the PFIC rules,
and we cannot assure you that the U.S. Internal Revenue Service will not take a contrary position.
A non-U.S. corporation will be a PFIC for any taxable year if either (i) at least 75% of its gross
income for such year is passive income or (ii) 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. We must make a separate
determination after the close of each taxable year as to whether we were a PFIC for that year.
Because the value of our assets for purposes of the PFIC test will generally be determined by
reference to the market price of our ADSs and ordinary shares, our PFIC status will depend in large
part on the market price of the ADSs and ordinary shares, which may fluctuate significantly. If we
are a PFIC for any taxable year during which a U.S. Holder (as defined in Item 10, “Additional
Information—Taxation—United States Federal Income Taxation”) holds an ADS or a ordinary share,
certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See Item 10,
“Additional Information—Taxation—United States Federal Income Taxation—Passive Foreign
Investment Company.”
24
We have incurred and will continue to incur increased costs as a result of being a public company.
As a public company, we have incurred and will continue to incur a significantly higher level of
legal, accounting and other expenses than we did as a private company. We have incurred and will
continue to incur costs associated with our public company reporting requirements. In addition, the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and the NYSE,
have required changes in corporate governance practices of public companies. We expect these new
rules and regulations to increase our legal and financial compliance costs and to make some
activities more time-consuming and costly. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of additional costs
we may incur or the timing of such costs.
ITEM 4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
We commenced operations in 1995 through Wensi Chuangyi, a limited liability company established in
China. In 1999 and 2002, two subsidiaries of Wensi Chuangyi, Shanghai Wensi Chuangyi Technology
Co., Ltd., or Shanghai Wensi Chuangyi and Wuhan Wensi Chuangyi Technology Co., Ltd., or Wuhan Wensi
Chuangyi, were incorporated in China as part of the expansion of our IT services businesses.
Our holding company, VanceInfo, was incorporated under the laws of the British Virgin Islands in
April 2004. In July 2004, we formed VanceInfo Beijing, a wholly owned subsidiary of VanceInfo, in
China. In August 2004, VanceInfo Beijing acquired the IT services business and related assets of
Wensi Chuangyi, including those of
Shanghai Wensi Chuangyi and Wuhan Wensi Chuangyi. In October 2005, VanceInfo was redomiciled to the
Cayman Islands, and is currently an exempted company with limited liability operating under the
Companies Law (2007 Revision).
In June and July 2004, we issued an aggregate of 100,000 ordinary shares to Inno Global Technology
Limited, Team Dragon International Limited and Button Software Ltd. for US$3.0 million.
In March 2005, we issued in a private placement an aggregate of 7,175,000 shares of Series A
preferred shares to LC Fund II, DCM IV, L.P., DCM Affiliates Fund IV, L.P. and Harper Capital for
US$7.0 million and certain finance consulting services provided by a shareholder of Harper Capital.
In May 2006, we issued in a private placement an aggregate of 2,990,000 shares of Series B-1
preferred shares and 6,380,188 shares of Series B-2 preferred shares together with certain warrants
to acquire Series B-3 preferred shares 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 Partners III, L.P., Sequoia Capital Growth III Principals Fund, LC Fund II,
DCM IV, L.P., and DCM Affiliates Fund IV, L.P. The proceeds we received from this private
placement were US$25.1 million.
Since 2005, we have acquired a number of businesses. The following are our recent acquisitions:
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In September 2005, we acquired the international business division of SureKAM, a software
development outsourcing service provider.
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In January 2006, we acquired the IT services business of Envisys System Co., Ltd., or
Envisys.
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In September 2006, we acquired 100% of the equity interest in Prosoft, an IT service
provider primarily focusing on R&D services, from Shenzhen Yun Gong Investment Co., Ltd., Ms.
Hong Zhang, Mr. Wei Chen, Mr. Li Ma and Ms. Lin Zhao.
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In December 2006, we acquired the IT services business of Beijing SunBridges Technologies
Development Co., Ltd., or SunBridges.
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In March 2007, we acquired ITC, an IT service provider primarily focusing on R&D services,
from Mr. Hao Yu and Mr. Wei Wei.
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In March 2007, we entered into certain contractual arrangements with Megainfo through which
we gained effective control over the operations of Megainfo.
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In May 2007, we acquired a 75% equity interest in Shanghai VanceInfo, an IT service
provider primarily focusing on ADM services, from Mr. Jilun Zhang and Mr. Rongbin Shi. In July
2008, we completed the acquisition of an additional 10% equity interest in Shanghai VanceInfo
from NEC System Technologies Ltd., a Japanese company. In August 2008, we completed the
acquisition of the remaining 15% of Shanghai VanceInfo from Mr. Jilun Zhang and Mr. Rongbin
Shi.
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In May 2007, we acquired an additional 48.99% of the equity interest of VanceInfo Japan
Inc., or VanceInfo Japan, from Mr. Jinsong Tang.
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In July 2007, we acquired Chosen, an IT service provider primarily focusing on SAP
consulting and implementation services, from Mr. Gang Li, Mr. Tong Liu and Mr. Bin Huang.
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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.
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In October 2008, we completed the acquisition of a 33% equity interest in Link Result
Limited, or Link Result, a China-based company providing IT outsourcing services to
multinational financial institutions, from A-IT Software Services PTE Ltd. The investment was
accounted for using the equity method of accounting.
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In October 2008, we completed the acquisition of 100% of the equity interest in WIT, a U.S.
based mobile testing and application development services provider, from Wireless Info Tech
Limited.
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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.
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We sold 100% of our equity interest in ITC in February 2008 after integrating its business and
employees. Prosoft and Megainfo were liquidated in December 2008 and January 2009, respectively,
after integrating their business and employees. We are in the process of completing the tax
clearance procedures of Prosoft and Magainfo. In December 2007, we completed our initial public
offering and trading of our ADSs on the New York Stock Exchange.
Our principal executive offices are located at 3/F, Building 8, Zhongguancun Software Park, Haidian
District, Beijing 100193, People’s Republic of China. Our telephone number at this address is
+86(10) 8282-5266. Our registered office in the Cayman Islands is located at the offices of Codan
Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, George Town, Grand
Cayman, KY1-1111, Cayman Islands. Our agent for service of process in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
B.
Business Overview
We are an IT service provider and one of the leading offshore software development companies in
China. Our comprehensive range of IT services includes R&D services, enterprise solutions, ADM,
quality assurance and testing, as well as globalization and localization. We provide these services
primarily to corporations headquartered in the United States, Europe, Japan and China, targeting
high-growth industries such as technology, telecommunications, financial services, manufacturing,
retail and distribution.
We offer our services through our globally integrated network of onsite and offsite delivery
locations, primarily in China, to enable our clients to focus on their core competencies and
improve operating efficiencies. With over 5,400 professionals as of March 31, 2009, we operate a
number of CDCs, each with dedicated project teams and facilities designed to provide tailored
solutions to individual clients. We believe that these dedicated CDCs provide our clients with
differentiated services and enhance their confidence in our capabilities. We also deliver our
services at clients’ facilities or via our offices in major cities across China and in Washington
and California, the United States, and in Japan.
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Our major clients include Microsoft, IBM, Huawei, TIBCO, and a European mobile handset
manufacturer. The number of our clients increased significantly from 98 for 2005 to 241 for 2008.
We deploy our sales and marketing teams in several of our key target markets and in close proximity
to our clients, which enables us to better understand our clients’ needs, effectively cross-sell
our services and develop new client relationships.
In recent years, we have experienced significant organic growth, complemented by selective
strategic acquisitions. Since 2005, we have made a number of acquisitions to strengthen our service
lines and industry expertise, diversify our client base, and expand our sales network and delivery
platform. Our net revenues grew from US$29.1 million in 2006 to US$102.7 million in 2008,
representing a compound annual growth rate, or CAGR, of 88.0%. Our net income grew from US$4.4
million to US$16.2 million over the same period, representing a CAGR of 92.3%.
Service Lines
We categorize our service lines into R&D services, enterprise solutions, ADM, quality assurance and
testing, as well
as globalization and localization, which we develop in response to client requirements and
technology life cycles.
Set forth below is our net revenues breakdown by service lines for the periods indicated:
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Year Ended December 31,
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2006
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2007
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2008
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(in US$ thousands, except for percentages)
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R&D services
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18,266
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62.9
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%
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36,013
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57.4
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%
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60,808
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59.2
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%
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Globalization and localization
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3,086
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10.6
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3,886
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6.2
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4,259
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4.2
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Enterprise solutions
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2,163
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7.4
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8,748
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14.0
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13,553
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13.2
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ADM
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2,328
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8.1
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9,348
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14.9
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17,242
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16.8
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Quality assurance and testing
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3,208
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11.0
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4,719
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7.5
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6,801
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6.6
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Total net revenues
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29,051
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100.0
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%
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62,714
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100.0
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%
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102,663
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100.0
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%
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We are capable of offering each of our service lines to clients in a variety of industries,
including the technology, telecommunications, financial services, manufacturing, retail and
distribution industries.
Research and Development Services
We provide product development services for software systems that are implemented in computers and
embedded systems. We typically market these services to the chief technology officers, engineering
vice presidents or outsourcing project heads of technology product development companies, ranging
from independent software vendors to telecommunications equipment developers.
We have accumulated a variety of skill sets from over 11 years of experience in the outsourced
development of computer software and hardware products. We provide R&D services in all phases of
development, from requirements analysis, concept generation, product realization, to quality
assurance and testing and technology and information transfer to the client. We offer our services
over a broad spectrum of technology areas and are able to provide our clients complete subsystems
or entire products.
We develop various software products, including middlewares, Internet protocols and other software.
We also focus on embedded software technologies that involve the design and development of software
solutions embedded in the hardware of a particular device. In addition, we provide cost-effective
testing services to help technology product development companies improve their hardware and
software. Our research and development resources allow us to serve clients that seek highly skilled
product development services, including services for their core technologies. Our timely delivery
capabilities help our clients to gain a time-to-market advantage during their product development
process. We also employ advanced processes and tools to ensure a high level of protection of
clients’ intellectual property.
27
The following case studies describe the R&D services we provide to three of our clients:
TIBCO
(a Nasdaq-listed software company with over 3,000 customers)
Client’s Project Requirements
. TIBCO, which we have served since 2005, sought to improve the
operating efficiency, price competitiveness and time-to-market of its core products to remain
competitive. To achieve its goals, TIBCO sought to lower its software research and development
costs through outsourcing. TIBCO chose us as a partner to assist with the full development cycle of
several of its product lines. One such product line was TIBCO’s B2B suite, which is a
standards-based business-to-business integration platform for secure transmission of business
documents and messages among disparate partner systems.
Our Solutions
. Our team worked closely with the managers and engineers at TIBCO’s global
headquarters to understand the client’s requirements, which included the development of several new
B2B protocols. We performed extensive studies and analyses to meet the following technical
requirements of TIBCO’s B2B suite project:
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understanding of leading industry standard B2B protocols;
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Extensible Markup Language, or XML, processing and parsing;
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security and authentication based on product key infrastructure, or PKI platform;
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TIBCO infrastructure products; and
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Java language for platform independence.
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During the course of the B2B suite project, our TIBCO CDC actively worked in every key aspect of
the structuring and formation of the B2B platform, including framework design, concrete coding,
quality assurance and testing, and particularly, the documentation of the development process,
which enables TIBCO to access critical know-how for the buildup of the B2B platform in the future
and thus enhances the operation efficiency of the platform. The new product was released in January
2007, and is now widely used by TIBCO’s customers.
Current
Relationship
with Client
. We are the only Chinese service provider to help TIBCO to develop
software products. Since 2005, we have been involved in a wide range of research and development
services for this client on over 50 products. Currently, we have more than 200 staff at our TIBCO
CDC dedicated to product development for TIBCO. We recently have been appointed by TIBCO to develop
more technically challenging products.
We have a team of approximately 20 professionals dedicated to the B2B suite project. Following the
release of the new version of the B2B suite, our B2B team continues to play a significant role in
building up additional B2B protocols. Additionally, due to our experience working with TIBCO
products, we have also had the opportunity to work on additional professional services for local
TIBCO customers under separately billed assignments.
A Fortune 100 multinational software company
Client’s Project Requirements.
Some of the client’s main products are operating systems that run on
personal computers, server computers, and embedded devices. Compatibility with existing and new
applications is typically a critical concern for personal computer users and enterprises when
upgrading to a new version of an operating system, and may significantly affect the acceptance of
the client’s product in the marketplace.
28
In an important release, this client needed to develop a software component and conduct extensive
testing to ensure applications under the older version operating system would be compatible with
the new version. It decided to appoint an independent service provider to help with this specific
issue due to a tight schedule and budget concerns. The task required not only in-depth knowledge of
both the old and new versions of this operating system, but also rich experience in software
development and testing work.
Our team was selected to provide this service, and our in-depth knowledge and expertise is highly
valuable to the client.
Our Solutions.
We assembled a highly qualified and experienced development and testing team, and
dispatched them to the client’s premises to work closely with its development personnel. During the
four-month development process, our professionals designed various transition programs of the
software component for over 80 types of applications, and automated over 70 tests covering
approximately 160 Application Programming Interfaces, or APIs. Our understanding of the two
versions of the operating system, know-how across development and testing processes, and
outstanding communications and coordination capabilities enabled us to deliver the work on time,
facilitating the client’s successful launch of the upgraded operating system.
Current Relationship with Client.
We were one of the first Chinese service providers to help this
software company resolve technically challenging and strategically important issues. Since then, we
have been involved in a wide range of R&D services for this client on over 100 projects. We are one
of the largest Chinese service providers working with this software company in terms of revenues
and the number of dedicated professionals. Currently, we are working to expand our service scope
with this client and to provide services on more challenging projects such
as end to end business intelligence, or BI, solutions and embedded devices solutions.
Huawei
(a leading Chinese telecommunications equipment manufacturer with nearly 90,000 employees)
Client’s Project Requirements
. In 2004, Huawei appointed us to develop label switch protocol
management system, or LSPM, version 1.0, for network management of Internet communications. As
Huawei’s customers, who are mainly telecommunications carriers, were in urgent need of this system,
we were required to deliver LSPM version 1.0 within a tight timeframe.
Our Solutions
. We assembled a project team consisting of an experienced project manager and 10
professionals, each with a background in the
telecommunications
industry, to facilitate our
completion of this project within the required deadline. Since LSPM was designed for the provision
of an integrated platform for all network switch elements, our team devoted extensive efforts to
making the system compatible with switch equipment manufactured by various vendors. Our LSPM
version 1.0 also provides Huawei’s customers with a user-friendly interface to efficiently manage
network communications and shorten their response time to telecommunication service subscribers. In
addition, we adhered to high standards of quality control, risk management and progress control in
performing our work for this project.
Current Relationship with Client
. Historically, Huawei was reluctant to outsource software
development due to quality concerns. Recognizing the quality of our services for LSPM version 1.0,
Huawei further engaged us to develop LSPM version 2.0 and version 3.0 under subsequently negotiated
assignments, which had a project scale much larger than that of version 1.0. Currently, we are one
of the major R&D service providers of Huawei.
Enterprise Solutions
We provide clients with a full spectrum of services in enterprise solutions, including enterprise
resource planning, or ERP, customer relationship management, or CRM, supply chain management,
enterprise application integration, or EAI, and system support and maintenance. We provide
implementation and maintenance services for major enterprise resource planning systems, including
SAP, Siebel, Peoplesoft, JD Edwards, Microsoft Dynamics and Oracle E-Business Suite. We provide
comprehensive management and ongoing optimization of customer enterprise solutions. Our offerings,
which are usually billed separately on a time-and-material basis, include:
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packaged evaluation and selection;
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packaged implementation;
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enhancement, maintenance and product support;
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business intelligence/data warehouse, or BI/DW.
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Our enterprise solutions are intended to help our clients focus on their core competencies and
significantly reduce the clients’ expenses by taking advantage of our IT expertise. We focus on
providing customized enterprise implementation that is both innovative and seamless, offering
clients cost-effective solutions for consistent results.
The following case studies describe the enterprise solutions services we provide to two of our clients:
A Fortune 100
company
in the wireless and broadband communications business
Client’s Project Requirements
. Facing intense competition from other industry players, the communications
company was under pressure to improve the efficiency and effectiveness of its channel management.
The Mobile Devices Business Unit of the communications company intended to introduce a system based
on the Siebel platform with the following defined targets:
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accurate sales forecast by model and retail shop;
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operation performance evaluation by volume and profitability by retail shops; and
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sales and competition analysis to outline promotion and incentive plan.
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Our Solutions
. We have worked closely with the communications company’s other service providers on
this project since February 2006. Our team actively participated in the full life cycle of Siebel
implementation from business requirements analysis, system design analysis, system structuring,
implementation, testing, release to production, post production support and post-production change
requests and enhancements and operation. As of September 30, 2007, we had devoted over 250
man-months to this project. We performed extensive studies and interviews to better understand the
client’s specific needs and designed solutions by tailoring the Siebel system to meet the client’s
business needs and technical requirements. Since the launch of the system, the communications
company has significantly improved its retail channel management.
Current Relationship with Client
. Following the operation of the above project, we continue to
provide supporting services for the client’s system on an on-going basis under separately billed
assignments. We are also responsible for the installation and maintenance of the system under
various operating environments.
Furthermore, this client chose us to be one of its preferred service providers in Siebel
implementation.
Adidas
(a world leading sportswear and sports equipment manufacturer with over 31,000 employees)
Client’s
Project
Requirements
. Adidas, which we have served since 2006, needed assistance in
implementing a system to handle and analyze data from the following sources:
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thousands of franchised stores across China;
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a growing number of wholly-owned outlets; and
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entities previously owned by Reebok which Adidas acquired.
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In late 2006, Adidas appointed us to deliver a DW/BI solution to efficiently store, manage and
utilize its business data.
Our Solutions
. In early 2007, we began developing a Cognos based DW/BI solution capable of helping
Adidas to achieve its goal of improving its supply chain and financial management framework. We
designed and implemented a DW/BI solution to extract data from Adidas’s SAP system, transfer such
data to Microsoft Structured Query Language, or SQL, server pre-staging database, and load the data
into a data warehouse in an expedient and cost effective manner. The team then generated standard
reports and online analytical processing, or OLAP, to fulfill the demands of Adidas’s key users and
data analysts. We conducted the requirement collection process by analyzing business processes and
performing comprehensive tests to ensure that the system conformity and performance standards were
met. Recently, we have also been requested to provide post-production support under separately
billed assignments to ensure stable operation of the data warehouse and function as a helpdesk to
support the ongoing changes in user data requirements.
Current Relationship with Client
. As our relationship with Adidas evolves, we have accumulated
extensive knowledge of Adidas’s IT systems. We have successfully expanded our services to Adidas,
such as phased data warehouse construction, Cognos reports/cube development, post-production
support, and customized application development. Our Adidas team is comprised of 12 engineers
dedicated to working on various Adidas projects. As of March 31, 2009, the team had devoted over
180 man-months to data warehouse design, data integration from SAP,
BI platform construction for Adidas, and customized application development. We intend to
continually leverage our understanding of Adidas and its IT systems to provide more support and
solutions for this client in the future under separately billed assignments.
Application Development and Maintenance
We design, develop and implement software solutions to meet a variety of client requirements. We
also provide maintenance services for large software systems, which may include modifications and
enhancements to the system and product support. Unlike our R&D services that target research and
development spending by technology product development companies, our ADM services target our
clients’ other IT spending, which is generally controlled by their chief information officers. We
perform application design, programming, testing and maintenance either in our delivery offices or
at our clients’ sites. Our projects include new development and significant functional enhancements
to existing software applications. We have developed expertise in mainframe, customer-server,
Internet and mobile software technologies and on emerging platforms such as Windows series, Linux,
Unix, IBM Mainframe and Symbian. Our major programming language tools include C/C++,
Java/J2EE/J2ME, JSP and .NET.
We offer a wide spectrum of ADM services to our clients, designed to help them manage their IT
outsourcing spending. The following case study describes the ADM services we provide to one of our
clients:
NEC System
(a subsidiary of NEC Corporation, a multinational technology company headquartered in
Japan)
Client’s Project Requirements
. NEC System positions itself as a key supplier of application
solutions to governments, telecommunications carriers and enterprises and has built up its core
competencies in this sector. Facing intensive competition from other industry players, declining
project prices and climbing labor costs, as well as customers’ constantly changing demands and
increasing requests for customization, NEC System decided to outsource development work to
lower-cost locations, such as China. However, NEC System has always had concerns about outsourcing,
particularly in the following aspects:
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quality assurance, which is critical for NEC System to serve its customers in Japan;
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understanding the demands of end users.
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Our Solutions
. Shanghai VanceInfo, which we acquired in 2007, built up a team to assist NEC System
in 2002. Currently, we maintain a dedicated development team of over 60 engineers for NEC System.
Our strict cost control, project management experience and economies of scale brought cost
advantages to NEC System in the Japanese market. To meet the quality requirements of NEC System’s
customers, we designed a set of development processes and a quality control system which meet NEC
System’s own standards. We have also strengthened NEC System’s confidence in our quality control
through stringent internal inspection and continual improvements. Through our real-time Web-based
monitoring and communications system, we are able to control the work progress and better
understand the demand and feedback from NEC System and its customers. In addition, our in-depth
industry expertise has enabled NEC System to better serve its customers in a short timeframe.
Current Relationship with Client
. We set up a WEB Application System Development Center in Shanghai
for NEC System with approximately 60 engineers, and have devoted over 50 man-months for NEC
System’s projects every month. Our partnership with NEC System has enabled it to sustain a
competitive position in the Japanese market. For instance, due to our delivery capability, NEC
System won a project of 1,500 man-months from COREPLUS, lasting from 2004 to 2007.
Quality Assurance and Testing
Businesses rely on quality assurance and testing to reduce defects and enhance IT applications. As
testing is relatively independent from the development process, many clients outsource testing to
third-party service
providers, which also mitigates conflicts of interest faced by their internal testing department
and enhances the neutrality and accuracy of testing. Our testing services help clients successfully
and cost-effectively realize their goals. Our advanced testing skills, cost-effective testing
approaches, and proven testing methodologies help clients improve their hardware and software.
We offer customized and automated testing practices according to clients’ business needs, including
functional testing, globalization and localization testing, automation testing, performance
testing, remote testing and test process consulting. Our testing engineers are well trained in
several test management tools such as Performance Studio, WinRunner/LoadRunner and TestDirector.
The following case study describes the quality assurance and testing services we provide to one of
our clients:
A Fortune 100
financial
services company
Client’s Project Requirements
. In 2006, a European subsidiary of the financial services company
decided to adopt a new system to manage its banking businesses ranging from retail banking, credit
cards to capital markets services. Due to the complexity of the project and its importance to our
client’s business, rigorous tests must be conducted before the launch of this new system. The
client required that the service provider have:
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extensive experience in testing;
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solid knowledge of financial services industry practice;
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clear understanding of relevant local regulations; and
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cost effective and timely delivery capabilities.
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Our Solutions
. We set up a joint testing center with the client in 2003, where we established
well-defined testing processes, methodologies and project management procedures for the client’s
projects. For this specific testing project, we formulated a comprehensive testing plan together
with the client’s software developers. We deployed, on short notice, a dedicated testing team of
over 100 engineers. We participated in the testing work during each phase of the project, from
system integration testing during system development to customer acceptance testing during
implementation. The project is proceeding smoothly and is expected to be completed in 2008.
Current
Relationship
with Client
. Since 2006, we have also been retained by the client’s
Asia-Pacific research headquarters and other branches for various testing projects under separately
billed assignments.
32
Globalization and Localization
We started our business in 1995 by offering globalization and localization services to help clients
penetrate local markets. We also started our engagement for several of our key clients, such as
IBM, by providing quality globalization and localization services. Our globalization and
localization services consist of a multi-step process to create the specific language versions of
our clients’ software and hardware, including software applications, printed documents,
communications materials, website contents, desktop publishing, E-learning and training content.
Our globalization and localization services are generally billed on a time-and-material basis. Our
customized solutions include:
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software and content localization;
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localization engineering;
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internationalization engineering; and
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internationalization testing.
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We provide these services to meet our clients’ cultural, linguistic, legal, technical and marketing
requirements in a specific country or region. Currently, we provide high-quality globalization and
localization services at significant cost savings and offer translation services into over 65
languages, including Asian languages, EMEA (Europe, the Middle East and Africa) languages, Nordic
languages and North and South American languages. Our superior project management capability
enables us to maintain long-term relationships with our clients as they generally continue to work
with us for upgraded versions or updates of existing products, under separately negotiated and
billed contracts or SOWs entered into subsequently.
The following case studies describe the globalization and localization services we provide to two
of our clients:
A Fortune 100
international
information technology company
Client’s Project
Requirements
.
In 1998, the information technology company decided to release an
upgraded version of its enterprise solution product which enables customers to better manage their
infrastructure operations and IT processes, in the Asian market. The information technology company
required that the upgraded enterprise solution product with all of its new features be translated
into multi-linguistic versions, and all testing work be completed to ensure the stability and
suitability of these versions. This project required not only globalization and localization
expertise, but also deep understanding of the structure and features of the enterprise solution
product. In addition, the information technology company targeted to release qualified local
versions in Asia within a very short lead time.
Our Solutions.
As a major testing vendor for the enterprise solution product of this information
technology company, we had accumulated in-depth knowledge and experience with respect to its
enterprise solution product. We set up a team consisting of localization and testing experts to
provide one-stop-shop services to the information technology company, from translation, desktop
publishing in Simplified Chinese, English, Japanese, Korean and other languages, to localization
testing and localization engineering. In particular, by leveraging our project management
experience, we designated a senior project manager to control the working process, coordinate
different service stages and plan an elaborate timetable in order to shorten the overall turnaround
time. Within the planned budget, our localization services achieved quality delivery of the
enterprise solution product localized versions in a timely manner.
Current Relationship with Client
. As one of this leading information technology company’s
earliest localization vendors, we have maintained a long-term relationship with this client for its
different product lines. We have a team of dedicated professionals in the client’s localization
team each year, providing localization, engineering, and translation verification testing services.
In addition, we provide a full-spectrum of services, including quality assurance and testing,
software development and enterprise solutions.
33
A Chinese subsidiary of one of the largest global enterprise software providers
Client’s Project Requirements
. The client believed that a truly global enterprise software company
should have a presence in every country and decided to expand their business to Asia, especially
China. In order to attract local Chinese customers and successfully penetrate the Chinese market,
the client sought to develop Chinese versions of its products, including user interface
applications, user manuals and related content.
Our Solutions
. We established a highly qualified in-house engineering team dedicated to the
client’s localization project. Our team worked closely with engineers and business managers of the
client to obtain first-hand information from end users, which helped us to better understand end
users’ behavior patterns and provided us the basis to structure and customize user interface
applications and improve user manuals. Following the completion of the user interface application
construction, we also designed test plans and implemented the test cases/scenarios to monitor and
ensure the functionality and compatibility of the localizations and customizations. We performed
extensive analysis and were able to meet the following requirements of the client:
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domain expertise and technical sophistication to handle complex enterprise applications;
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understanding of Chinese culture and end users’ behavior and habit;
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resource management capacity to meet the tight schedule and minimize risks; and
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lower costs compared to existing service providers in the United States.
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Current
Relationship
with Client
. Our capability to respond to the fast-changing market on short
notice and our user-friendly interface applications contributed to the success of the client’s
development strategy in China.
We have had a dedicated localization team for the client with approximately 50 localization
professionals each year. Most of them have been serving the client on localization testing and
engineering since 2001. We now provide a full range of localization services for multiple
enterprise solutions for the client in Asia.
Our successful partnership with the client extends beyond localization services. In 2004, the
client chose us as its sole partner in China to set up a CDC for the client. Currently, the
client’s CDC, along with our localization service team provides ongoing testing services,
enterprise solution customization and localization services to the client. We bill such services on
a time-and-material basis. Our comprehensive services helped the client to enhance its enterprise
solution capabilities in China.
Delivery of Our Services
In addition to providing services from our facilities, we offer our clients flexible delivery
alternatives through our CDCs and through onsite teams operating on our clients’ premises.
CDCs
We currently operate a number of CDCs with dedicated project teams and facilities designed to
tailoring solutions for individual clients. The professionals in our CDCs work with clients to
develop and deliver business operational improvements with the goal of achieving higher performance
at lower costs. We typically lease premises, purchase or lease relevant equipment and facilities,
in some cases reimbursed by our clients, and hire engineering professionals as required by our
clients. All of our CDCs have high-speed broadband connections to the clients’ facilities via
dedicated lines. Our CDCs employ advanced technology and process-based methods to ensure a high
level of security. The intellectual property rights in relation to the software products we develop
for our clients are generally owned by our clients. These approaches successfully address our
clients’ concerns in terms of security and intellectual property protection when selecting
outsourcing service providers. The resources committed to our clients at our various CDCs also help
to inspire our clients’ confidence in our competencies and capabilities, thus enhancing customer
loyalty. CDCs comprise an important platform for China-based IT services companies, like us, to
deliver their services.
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To address clients’ concerns with respect to security and intellectual property rights, IT services
companies generally grant clients an option to acquire their CDCs, which options we believe are
rarely exercised due to cost and other considerations associated with changing the operators of
CDCs. We believe that the transfer fees agreed between our clients and us for our clients to
acquire our CDCs are generally no less than the carrying value of our assets in the relevant CDCs.
The following case study describes our relationship with one of our CDC clients.
TIBCO
We first offered CDC services to TIBCO after it migrated certain research and development work from
India to us in October 2005.
Our TIBCO CDC is located on leased premises and is equipped with more than 200 computers and
ancillary equipment and furniture. The CDC is connected to TIBCO’s facilities through a dedicated
virtual private network, or VPN. The intellectual property rights in relation to the software
products we develop for TIBCO are owned by
TIBCO. We have deployed advanced technology and process-based methods to ensure a consistently high
level of security. We have granted an option to TIBCO to acquire this CDC, including the
facilities, employment relationships with our professionals working in the CDC and certain
operating relationships such as the lease for the premises, in consideration of an agreed transfer
fee.
We believe our in-depth experience in developing TIBCO products via our CDC and our commitment to
real- time response have played an important role in TIBCO’s marketing efforts. In 2006, we
successfully helped TIBCO win several important bids. Furthermore, our presence in major Chinese
cities and our deep understanding of the Chinese culture and the local market dynamics help us
provide prompt technical support to TIBCO’s Chinese sales force. For instance, we assisted TIBCO in
successfully securing two Chinese banking customers in 2007. Our dedicated professional team for
TIBCO in China does not face the distance, time and cultural differences encountered by TIBCO’s
U.S. team with its Asian customers. We believe that our participation in TIBCO’s sales and
marketing activities presents new opportunities to further develop our relationship, and will
contribute to our revenue growth while creating additional value for TIBCO.
As of March 31, 2009, we maintained a high-quality research and development team of professionals
for TIBCO, all of whom hold undergraduate and graduate degrees, with approximately 15% of them
having completed part or all of their education in the United States, Europe, Australia or
Singapore.
Onsite Teams
Some clients require the presence of our project teams on their or their customers’ premises. We
maintain a certain portion of our professionals on our clients’ or their customers’ premises, in
order to ensure optimal collaboration and close interaction between the clients’ teams and our
project team and to provide a comprehensive range of IT services that meet our clients’
expectations. For clients to whom we provide CDC services such as TIBCO, we usually rotate 6% to
15% of our project team members to our clients’ sites. In other cases, a higher proportion of our
professionals may work onsite based on the confidentiality and technical requirements of our
clients.
Quality and Process Management
We have invested heavily in the customization and application of the VanceInfo Technical Delivery
Platform, or VTDP, incorporating a technical process management system developed by Digite, a
leading provider of collaborative enterprise application software for process and portfolio
management. We broadly apply VTDP in our services in various industries to streamline our delivery
process and project management. On this platform, we are able to define various project processes,
monitor the project schedule and workforce allocation, and improve our requirements management,
testing management, defect management, risk management and resource management. We believe our VTDP
has greatly improved our global delivery capability, process maturity and timely decision-making.
35
We typically follow the standard process requested by our clients and have devoted substantial
efforts to obtaining certification under certain generally recognized quality control systems. We
are ISO 9001 certified and one of our subsidiaries, Shanghai VanceInfo is ISO 27001 certified. We
achieved Level-Five certification under the Capability Maturity Model Integration, or CMMI, an
industry recognized rating system for systems engineering developed by Carnegie Mellon University,
at one of our key development centers. CMMI is graded in five levels of increasing maturity and
capability, with Level 5 representing the highest certification.
Sales and Marketing
Our sales and marketing strategy seeks to increase clients’ awareness of our service lines,
generate new and repeat business from target clients, promote client loyalty and enhance brand
recognition. We promote our services directly through our business development, or BD, team.
Members of our executive management team are also actively involved in managing key client
relationships through targeted interaction with our clients’ senior management. We also assign
midlevel managers with service line expertise to assist our BD team in exploring business
opportunities.
Sales and
Marketing
Organization
. As of March 31, 2009, our BD team consisted of 64 full-time sales
personnel,
including 50 sales managers, each of whom is responsible for a designated sales region, a specific
service line or an industry. We have sales offices in major cities in China and in Silicon Valley,
Seattle, Tokyo and Hong Kong. We plan to enhance our sales efforts by recruiting more sales
professionals and setting up additional sales offices overseas.
New Business Development
. We use a cross-functional, integrated sales approach under which our
executives, sales personnel and midlevel management analyze potential projects and collaboratively
develop strategies to promote our expertise to potential clients. This approach allows for a smooth
transition to execution once a sale is secured. For larger projects, we typically bid against other
IT service providers in response to requests for proposals. Clients often cite the following as
reasons for awarding us contracts: our flexible delivery model, comprehensive outsourcing services,
ability to scale, superior quality and process execution, industry expertise, experienced
management team, talented professionals, strong track record and competitive pricing. In addition,
client referrals and cross-selling provide objective validation of our competitive strengths. We
often gain new business opportunities through referrals from existing clients to new clients or the
different departments of our existing clients.
Enhancing Brand Visibility.
We also devote substantial efforts to public relations, attendance at
global exhibitions and conferences, governmental relations and advertising. For example, we
attended various forums and exhibitions organized in the United States and China in 2008, including
Gartner Outsourcing & Vendor Management Summit 2008, the 7th Anniversary OutsourceWorld, Gartner
China Outsourcing Summit 2008, China International Software & Information Service Fair 2008, Hong
Kong International Computer Conference 2008, 2008 Summer Davos Forum, the 6th Global IT Outsourcing
Summit Shanghai and China Computer World CEO & CIO Summit 2008. We believe our marketing team’s
efforts have enhanced our company’s corporate image and brand name.
Our Clients
Our clients include large corporations headquartered in the United States, Europe, Japan and China.
We have a strong market share of U.S. and European corporations operating in China and have a
growing presence in Japan. The number of our clients increased significantly from 98 for 2005 to
241 for 2008.
36
The following table sets forth our net revenues by geographic breakdown based on the location of
our clients’ headquarters for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands, except percentages)
|
|
|
United States
(1)
|
|
|
24,717
|
|
|
|
85.1
|
%
|
|
|
43,153
|
|
|
|
68.8
|
%
|
|
|
56,175
|
|
|
|
54.7
|
%
|
|
Europe
(1)
|
|
|
714
|
|
|
|
2.5
|
|
|
|
6,284
|
|
|
|
10.0
|
|
|
|
14,991
|
|
|
|
14.6
|
|
|
Japan
(1)
|
|
|
1,548
|
|
|
|
5.3
|
|
|
|
5,828
|
|
|
|
9.3
|
|
|
|
9,157
|
|
|
|
8.9
|
|
|
China
(1)
|
|
|
2,065
|
|
|
|
7.1
|
|
|
|
7,329
|
|
|
|
11.7
|
|
|
|
22,045
|
|
|
|
21.5
|
|
|
Others
|
|
|
7
|
|
|
|
0.0
|
|
|
|
120
|
|
|
|
0.2
|
|
|
|
295
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
29,051
|
|
|
|
100.0
|
%
|
|
|
62,714
|
|
|
|
100.0
|
%
|
|
|
102,663
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Countries or regions where the headquarters of our clients are located.
|
Microsoft and IBM, our top two clients, each accounted for over 20% of our net revenues in 2006. In
the aggregate, these two clients accounted for 53.1% of our net revenues in 2006. For the year
ended December 31, 2007, each of these two clients accounted for over 10% of our net revenues, and
in the aggregate accounted for 34.6% of our net revenues in 2007. For the year ended December 31,
2008, each of Microsoft, IBM and Huawei accounted for over 10% of our net revenues, and in the
aggregate accounted for 38.8% of our net revenues in 2008. Our top five clients accounted for
approximately 69.3%, 53.7% and 53.8% of our net revenues in 2006, 2007 and 2008, respectively. The
volume of work we perform for specific clients is likely to
vary from year to year, as we typically are not their exclusive external IT service provider.
Accordingly, a major client in one year may not contribute the same amount or percentage of our net
revenues in a subsequent year.
We typically enter into MSAs with our clients, which are either renewable for successive one-year
periods, or have no fixed terms. These agreements typically stipulate our general responsibilities
and obligations, the service quality standard, a confidentiality undertaking and the ownership of
intellectual property rights. The MSAs are not commitments to purchase our services, and generally
may be terminated without cause on short notice or when there are no outstanding SOWs under them.
For each specific project, clients place service orders with us from time to time through SOWs. We
usually bill our clients a time-based fee or a fixed price according to clients’ requirements and
our negotiations with clients. Our SOWs with Microsoft mainly describe our work scope and
specifications, the performance and acceptance criteria, the delivery schedule and price and
payment terms. Similarly, our SOWs with IBM typically describe our work scope, the delivery
schedule, the acceptance methods, quality schedules, and price and payment terms. Under the SOWs,
IBM has the right to audit our charges and invoices and to inspect our performances. Our clients
typically have a right to terminate their SOWs on short notice without any cancellation charge.
Competition
The offshore IT services market is highly competitive. Competition in the offshore IT services
market depends in large part on industry experience, quality of the services offered, reputation,
marketing and selling skills as well as price. No single participant or group of participants
dominates the entire market or any of the segments, and we expect competition to intensify. We
compete in the offshore IT services market primarily with:
|
•
|
|
Chinese IT services companies, such as Achievo, Chinasoft International, DHC, Hisoft,
Neusoft and SinoCom;
|
|
•
|
|
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.
|
37
Our international competitors are either setting up operations in China or are increasing their
presence in China as offshore operations in China are increasingly becoming an important element of
their delivery strategy. This has resulted in increased employee attrition among Chinese IT service
providers and increased wage pressure to retain IT service professionals. We believe, however, that
price alone is not a sustainable competitive advantage in an environment where IT solutions are
becoming increasingly critical to clients’ core corporate strategies. We have, therefore, built our
competitive position primarily on our ability to leverage our industry specific knowledge and
experience in a broad range of IT services, manage and maintain key customer relationships,
continually monitor and improve our delivery excellence and attract and retain highly skilled
professionals.
Intellectual Property
Our intellectual property rights are important to our business. We rely on a combination of
trademarks, domain names, trade secrets, confidentiality procedures and contractual provisions to
protect our intellectual property. We have proprietary know-how in software development and testing
methodologies. We hold trademark registrations for one or both of “VANCEINFO” and “
” in the United
States, Europe, Australia, Singapore and Hong Kong, and have additional trademark registration
applications pending in China, the United States and Japan for one or both of these marks. We have
registered our domain names, www.vanceinfo.com, www.vanceinfo.net, www.vanceinfo.com.cn,
www.vanceinfo.net.cn, www.vanceinfo.cn, and www.vitocs.com. Our subsidiary, Shanghai VanceInfo, has
also registered its domain name, www.solutions.sh.
We require our employees and subcontractors to enter into non-disclosure agreements to limit access
to and distribution of our clients’ proprietary and confidential information as well as our own.
These agreements
generally provide that any confidential or proprietary information developed by us or on our behalf
must be kept confidential. These agreements also provide that any confidential or proprietary
information disclosed to third parties in the course of our business must be kept confidential by
such third parties. However, our clients usually own the intellectual property rights in the
software we develop for them. We are responsible to our clients for complying with certain security
obligations, including maintaining network security, backing-up data and maintaining a virus free
network. We cannot assure you that we will be able to comply with all such obligations without
incurring any liabilities.
In addition, the terms of our contracts with clients often impose particular confidentiality and
security standards. We have established a system of security measures to protect our computer
systems from security breaches and computer viruses. We have employed advanced technology and
process-based methods to ensure a high level of security, such as clustered and multi-level
firewalls, intrusion detection mechanisms, vulnerability assessments, content filtering, antivirus
software and access control mechanisms. We use encryption techniques as required.
We control and limit access to client-specific project areas, particularly at our CDCs.
We previously conducted business under the trade name “WORKSOFT” and used “WORKSOFT” in our
subsidiaries’ company names. In January 2007, we were informed by Worksoft Inc., a U.S. software
developer, that it has registered the trademark “WORKSOFT” in the United States. After
communications, we decided to use a new business name, and Worksoft Inc. agreed to give us a
10-month period from July 2007 for transitioning to the new name. We have changed our subsidiaries’
company names and our trade name to “VanceInfo” accordingly.
Technology, Facilities and Infrastructure
A key component of our global delivery model is the telecommunications linkage between client sites
and our sites and among our various sites in China and overseas. We have designed a high-quality,
scalable and secure network architecture that provides client connectivity, CDC connectivity and
broadband connectivity. This network provides seamless access and uses high capability networks and
advanced routing protocols for redundancy. Although we rely on third parties such as
telecommunications providers and Internet service providers to provide such services, we ensure
that we have multiple service providers using multiple routes and media to attain high levels of
redundancy, availability and performance.
38
Our clients operate in multiple jurisdictions and have a variety of voice and data systems. Our
in-house solution architecture team has the capability to understand and integrate our clients’
voice and data networks with our networks, support procedures, security environment and reporting
procedures to create a homogeneous environment for consistent service delivery.
We have a technology operations team which provides IT support to our employees to ensure that our
employees face minimal loss in time and efficiency in their work processes. In addition, we have an
enterprise wide “Centralized Service Desk” where our employees can log their requests or report any
malfunctions.
Government Regulations
Information Service Industry Regulations
On June 24, 2000, the State Council promulgated the
Certain Policies in Encouraging the Development
of Software and Integrated Circuit Industry
(the “Encouraging Policy”) to promote the development
of the software and integrated circuit industries in China. Pursuant to the Encouraging Policy, the
software enterprises in China are entitled to preferential treatment, including financing support,
tax preferential treatment, export incentives, discretion and flexibility in determining employees’
welfare benefits and remuneration. For example, a recognized software enterprise is entitled to an
exemption from EIT for its first two profitable years and a 50% reduction of its applicable EIT
rate for the subsequent three years. A key software enterprise under the State plan is entitled to
a 10% EIT rate. All of the above qualifications are subject to an annual assessment
by the relevant government authority in China. Enterprises which fail to meet the annual
examination standards are not entitled to the favorable EIT treatments.
On October 16, 2000, the Ministry of Information Industry, Ministry of Education, Ministry of
Science and Technology and the State Administration of Taxation promulgated the
Certifying
Standards and Administration Measures for Software Enterprises (Trial Implementation)
(the
“Certifying Standards”). The Certifying Standards further elaborated the provisions of the
Encouraging Policy by establishing the specific standards and procedures for the recognition and
annual assessment of software enterprises.
On January 4, 2001, the Ministry of Foreign Trade and Economic Cooperation, Ministry of Information
Industry, State Administration of Taxation, General Administration of Customs, State Administration
of Foreign Exchange and the State Statistics Bureau promulgated the Circular
Concerning Relevant
Issues about Software Export
(the “Circular”). Pursuant to the Circula
r
, enterprises exporting
software are entitled to preferential treatment including governmental financial support,
preferential interest rate of export credit and tax preferential treatment.
On February 22, 2008, the Ministry of Finance and State Administration of Taxation promulgated the
Notice of the Ministry of Finance and State Administration of Taxation on Several Preferential
Policies in Respect of Enterprise Income Tax
, which emphasizes that a recognized software
enterprise is entitled to an exemption from EIT for its first two profitable years and a 50%
reduction of its applicable EIT rate for the subsequent three years. A key software enterprise
under the State plan is entitled to a 10% EIT rate.
Intellectual Property Rights
The State Council and the State Copyright Bureau have promulgated various regulations and rules
relating to protection of software in China. Under these regulations and rules, software owners,
licensees and transferees may register their rights in software with the State Copyright Bureau or
its local branches and obtain software copyright registration certificates. We have registered our
Wensi Load management system, Octiga distribution resource management system, and Pu Te Lei En
computer translation system with the State Copyright Bureau. Although such registration is not
mandatory under PRC law, software owners, licensees and transferees are encouraged to go through
the registration process and registered software rights may receive better protections.
The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules adopted
in 2002, protects registered trademarks. The Trademark Office of the State Administration of
Industry and Commerce, or the SAIC, handles trademark registrations and grants a protection term of
10 years to registered trademarks. We have filed trademark registration applications for our
trademarks, “VANCEINFO” and “
”, with the Trademark Office of the SAIC. The registration applications
for these trademarks are still pending and, according to PRC law, we therefore do not enjoy
proprietary rights to these trademarks in China at this time.
39
Tax
See Item 5, “Operating and Financial Review and Prospects—Taxes—PRC Enterprises Income Tax, or
EIT, and PRC Business Tax.”
Regulation of Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange.
The principal regulations governing foreign currency exchange in China
are the Foreign Exchange Administration Regulations (1996), as amended. Under the regulations, the
RMB is freely convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions, but not for capital
account items, such as direct investment, loan, repatriation of investment and investment in
securities outside China, unless the prior approval of the SAFE is obtained.
In addition, any loans to our operating subsidiaries in China, each a foreign invested enterprise,
cannot, in the aggregate, exceed the difference between their respective approved total investment
amount and their
respective approved registered capital amount. Furthermore, any foreign loan must be registered
with SAFE or its local counterparts for the loan to be effective. Any increase in the amount of the
total investment and registered capital must be approved by the PRC Ministry of Commerce or its
local counterpart. We may not be able to obtain these government approvals or registrations on a
timely basis, if at all, which could result in a delay in the process of making these loans.
The dividends generated on or after January 1, 2008 and paid by the subsidiary to its foreign
shareholders are deemed income of the foreign shareholders and are taxable in China if the foreign
shareholders are considered as non-resident enterprises without any establishment or place within
China or if the dividends payable have no connection with the establishment or place of the foreign
shareholders within China. Pursuant to the Administration Rules of the Settlement, Sale and Payment
of Foreign Exchange (1996), foreign-invested enterprises in China may purchase or remit foreign
exchange, subject to a cap approved by the SAFE, for settlement of current account transactions
without the approval of the SAFE. Foreign exchange transactions under the capital account are still
subject to limitations and require approvals from, or registration with, the SAFE and other
relevant PRC governmental authorities.
Dividend Distribution.
The principal regulations governing distribution of dividends of foreign
holding companies include the Foreign Investment Enterprise Law (1986), as amended, and the
Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended.
Under these regulations, FIEs in China may pay dividends only out of their accumulated profits, if
any, determined in accordance with PRC accounting standards and regulations. In addition, FIEs in
China are required to allocate at least 10% of their respective accumulated profits each year, if
any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital
of the enterprises. These reserves are not distributable as cash dividends. Future dividend
distributions by VanceInfo Beijing to our company are subject to these regulations.
Notice 75.
On October 21, 2005, the SAFE issued Notice 75, which became effective as of November 1,
2005. According to Notice 75, prior registration with the local SAFE branch is required for PRC
residents to establish or to control an offshore company for the purposes of financing that
offshore company with assets or equity interests in an onshore enterprise located in the PRC, or
offshore special purpose company. An amendment to registration or filing with the local SAFE branch
by such PRC resident is also required for the injection of equity interests or assets of an onshore
enterprise in the offshore special purpose company or overseas funds raised by such offshore
company, or any other material change involving a change in the capital of the offshore special
purpose company.
40
Moreover, Notice 75 applies retroactively. As a result, PRC residents who have established or
acquired control of offshore special purpose companies that have made onshore investments in the
PRC in the past are required to complete the relevant registration procedures with their local SAFE
branch by March 31, 2006. To further clarify the implementation of Notice 75, the SAFE issued
Notice 106 on May 29, 2007. Under Notice 106, PRC subsidiaries of an offshore special purpose
company are required to coordinate and supervise the filing of SAFE registrations by the offshore
holding company’s shareholders or beneficial owners who are PRC residents in a timely manner.
Certain of the holders of options to purchase our ordinary shares and holders of restricted share
units are PRC residents. Under the relevant rules, failure to comply with the registration
procedures set forth in Notice 75 may result in restrictions being imposed on the foreign exchange
activities of the relevant onshore company, including the increase of its registered capital, the
payment of dividends and other distributions to its offshore parent or affiliate and the capital
inflow from the offshore entity, and may also subject relevant PRC residents to penalties under PRC
foreign exchange administration regulations.
New M&A Regulations and Overseas Listings
On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the State
Assets Supervision and Administration Commission, the State Administration for Taxation, the State
Administration for Industry and Commerce, the CSRC and the SAFE, jointly issued the Regulations on
Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became
effective on September 8, 2006. This New M&A Rule, among other things, includes provisions that
purport to require that an offshore special purpose vehicle formed for purposes of overseas listing
of equity interests in PRC companies and controlled directly or indirectly by PRC companies or
individuals obtain the approval of the CSRC prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange.
On September 21, 2006, the CSRC published on its official website procedures regarding its approval
of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing
of a number of documents with the CSRC and it would take several months to complete the approval
process. The application of this new PRC regulation remains unclear with no consensus currently
existing among leading PRC law firms regarding the scope of the applicability of the CSRC approval
requirement.
Our PRC counsel, Jun He Law Offices, has advised us that, based on their understanding of the
current PRC laws and regulations as well as the procedures announced on September 21, 2006:
|
•
|
|
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.
|
41
C. Organizational Structure
The following diagram illustrates our corporate structure:
|
|
|
|
|
(1)
|
|
Vancelnfo 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 the laws of the British
Virgin Islands, 100% owned by VanceInfo.
|
|
|
|
(5)
|
|
Nanjing VanceInfo Creative Software Technology Limited, a Chinese limited liability company,
100% owned by VanceInfo Beijing.
|
|
|
|
(6)
|
|
Shanghai VanceInfo Creative Software Technology Limited, 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.
|
42
|
|
|
|
|
(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)
|
|
Wireless Info Tech, Ltd., or WIT, a corporation incorporated under the laws of the California
in the United States, 100% owned by VanceInfo US.
|
|
|
|
(10)
|
|
VanceInfo Malaysia Inc. Sdn. Bhd., or VanceInfo Malaysia, a corporation incorporated under
the laws of Malaysia, 100% owned by VanceInfo BVI.
|
|
|
|
(11)
|
|
VanceInfo Technologies Limited, or VanceInfo Hong Kong, formerly named Worksoft Information
Technology Service Limited, a company incorporated the laws of Hong Kong, 100% owned by
VanceInfo BVI.
|
|
|
|
(12)
|
|
VanceInfo Technologies Limited, or VanceInfo Tianjin, a Chinese Limited liability company,
100% owned by VanceInfo Hong Kong.
|
|
|
|
(13)
|
|
Shenzhen VanceInfo Creative Software Technology Limited, or VanceInfo Shenzhen, a Chinese
Limited liability company, 100% owned by VanceInfo Hong Kong.
|
D. Property, Plants and Equipment
Our principal executive offices are located on premises comprising approximately 8,000 square
meters in an office building in Zhongguancun Software Park, Beijing, China. We have leased all of
our facilities from unrelated parties, and most of our leases are renewable at our option.
We have maintained a number of offices in China, the United States, Japan, Hong Kong and Malaysia
under leases with terms ranging from one to four years.
The following table describes each of the leases for our headquarters and other major delivery
centers as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
Space
|
|
|
|
|
|
|
|
|
(in square
|
|
|
|
|
|
|
Location
|
|
meters)
|
|
|
Usage of Property
|
|
Expiration Time
|
|
Beijing
|
|
|
3,005
|
|
|
Headquarters, R&D Services
|
|
February 2011
|
|
|
|
|
1,477
|
|
|
General Administration
|
|
|
|
|
|
|
|
|
|
Globalization and Localization
|
|
|
|
|
|
|
|
|
|
R&D Services
|
|
March 2012
|
|
|
|
|
2,425
|
*
|
|
General Administration
|
|
|
|
|
|
|
|
|
|
Globalization and Localization
|
|
|
|
|
|
|
|
|
|
R&D Services
|
|
December 2009
|
|
|
|
|
1,602
|
|
|
ADM, R&D Services
|
|
February 2012
|
|
|
|
|
1,487
|
|
|
R&D Services
|
|
March 2010
|
|
|
|
|
2,563
|
|
|
R&D Services
|
|
June 2010
|
|
|
|
|
3,025
|
|
|
R&D Services
|
|
December 2012
|
|
|
|
|
4,452
|
|
|
R&D Services
|
|
July 2011
|
|
|
|
|
1,335
|
|
|
R&D Services
|
|
September 2010
|
|
Shanghai
|
|
|
1,503
|
|
|
Quality Assurance and Testing
|
|
March 2010
|
|
|
|
|
922
|
|
|
R&D Services
|
|
October 2011
|
|
|
|
|
1,739
|
|
|
R&D Services
|
|
May 2010
|
|
|
|
|
1,758
|
|
|
ADM, Quality Assurance and
|
|
|
|
|
|
|
|
|
|
Testing, R&D Services
|
|
April 2010
|
|
|
|
|
2,902
|
|
|
ADM
|
|
May 2012
|
|
|
|
|
3,022
|
*
|
|
ADM, Quality Assurance and
Testing, R&D Services
|
|
May 2010
|
|
Nanjing
|
|
|
3,000
|
|
|
R&D Services
|
|
February 2012
|
|
Shenzhen
|
|
|
3,838
|
*
|
|
ADM, R&D Services
|
|
September 2013
|
|
|
|
|
1,213
|
|
|
R&D Services
|
|
September 2013
|
|
Chengdu
|
|
|
1,200
|
|
|
R&D Services
|
|
March 2010
|
|
|
|
|
|
*
|
|
The sum of space under multiple leases.
|
43
We
currently have capacity for approximately 6,200 professionals and general and administrative
personnel at these facilities. As of March 31, 2009, we used approximately 83% of our existing
office space for our operations.
ITEM 4A UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and
should be read in conjunction with our consolidated financial statements and their related notes
included in this annual report on Form 20-F. This report contains forward-looking statements. See
“Introduction—Forward-Looking Information.” In evaluating our business, you should carefully
consider the information provided under the caption “Risk Factors” in this annual report on Form
20-F. We caution you that our businesses and financial performance are subject to substantial risks
and uncertainties.
A. Operating Results
Overview
We are an IT service provider and one of the leading offshore software development companies in
China. We deliver a comprehensive range of IT services through our globally integrated network of
onsite and offsite delivery locations, primarily in China, to enable our clients to focus on their
core competencies and improve operating efficiencies. Our IT services include R&D services,
enterprise solutions, ADM, quality assurance and testing, as well as globalization and
localization. We provide these services primarily to corporations headquartered in the United
States, Europe, Japan and China, targeting high-growth industries such as technology,
telecommunications, financial services, manufacturing, retail and distribution. We have a team of
over 5,400 professionals as of March 31, 2009 and operate a number of CDCs, and also deliver our
services at clients’ facilities or via our offices in major cities across China and in Washington
and California, the United States, and in Japan. Our net revenues grew from US$29.1 million in 2006
to US$102.7 in 2008, representing a CAGR of 88.0%. Our net income grew from US$4.4 million in 2006
to US$16.2 million in 2008, representing a CAGR of 92.3%.
Factors Affecting Our Results of Operations
We believe the most significant factors that affect our business and results of operations are:
|
•
|
|
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.
|
44
Our management evaluates our results of operations by examining financial and operating data in a
variety of categories, including service lines, clients, and geographic markets. We manage and
market our business according to our service lines and industry practices. Our IT services include
R&D services, enterprise solutions, ADM, quality assurance and testing, as well as globalization
and localization. We provide these
services primarily to corporations headquartered in the United States, Europe, Japan and China.
Net Revenues
Our net revenues are net of business tax and other sales tax. In recent years, we have experienced
rapid growth and significantly expanded our business. Our net revenues grew from US$29.1 million in
2006 to US$62.7 million in 2007 and US$102.7 million in 2008.
We discuss below the breakdown of our net revenues by service lines, clients, and geographic
markets.
Net Revenues by Service Lines
We derive net revenues from the provision of our IT services, including R&D services, enterprise
solutions, ADM, quality assurance and testing, and globalization and localization.
Set forth below is our net revenue breakdown by service lines for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
R&D services
|
|
|
18,266
|
|
|
|
62.9
|
%
|
|
|
36,013
|
|
|
|
57.4
|
%
|
|
|
60,808
|
|
|
|
59.2
|
%
|
|
Globalization and localization
|
|
|
3,086
|
|
|
|
10.6
|
|
|
|
3,886
|
|
|
|
6.2
|
|
|
|
4,259
|
|
|
|
4.2
|
|
|
Enterprise solutions
|
|
|
2,163
|
|
|
|
7.4
|
|
|
|
8,748
|
|
|
|
14.0
|
|
|
|
13,553
|
|
|
|
13.2
|
|
|
ADM
|
|
|
2,328
|
|
|
|
8.1
|
|
|
|
9,348
|
|
|
|
14.9
|
|
|
|
17,242
|
|
|
|
16.8
|
|
|
Quality assurance and testing
|
|
|
3,208
|
|
|
|
11.0
|
|
|
|
4,719
|
|
|
|
7.5
|
|
|
|
6,801
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
29,051
|
|
|
|
100.0
|
%
|
|
|
62,714
|
|
|
|
100.0
|
%
|
|
|
102,663
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D services have accounted for a majority of our net revenues in recent years. On the other hand,
our net revenues from ADM increased most significantly from 2006 to 2008 as we increased our
efforts in these service lines. Our net revenues from globalization and localization, enterprise
solutions, and quality assurance and testing services also increased in absolute numbers, but
decreased as a percentage of our total net revenues in 2008 compared to 2007.
Net Revenues by Clients
We have achieved strong revenue growth by focusing on select, long-term client relationships that
we refer to as strategic accounts. Currently, our strategic accounts include Microsoft, IBM,
Huawei, TIBCO, and a European mobile handset manufacturer, and we commenced our relationships with
them in 1995, 1997, 2004, 2005 and 2007, respectively, and we have steadily expanded our business
and service offerings to these clients since then. Net revenues from these clients grew from
US$16.6 million, or 57.2% of our total net revenues, in 2006, to US$55.2 million, or 53.8% of our
total net revenues, in 2008.
45
As illustrated in the table below, a significant proportion of our net revenues has been derived
from a limited number of clients. Microsoft and IBM, our top two clients, each accounted for over
20% of our net revenues in 2006. In the aggregate, these two clients accounted for 53.1% of our net
revenues in 2006. For the year ended December 31, 2007, each of these two clients accounted for 10%
or more of our net revenues, and in the aggregate accounted for 34.6% of our net revenues in 2007.
For the year ended December 31, 2008, each of Microsoft, IBM and Huawei accounted for 10% or more
of our net revenues, and in the aggregate accounted for 38.8% of our net revenues in 2008. We
initially developed relationships with certain divisions of Microsoft, IBM and Huawei, based on
which we have cross-sold our wide range of services to their other departments and regional
offices. The increases in net revenues from Microsoft, IBM and Huawei were primarily attributable
to cross-selling and enhanced relationships.
In recent years, we have been diversifying our client base by implementing various initiatives,
including adding new strategic accounts, expanding our industry practices and increasing our
service lines. The number of our clients with at least US$1 million in annual revenue increased
significantly from 5 for 2006 to 18 for 2008. The percentage of our net revenues derived from our
top five clients decreased from 69.3% in 2006 to 53.7% in 2007 and remained essentially constant at
53.8% in 2008. The percentage of our net revenues derived from our top ten clients decreased from
79.7% in 2006 to 69.4% in 2007 and 68.6% in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
Clients accounting
for 10% or more of
our net revenues
|
|
|
15,418
|
|
|
|
53.1
|
%
|
|
|
21,678
|
|
|
|
34.6
|
%
|
|
|
39,880
|
|
|
|
38.8
|
%
|
|
Top five clients
|
|
|
20,143
|
|
|
|
69.3
|
|
|
|
33,707
|
|
|
|
53.7
|
|
|
|
55,240
|
|
|
|
53.8
|
|
|
Top 10 clients
|
|
|
23,167
|
|
|
|
79.7
|
|
|
|
43,523
|
|
|
|
69.4
|
|
|
|
70,449
|
|
|
|
68.6
|
|
The volume of work we perform for specific clients is likely to vary from year to year, as we
typically are not their exclusive external IT service provider. Accordingly, a major client in one
year may not contribute the same amount or percentage of our net revenues in a subsequent year.
Net Revenues by Geographic Markets
We record our net revenues based on the geographic regions in which the headquarters of our clients
are located irrespective of the location of the specific client entity which we serve or the
locations at which our services are delivered or the invoice is rendered. We classify our net
revenues primarily into four geographic markets: the United States, Europe, Japan and China. We
typically provide IT services to our clients to enhance and facilitate their operations in China.
As the table below illustrates, a significant portion of our net revenues is derived from clients
headquartered in the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
United States
(1)
|
|
|
24,717
|
|
|
|
85.1
|
%
|
|
|
43,153
|
|
|
|
68.8
|
%
|
|
|
56,175
|
|
|
|
54.7
|
%
|
|
Europe
(1)
|
|
|
714
|
|
|
|
2.5
|
|
|
|
6,284
|
|
|
|
10.0
|
|
|
|
14,991
|
|
|
|
14.6
|
|
|
Japan
(1)
|
|
|
1,548
|
|
|
|
5.3
|
|
|
|
5,828
|
|
|
|
9.3
|
|
|
|
9,157
|
|
|
|
8.9
|
|
|
China
(1)
|
|
|
2,065
|
|
|
|
7.1
|
|
|
|
7,329
|
|
|
|
11.7
|
|
|
|
22,045
|
|
|
|
21.5
|
|
|
Others
|
|
|
7
|
|
|
|
0.0
|
|
|
|
120
|
|
|
|
0.2
|
|
|
|
295
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
29,051
|
|
|
|
100.0
|
%
|
|
|
62,714
|
|
|
|
100.0
|
%
|
|
|
102,663
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Countries or regions where the headquarters of our clients are located.
|
While we expect that a substantial portion of our net revenues will continue to be derived from
strategic clients headquartered in the United States, we expect that, as a result of our business
development efforts, we will derive an increasing portion of our net revenues from clients
headquartered in Europe and China.
46
Cost of Revenues
Cost of revenues represented 61.8%, 61.5% and 61.3% of our net revenues for the years ended
December 31, 2006, 2007, and 2008, respectively. Our cost of revenues largely consists of
compensation and benefit expenses of our professionals, including share-based compensation
expenses, subcontracting costs, travel expenses, rental expenses, depreciation expenses relating to
computers and equipment used by our professionals, telecommunications expenses and office expenses.
The principal component of our cost of revenues is the compensation and benefit expenses of our
professionals. A majority of our professionals are located in China, where labor costs in the IT services industry
are relatively low. In 2008, our compensation and benefit expenses, excluding share-based
compensation expenses, were US$46.0 million, compared to US$27.7 million in 2007 and US$13.8
million in 2006. As wages in China continue to increase, we may experience increases in our
compensation and benefit expenses, particularly expenses for project managers and other mid-level
professionals. To control our compensation cost, we will continue to recruit professionals from
outside the major cities in China where compensation tends to be lower. We seek to maintain
compensation levels in accordance with prevailing trends in our industry in China.
The utilization rates of our professionals also affect our gross profits. We define professionals’
utilization rate as the proportion of total billed man-months or man-hours to total available
man-months or man-hours, including professionals in training, during holidays and on vacation. We
manage utilization by monitoring project requirements and timetables. The number of professionals
assigned to a project varies according to the size, complexity, duration and demands of the
project. An unanticipated termination of a significant project could also cause us to experience
lower professional utilization resulting from a higher than expected number of unassigned
professionals. In addition, we do not fully utilize our professionals when they are enrolled in
training programs.
Our subcontractor cost includes expenses we incur for hiring subcontractors and freelancers from
time to time. We use subcontractors and freelancers primarily to perform short-term assignments in
certain specialty areas in connection with large projects. In 2008, we incurred a subcontracting
cost of US$10.4 million, compared to US$6.1 million in 2007 and US$2.0 million in 2006.
We incur travel expenses primarily due to our professionals’ traveling to perform onsite work for
projects. In 2008, our travel expenses were US$3.2 million, compared to US$3.1 million in 2007 and
US$1.2 million in 2006. We expect our travel expenses to increase as our overseas onsite services
and enterprise solutions services provided to domestic clients grow. We plan to explore
opportunities to establish additional overseas delivery offices and expand into second-tier cities
in China according to market demand and client preferences, which will also increase our
professionals’ travel expenses overseas and in China.
We expect our cost of revenues to increase in line with the growth of our business.
Operating Expenses
General and Administrative Expenses
General
and administrative expenses represented 21.1%, 22.1% and 21.0% of our net revenues for the
years ended December 31, 2006, 2007 and 2008, respectively. General and administrative expenses
consist primarily of compensation and benefit expenses, including share-based compensation
expenses, relating to personnel other than professionals and our business development team, rental
expenses, depreciation and amortization expenses and overhead expenses. General and administrative
expenses also include legal and other professional fees and miscellaneous administrative costs.
Depreciation and amortization expenses as a component of general and administrative expenses
excluded those included in cost of revenues and selling and marketing expenses. We expect our
general and administrative expenses to increase as we hire additional personnel and otherwise incur
additional expenses to support our operations as a public company, including compliance-related
costs.
47
Selling and Marketing Expenses
Selling
and marketing expenses represented 2.4%, 3.7% and 4.2% of our net revenues for the years
ended December 31, 2006, 2007 and 2008, respectively. Selling and marketing expenses consist
primarily of compensation and benefit expenses relating to our business development and marketing
personnel, including share-based compensation expenses, amortization expenses, travel expenses,
advertising expenses, selling and marketing-related office expenses. Amortization expenses as a
component of selling and marketing expenses include amortization of customer base and relationships
and contract backlog acquired from business combinations. We expect our selling and marketing
expenses to increase in the future as we increase our sales efforts, hire additional sales
personnel, target new markets, establish new sales offices both in China and
overseas and initiate additional marketing programs to further build our brand.
Share-based Compensation Expenses
We adopted our 2005 Stock Plan in November 2005 and amended the plan in April and May 2006 to
increase the total number of ordinary shares underlying the options issuable under the plan. We
adopted our 2007 Share Incentive Plan in July 2007 and amended the plan in August 2007. Under the
2005 Stock Plan, we have reserved 4,267,500 ordinary shares for issuance upon exercise of awards
granted thereunder. Under the 2007 Share Incentive Plan, we have authorized the issuance of up to
1,100,000 ordinary shares plus an annual 3% increase of then total outstanding shares on the first
business day of each calendar year beginning in 2008, upon exercise of awards granted thereunder.
We granted options to purchase and restricted share units for up to 3,011,700, 2,488,050 and
1,353,680 ordinary shares to our directors, officers and other employees in 2006, 2007 and 2008. As
of December 31, 2008, there were 3,777,340 ordinary shares issuable upon exercise of outstanding
options under our 2005 Stock Plan, as amended, and 2,189,683 ordinary shares issuable upon exercise
of outstanding options and restricted share units under our 2007 Share Incentive Plan, as amended.
We recorded share-based compensation expenses for the fair value of options at the grant dates and
recognized such share-based compensation expenses using a graded-vesting attribution method over
the vesting period of the options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Share-based compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
45
|
|
|
|
111
|
|
|
|
265
|
|
|
General and administrative expenses
|
|
|
632
|
|
|
|
808
|
|
|
|
950
|
|
|
Selling and marketing expenses
|
|
|
36
|
|
|
|
77
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
713
|
|
|
|
996
|
|
|
|
1,391
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the unamortized compensation expenses in connection with our outstanding
options and restricted share units were US$1.8 million.
Other Operating Income
Other operating income primarily relate to subsidies received from the PRC local government for
meeting the conditions required by various incentive policies, such as our office location in the
Haidian district in Beijing and our passing certain technological certification. Our continued
eligibility for such subsidies is subject to the discretion of the PRC local government. Moreover,
the PRC central government or local government could determine at any time to immediately eliminate
or reduce these government subsidies. Upon expiration of these government subsidies, we will
consider available options, in accordance with applicable laws, that would enable us to qualify for
further government subsidies to the extent they are then available to us.
48
Taxes
Under the current laws of the Cayman Islands, the Company is not subject to tax on its income or
capital gains. In addition, payment of dividends by us to our shareholders is not subject to
withholding tax in the Cayman Islands. VanceInfo BVI is a tax exempted company incorporated in the
British Virgin Islands. VanceInfo US was 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 2007 and
2008. WIT was 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% in 2008.
PRC Enterprise Income Tax, or EIT
Prior to January 1, 2008, PRC EIT was generally assessed at the rate of 33% of taxable income.
Under the
applicable PRC rules and policies, an enterprise qualified as a “high and new technology
enterprise” located in the Beijing New Industry Development Pilot Zone was entitled to a
preferential EIT rate of 15% and was further entitled to a three-year EIT exemption from either its
first year of operation or, if it was incorporated in the second half of a calendar year, its
second year of operation if so selected, and a 50% reduction of its applicable EIT rate for the
succeeding three years. VanceInfo Beijing, Prosoft, and ITC were qualified as “high and new
technology enterprises” located in the Beijing New Industry Development Pilot Zone, and enjoyed
preferential tax treatment as a result of this status. VanceInfo Beijing was incorporated in the
second half of 2004, and elected to be exempted from EIT from 2005 to 2007 and be subject to a 7.5%
EIT rate from 2008 to 2010. Prosoft and ITC were incorporated in June 2004, and had been entitled
to be exempted from EIT from 2004 to 2006 and be subject to a 7.5% EIT rate from 2007 to 2009. In
addition, under the PRC rules and policies then effective, an enterprise qualified as a “software
enterprise” was entitled to an exemption from EIT for the first two profitable years and a 50%
reduction of its applicable EIT rate for the subsequent three years. Shanghai VanceInfo, one of our
subsidiaries, was incorporated in 2002 and was recognized as a “software enterprise” in 2003,
therefore, it was entitled to be exempted from EIT in 2003 and 2004, and was subject to a 16.5% EIT
rate from 2005 to 2007. Furthermore, Shanghai VanceInfo was recognized as a “key software
enterprise under the State plan” in 2007, which entitled it to a 10% preferential income tax rate
in 2007.
Megainfo was incorporated in 2001, and it was recognized as a “software enterprise” in 2001.
Therefore, it was exempted from EIT from 2002 to 2003 and was subject to an 18% EIT rate from 2004
to 2006. In 2007, a 33% EIT was applicable to Megainfo. Chosen was incorporated in 2006 and was
subject to a 33% EIT prior to January 1, 2008.
On March 16, 2007, the National People’s Congress of China enacted a new EIT Law, which took effect
beginning January 1, 2008. On December 6, 2007, the State Council also adopted the Implementing
Rules, which also took effect beginning January 1, 2008. Moreover, on December 26, 2007, the State
Council circulated the Notice on Implementation of the Transitional Preferential Policies in
respect of Enterprise Income Tax, which took effect beginning December 26, 2007. On February 22,
2008, the Ministry of Finance and the State Administration of Taxation issued the Notice of the
Ministry of Finance and State Administration of Taxation on Several Preferential Policies in
respect of Enterprise Income Tax, which took effect beginning February 22, 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%. Preferential tax treatments will continue to
be granted to entities that are classified as “high and new technology enterprises strongly
supported by the State” or that conduct business in encouraged sectors, whether FIEs or domestic
companies. On April 14, 2008, Ministry of Science and Technology, Ministry of Finance and State
Administration of Taxation enacted the Management Measures for Certifying High and New Technology
Enterprises, which retroactively became effective on January 1, 2008. Under the new EIT Law,
enterprises that had been established and already enjoyed then applicable preferential tax
treatment prior to March 16, 2007 will continue to enjoy it subject to the following
qualifications: (i) in the case of preferential tax rates, for a period of five years from January
1, 2008, or (ii) in the case of a preferential tax exemption or reduction for a specified term,
until the expiration of such term. In addition, certain qualified high-technology companies may
still benefit from a preferential tax rate of 15% if they own their core intellectual properties
and are classified into certain industries strongly supported by the State to be set forth by the
certain departments of the State Council. Because the new EIT Law and relevant rules were recently
promulgated, there is still uncertainty with respect to their interpretation and implementation.
49
In December 2008, VanceInfo Beijing was qualified as a “high and new technology enterprise”.
Despite present uncertainties resulting from the limited PRC tax guidance, we believe it is more
likely than not that VanceInfo Beijing can continue to enjoy the preferential tax rate of 7.5%, a
50% reduction of its applicable EIT rate of 15%, 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 from 2008 to 2010. Our other subsidiaries located in the PRC were
subject to a 25% EIT rate for the year ended December 31, 2008.
Moreover, under the new EIT Law and the Implementing Rules, an enterprise established outside of
the PRC with “de facto management bodies” within the PRC is considered as a resident enterprise and
will be subject to a PRC income tax on its global income. According to the Implementing Rules, “de
facto management
bodies” refer to “establishments that carry out substantial and overall management and control over
the manufacturing and business operations, personnel, accounting, properties, etc. of an
enterprise.” Accordingly, our holding company may be considered a resident enterprise and may
therefore be subject to a PRC income tax on our global income. We do not believe our holding
company and our subsidiaries located outside of the PRC are PRC resident enterprises. However, if
we are considered a resident enterprise and earn income other than dividends from our PRC
subsidiary, such PRC income tax on our global income could significantly increase our tax burden
and materially and adversely affect our cash flow and profitability.
Under the applicable PRC tax laws in effect before January 1, 2008, dividend payments to foreign
investors made by foreign-invested enterprises such as our PRC subsidiary, VanceInfo Beijing, are
exempt from PRC withholding tax. Pursuant to the new EIT Law and the Implementing Rules which are
effective as of January 1, 2008, however, dividends generated after January 1, 2008 and payable by
a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if
the foreign investors are considered as non-resident enterprises without any establishment or place
within China or if the dividends payable have no connection with the establishment or place of the
foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a different withholding arrangement. The Cayman
Islands, where our holding company is incorporated, does not have such a tax treaty with China.
VanceInfo Hong Kong, our wholly owned subsidiary and the direct holder of a 100% equity interest in
VanceInfo Tianjin and VanceInfo Shenzhen is incorporated in Hong Kong. According to the Mainland
and the Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to
its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more
than 5% (if the foreign investor owns directly at least 25% of the shares of the foreign-invested
enterprise). Under the New EIT Law and the Implementing Rules, if VanceInfo Hong Kong is regarded
as a resident enterprise, the dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and
VanceInfo Shenzhen will be exempt from PRC income tax. If VanceInfo Hong Kong is regarded as a
non-resident enterprise, it will be subject to a 5% withholding tax for any dividends payable to it
from VanceInfo Tianjin and VanceInfo Shenzhen.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable
future and intend to retain most of our available funds and any future earnings for use in the
operation and expansion of our business. As such, the aggregate undistributed earnings of our
subsidiaries and VIE located in the PRC that are available for distribution to us of approximately
US$30.6 million at December 31, 2008 are considered to be indefinitely reinvested under APB opinion
No. 23, Accounting for Income Taxes—Special Areas, and accordingly, no provision has been made for
the Chinese dividend withholding taxes as of December 31, 2008.
In addition, because there remains uncertainty regarding the interpretation and implementation of
the new EIT Law and its Implementation Rules, if we are regarded as a PRC resident enterprise, then
any dividends to be distributed by us to our non-PRC shareholders or any gains realized by non-PRC
shareholders or ADS holders from transfer of our shares or ADSs may be subject to PRC withholding
tax. If we are required under the new EIT Law to withhold PRC income tax on the above dividends or
gains, the investment in our shares or ADSs may be materially and adversely affected.
50
PRC Business Tax
Taxpayers providing taxable services in China are required to pay a business tax at a statutory tax
rate of 5% of their revenues. According to applicable tax rules, each of VanceInfo Beijing,
Shanghai VanceInfo, VanceInfo Tianjin, and VanceInfo Shanghai Creative, may enjoy exemption from
business tax with respect to the technology development services that they engage in that fall
under the definition of technology development business.
Minority Interest
In 2006, we held a 51% equity interest in VanceInfo Japan. Minority interest in 2006 represented
minority shareholders’ share of the net income of VanceInfo Japan. We subsequently acquired an
additional 48.99% equity interest in VanceInfo Japan and a 75% equity interest in Shanghai
VanceInfo in May 2007. We completed the acquisition of an additional 10% equity interest in
Shanghai VanceInfo in July 2008, and
acquired the remaining 15% equity interest in Shanghai VanceInfo in August 2008. Accordingly, as of
December 31, 2008, our balance sheet included an insignificant minority interest in VanceInfo
Japan. Minority interest in our statement of operations for 2007 and 2008 represented minority
shareholders’ share of the net income of Shanghai VanceInfo and VanceInfo Japan.
Deemed Dividends
We issued our Series A preferred shares in March 2005. The Series A preferred shares, unless
previously converted, were redeemable at a premium at the option of the holders 60 days after we
have redeemed our Series B preferred shares. We recognized accretion to the redemption value of our
Series A preferred shares as deemed dividends for the years ended December 31, 2006 and 2007.
Critical Accounting Policies
Our consolidated financial information has been prepared in accordance with U.S. GAAP, which
requires us to make judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities, and revenue and expenses in the financial statements and accompanying notes. We
continually evaluate these judgments and estimates based on our own historical experience,
knowledge and assessment of current business and other conditions, our expectations regarding the
future based on available information and reasonable assumptions, which together form our basis for
making judgments about matters that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, our actual results could
differ from those estimates.
Some of our accounting policies require a higher degree of judgment than others in their
application.
When reviewing our financial statements, you should consider (1) our selection of critical
accounting policies, (2) the judgment and other uncertainties affecting the application of those
policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We
believe that the following accounting policies involve the most significant judgment and estimates
used in the preparation of our financial statements.
Revenue recognition
Our revenue recognition policy is significant because our revenue is a key component of our results
of operations. We follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue recognition policy.
We derive revenues from provision of IT services. The majority of our contracts are for the
provision of services performed on a time-and-material basis. Revenues from this type of contracts
are recognized as billable services are rendered. The client is billed for related services based
on pre-agreed billing rates. There are no significant assumptions related to time-and-material
arrangements.
51
The remaining revenues are earned from fixed-price contracts. Fixed-price contracts require us to
perform services throughout the contractual period, which is generally less than one year. Revenues
from fixed-price contracts are generally recognized using a proportional performance method. The
use of this method requires management to exercise judgment and careful consideration. Our
contracts refer to milestones related to the completion of specific tasks such as planning
documentation and testing reports. We estimate the man-hours required to achieve each of these
milestones and, when the milestone is achieved, we recognize a proportion of the total revenue
under the contract based on the hours incurred in achieving that milestone against our latest
estimate of the total man-hours to be incurred to complete the contract.
Some of our contracts with customers include provision for inspection, test, acceptance or
rejection in accordance with the acceptance or completion criteria as specified in the relevant SOW
and/or work authorization. We do not believe that there is uncertainty about customer acceptance
once the services have been rendered. We are able to reliably demonstrate that the criteria
specified in the acceptance provisions and all other revenue recognition criteria are met prior to
formal customer sign-off. We believe that we would be
successful in enforcing a claim for payment even in the absence of formal sign-off.
We do not enter into maintenance service arrangements for our fixed-price contracts. For our
time-and-material contracts, we 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.
Reimbursable out-of-pocket expenses and material costs are recognized as revenues when billed in
accordance with Emerging Issues Task Force, or EITF, 01-14:
Income Statement Characterization of
Reimbursements Received for “Out-of-Pocket” Expenses Incurred
.
We account for volume discounts and pricing incentives to clients using the guidance of EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products)
. The discount terms in our arrangements with clients generally entitle the client to
discounts if the client completes a specified cumulative level of revenue transactions. The
discounts are passed on to the client either as cash payments or as a reduction of payments due
from the client. We have recorded the revenue rebate as reduction in revenues.
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.
In July 2006, the Financial Accounting Standard Board, or FASB, issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
(“FIN No.
48”) which clarifies the accounting for uncertainty in income taxes recognized in any entity’s
financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes
and
prescribes a recognition threshold and measurement attributes for financial statement disclosure of
tax positions taken or expected to be taken on a tax return. Under FIN No. 48, 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. Additionally, FIN No. 48 provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective
for fiscal years beginning after December 15, 2006, with early adoption permitted. We adopted the
provisions of FIN No. 48 effective January 1, 2007. The adoption of FIN No. 48 did not result in a
cumulative adjustment on January 1, 2007 and had no significant impact on our accounting for income
taxes for the years ended December 31, 2007 and 2008. We did not incur any interest or penalties
related to potential underpaid income tax expenses for the years ended December 31, 2007 and 2008.
52
Share-based compensation
In 2006, 2007 and 2008, we entered into award agreements pursuant to our 2005 Stock Plan and 2007
Share Incentive Plan, or plans. Under the award agreements, we had outstanding options to purchase
5,939,043 ordinary shares and had 27,980 restricted share units as of December 31, 2008. See Item
6, “Directors, Senior Management and Employees—Compensation of Directors and Executive Officers —
Share Incentive Plans.”
Under SFAS No. 123R, “Share-Based Payment”, which became effective on January 1, 2006, we are
required to recognize share-based compensation as compensation expense in our statement of
operations based on the fair value of equity awards on the grant date. With compensation expense
recognized over the period in which the recipient is required to provide service in exchange for
the award (usually the vesting period). This
statement also requires us to adopt a fair value-based method of measuring the compensation expense
related to share-based compensation. For options and restricted share units granted to employees,
we measure share-based compensation expenses or the fair value of the options and restricted share
units at the grant date. We recognize such share-based compensation expenses over the vesting
period of the options and restricted share units. Share-based payment transactions with
non-employees are accounted for as share based compensation expense in accordance with EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”.
Prior to the IPO in December 2007, when estimating the fair value of the ordinary shares on the
grant date, we considered a number of factors, including our financial condition, financial and
operating prospects with reference to our equity transactions at that time. After our IPO, we used
the prior day closing market price of our ordinary shares as the fair value of our ordinary shares
at the date of grant.
The fair value of the option award was estimated on the date of grant using the Black-Scholes
option pricing model that uses assumptions including the fair value of the ordinary shares
underlying the options, expected term, expected volatility, expected risk free interest rate and
expected dividend yield. As we did not have sufficient historical share option exercise experience,
we estimated the expected term as the average between the vesting term of the options and the
original contractual term. 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 because we did not have sufficient
historic volatility data of our own ordinary shares, which commenced public trading after our IPO.
The 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. The dividend
yield was estimated by us based on our expected dividend policy over the expected term of the
options. We are required to estimate forfeitures at the time of grant and record share-based
compensation expenses only for those awards that are expected to vest. If actual forfeitures differ
from these estimates, we may need to revise those estimates used in subsequent periods.
Accounts receivable
Our accounts receivable as of December 31, 2006, 2007 and 2008 were US$11.8 million, US$24.7
million and US$36.8 million, respectively. Our days of sales outstanding in 2006, 2007 and 2008
were 107, 104 and 106 days, respectively. We define our days of sales outstanding as the ratio of
the average accounts receivable to revenues in a year, multiplied by 365.
We conduct credit evaluations of clients and generally do not require collateral or other security
from our clients. We establish an allowance for doubtful accounts based upon estimates, historical
experience and other factors surrounding the credit risk of specific clients. The amount of
receivables ultimately not collected by us has generally been consistent with our expectations and
the allowance established for doubtful accounts. In 2006, 2007 and 2008, the provision made for
doubtful accounts was US$53,000, US$342,000 and US$587,000, respectively. If the frequency and
amount of customer defaults change due to our clients’ financial condition or general economic
conditions, our allowance for uncollectible accounts may require adjustment. As a result, we
continuously monitor outstanding receivables and adjust allowances for accounts where collection
may be in doubt.
53
The following table presents a profile of our accounts receivable in terms of days for which
accounts receivable were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Period in days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-90
|
|
|
11,482
|
|
|
|
23,850
|
|
|
|
35,938
|
|
|
91-180
|
|
|
179
|
|
|
|
668
|
|
|
|
1,066
|
|
|
More than 180
|
|
|
207
|
|
|
|
532
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,868
|
|
|
|
25,050
|
|
|
|
37,414
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and Goodwill
We account for acquired businesses using the purchase method of accounting which requires that the
assets acquired and liabilities assumed be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. The judgments made in determining the estimated fair value
assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can
materially impact our results of operations. Accordingly, for significant items, we typically
obtain assistance from third party valuation specialists. The valuations are based on information
available near the acquisition date and are based on expectations and assumptions that have been
deemed reasonable by management.
There are several methods that can be used to determine the fair value of assets acquired and
liabilities assumed. For intangible assets, we typically use the income method. This method starts
with a forecast of all of the expected future net cash flows. These cash flows are then adjusted to
present value by applying an appropriate discount rate that reflects the risk factors associated
with the cash flow streams. Some of the more significant estimates and assumptions inherent in the
income method or other methods include the amount and timing of projected future cash flows; the
discount rate selected to measure the risks inherent in the future cash flows; and the assessment
of the asset’s life cycle and the competitive trends impacting the asset, including consideration
of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of
an intangible asset also requires judgment as different types of intangible assets will have
different useful lives and certain assets may even be considered to have indefinite useful lives.
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 goodwill to the carrying value of a
reporting unit’s 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.
Some of the more significant estimates and assumptions inherent in the goodwill impairment
estimation process using the market approach include the selection of appropriate comparable
companies, the determination of market value multiples for the comparable companies, the subsequent
selection of an appropriate market value multiple for the business based on a comparison of the
business to the comparable companies, the determination of applicable premiums and discounts based
on any differences in marketability between the business and the comparable companies and, when
considering the income approach, include the required rate of return used in the discounted cash
flow method, which reflects capital market conditions and the specific risks associated with the
business. Other estimates inherent in the income approach include long-term growth rates and cash
flow forecasts for the business.
54
Estimates of fair value result from a complex series of judgments about future events and
uncertainties and rely heavily on estimates and assumptions at a point in time. The judgments made
in determining an estimate of fair value can materially impact our results of operations. The
valuations are based on information available as of
the impairment review date and are based on expectations and assumptions that have been deemed
reasonable by management. Any changes in key assumptions, including unanticipated events and
circumstances, may affect the accuracy or validity of such estimates and could potentially result
in an impairment charge.
Recently issued accounting standards
In September 2006, the FASB issued SFAS, No. 157, effective January 1, 2008. We adopted the
measurement and disclosure other than those requirements related to nonfinancial assets and
liabilities in accordance with guidance from FASB Staff Position, or FSP, 157-2, “Effective Date of
FASB Statement No. 157,” which delayed the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), until the beginning of
fiscal year 2009. We do not expect that the adoption of SFAS No. 157 for nonfinancial assets and
liabilities will have a significant effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No.141, Business Combinations (Revised 2007). SFAS No. 141R
is relevant to all transactions or events in which one entity obtains control over one or more
other businesses. SFAS No. 141R requires an acquirer to recognize any assets and noncontrolling
interest acquired and liabilities assumed to be measured at fair value as of the acquisition date.
Liabilities related to contingent consideration are recognized and measured at fair value on the
date of acquisition rather than at a later date when the amount of the consideration may be
resolved beyond a reasonable doubt. This revised approach replaces SFAS No. 141’s cost allocation
process in which the cost of an acquisition was allocated to the individual assets acquired and
liabilities assumed based on their respective fair value. SFAS No. 141R requires any
acquisition-related costs and restructuring costs to be expensed as incurred as opposed to
allocating such costs to be assets acquired and liabilities assumed as previously required by SFAS
No. 141. Under SFAS No. 141R, an acquirer recognizes liabilities for a restructuring plan in
purchase accounting only if the requirements of SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, are met. SFAS No. 141R allows for the recognition of pre-acquisition
contingencies are likely to materialize. If this criterion is not met at the acquisition date, then
the acquirer accounts for the non-contractual contingencies in accordance with recognition criteria
set forth under SFAS No. 5, Accounting for Contingencies, in which case no amount should be
recognized in purchase accounting. SFAS No. 141R is effective as of the beginning of an entity’s
first fiscal year that begins after December 15, 2008. We do not expect that the adoption of SFAS
No. 141R will have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No.160, Noncontrolling Interests in Consolidated Financial
Statements-an Amendment of ARB No. 51. This Statement amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity and should be reported as equity on the financial statements. SFAS No.
160 requires consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. Furthermore, disclosure of the
consolidated net income attributable to the parent and to the noncontrolling interest is required
on the face of the financial statements. SFAS No. 160 is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008. We do not expect that the adoption
of SFAS No. 160 will have a material impact on our financial statements.
55
In April 2008, the FASB issued FSP FAS 142-3: Determination of the Useful Life of Intangible
Assets. This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No.142,
Goodwill and Other Intangible Assets. This FSP is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The
guidance for determining the useful life of a recognized intangible asset in this FSP shall be
applied prospectively to intangible assets acquired after the effective date. We do not expect that
the adoption of FSP 142-3 will have a material impact on our financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This FSP gives guidance on the
computation of earnings per share and the impact of share-based instruments that contain certain
nonforfeitable rights to dividends or
dividend equivalents. This FSP is effective for fiscal years beginning after December 31, 2008 and
early application is prohibited. We do not expect that the adoption of FSP 03-6-1 will have a
material impact on our financial statements.
At a November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in Issue
EITF 08-6: Equity Method Investment Accounting Considerations. Because of the significant changes
to the guidance on subsidiary acquisitions and subsidiary equity transactions and the increased use
of fair value measurements as a result of SFAS No. 141R and SFAS No. 160, questions have arisen
regarding the application of that accounting guidance to equity method investments. EITF 08-6
provides guidance for entities that acquire or hold investments accounted for under the equity
method. This issue is effective for transactions occurring in fiscal years and interim periods
beginning on or after December 15, 2008. Early adoption is not permitted. We do not expect that the
adoption of EITF 08-6 will have a material impact on our financial statements.
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the other-than-temporary impairment guidance in
U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities in the financial
statements. This FSP does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. This FSP will be effective on April 1, 2009.
This FSP does not require disclosures for earlier periods presented for comparative purposes at
initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only
for periods ending after initial adoption. We do not expect that the adoption of this FAS will have
a material impact on our financial statements.
On April 9, 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance
with SFAS No. 157 when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying circumstances that indicate
a transaction is not orderly. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and regardless of the
valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. This FSP will be effective on April 1, 2009
and will be applied prospectively. This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP
requires comparative disclosures only for periods ending after initial adoption. We do not expect
that the adoption of this FSP will have a material impact on our financial statements.
56
Results of Operations
The following table sets forth a summary of our consolidated statements of operations for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
29,051
|
|
|
|
62,714
|
|
|
|
102,663
|
|
|
Cost of revenues
|
|
|
(17,961
|
)
|
|
|
(38,544
|
)
|
|
|
(62,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,090
|
|
|
|
24,170
|
|
|
|
39,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(6,140
|
)
|
|
|
(13,838
|
)
|
|
|
(21,625
|
)
|
|
Selling and marketing expenses
|
|
|
(681
|
)
|
|
|
(2,342
|
)
|
|
|
(4,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(6,821
|
)
|
|
|
(16,180
|
)
|
|
|
(25,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
54
|
|
|
|
860
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,323
|
|
|
|
8,850
|
|
|
|
14,705
|
|
|
Interest income
|
|
|
592
|
|
|
|
1,032
|
|
|
|
2,028
|
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(47
|
)
|
|
|
(69
|
)
|
|
Exchange differences
|
|
|
(93
|
)
|
|
|
317
|
|
|
|
703
|
|
|
Change in fair value of the warrants
|
|
|
(405
|
)
|
|
|
(357
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and minority interest
|
|
|
4,413
|
|
|
|
9,795
|
|
|
|
17,367
|
|
|
Income tax expense
|
|
|
(2
|
)
|
|
|
(174
|
)
|
|
|
(1,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before earnings in equity investment and minority
interest
|
|
|
4,411
|
|
|
|
9,621
|
|
|
|
16,069
|
|
|
Earnings in equity investment
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in net income of consolidated subsidiary
|
|
|
(35
|
)
|
|
|
(52
|
)
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,376
|
|
|
|
9,569
|
|
|
|
16,173
|
|
|
Deemed dividend on Series A convertible redeemable
preferred shares
|
|
|
(611
|
)
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to holders of ordinary shares
|
|
|
3,765
|
|
|
|
8,937
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain financial information as a percentage of our net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of revenues
|
|
|
(61.8
|
)
|
|
|
(61.5
|
)
|
|
|
(61.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
38.2
|
|
|
|
38.5
|
|
|
|
38.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(21.1
|
)
|
|
|
(22.1
|
)
|
|
|
(21.0
|
)
|
|
Selling and marketing expenses
|
|
|
(2.4
|
)
|
|
|
(3.7
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(23.5
|
)
|
|
|
(25.8
|
)
|
|
|
(25.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
0.2
|
|
|
|
1.4
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14.9
|
|
|
|
14.1
|
|
|
|
14.3
|
|
|
Interest income
|
|
|
2.0
|
|
|
|
1.6
|
|
|
|
2.0
|
|
|
Interest expense
|
|
|
*
|
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
Exchange differences
|
|
|
(0.3
|
)
|
|
|
0.5
|
|
|
|
0.7
|
|
|
Change in fair value of the warrants
|
|
|
(1.4
|
)
|
|
|
(0.5
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and minority interest
|
|
|
15.2
|
|
|
|
15.6
|
|
|
|
16.9
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Income tax expense
|
|
|
—
|
|
|
|
(0.3
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before earnings in equity investment and minority
interest
|
|
|
15.2
|
|
|
|
15.3
|
|
|
|
15.7
|
|
|
Earnings in equity investment
|
|
|
—
|
|
|
|
—
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in net income of consolidated subsidiary
|
|
|
(0.1
|
)
|
|
|
*
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
15.1
|
|
|
|
15.3
|
|
|
|
15.8
|
|
|
Deemed dividend on Series A convertible redeemable
preferred shares
|
|
|
(2.1
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to holders of ordinary shares
|
|
|
13.0
|
|
|
|
14.3
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Our results of operations for the year ended December 31, 2008 compared to the year ended December
31, 2007 were impacted by the inclusion in the operating results for 2008 of our acquisition of
WIT, which we acquired in October 2008.
Net Revenues
Our net revenues were US$102.7 million in 2008, representing an increase of 63.7% from our net
revenues of US$62.7 million in 2007. The growth in our net revenues was primarily due to an
increase in sales volumes, which was due primarily to a US$35.6 million increase in our sales to
our existing clients as of December 31, 2007, as a result of our enhanced relationships with these
clients, and to US$4.4 million of sales to new clients. The number of our clients increased to 241
for 2008 from 205 for 2007. In addition, the total number of clients that individually accounted
for over US$1 million of our net revenues on an annualized basis increased to 18 for 2008 from 11
for 2007.
We hired approximately 30 professionals through our acquisition of WIT in 2008. This acquisition
strengthened our capabilities and expertise in mobile testing and application development services.
Cost of Revenues
In 2008, our cost of revenues was US$62.9 million, representing an increase of 63.2% from US$38.5
million in 2007. Cost of revenues represented 61.5% and 61.3% of our net revenues in 2007 and 2008,
respectively. The increase was primarily due to increases in compensation and benefit expenses of
our professionals and our subcontracting costs, as explained further below.
In 2008, our compensation and benefit expenses in respect of our professionals, excluding
share-based compensation expenses, increased by 66.4% to US$46.0 million from US$27.7 million in
2007, primarily due to an increase in our number of professionals. Our cost of revenues in 2008 and
2007 also included US$0.3 million and US$0.1 million of share-based compensation expenses arising
from share options and restricted share units granted to our professionals.
Our subcontracting costs increased by 69.1% to US$10.4 million in 2008 from US$6.1 million 2007,
primarily due to increases in business volumes and project scale.
Our depreciation expenses included in cost of revenues increased to US$0.9 million in 2008 from
US$0.6 million in 2007, primarily due to increased depreciation expenses relating to computers and
equipment used by our professionals and depreciation of the leasehold improvements.
Gross Profit
Our gross profit in 2008 was US$39.8 million, representing an increase of 64.5% from US$24.2
million in 2007. Gross profit as a percentage of our net revenues was maintained at 38.7% in 2008
compared to 38.5% in
2007.
58
General and Administrative Expenses
Our general and administrative expenses were US$21.6 million in 2008, representing an increase of
56.3% from US$13.8 million in 2007.
Compensation and benefit expenses in respect of administrative employees, excluding share-based
compensation expenses, increased by 83.9% to US$7.9 million in 2008 from US$4.3 million in 2007,
primarily due to an increase in our number of administrative employees from 451 as of December 31,
2007 to 616 as of December 31, 2008. The increase in compensation and benefit expenses was also
attributable to an increase in the average salary of our administrative employees. Our general and
administrative expenses in 2008 also included US$1.0 million of share-based compensation expenses
arising from share options granted to our administrative employees compared to US$0.8 million of
share-based compensation expenses in 2007. Rental expenses increased to US$4.5 million in 2008 from
US$3.2 million in 2007, primarily due to our entering into new leases in major cities across China.
Selling and Marketing Expenses
In 2008, our selling and marketing expenses increased to US$4.3 million from US$2.3 million in
2007.
Compensation and benefit expenses in respect of selling and marketing employees, excluding
share-based compensation expenses, increased to US$2.4 million in 2008 from US$1.0 million in 2007,
as we hired more selling and marketing employees and their average salary increased. Our selling
and marketing expenses in 2008 and 2007 included US$176,000 and US$77,000, respectively, of
share-based compensation expenses arising from share options granted to our selling and marketing
employees. Our amortization of intangible assets acquired in mergers and acquisitions increased to
US$0.7 million in 2008 from US$0.6 million in 2007 as a result of our acquisitions in 2007 and
2008. Our travel and advertising expenses also increased in 2008 compared to 2007 primarily due to
enhanced marketing efforts.
Other Operating Income
Other operating income was generated primarily from government subsidies. In 2008, our government
subsidies were US$0.8 million, a decrease from US$0.9 million in 2007. In 2008, we were granted
government subsidies for obtaining certain technical certifications, improving our internal process
management system, successfully completing our initial public offering and hiring and training
interns. In 2007, we were granted government subsidies for obtaining certain technical
certifications, improving our internal process management system and for part of the Company’s
training costs incurred in 2007.
Income from Operations
Our income from operations was US$14.7 million in 2008, representing an increase of 66.2% from
US$8.9 million in 2007. The increase was due to our higher net revenues in 2008 compared to 2007,
partly offset by the increases in our cost of revenues and operating expenses during the same
period. Income from operations as a percentage of net revenues was maintained at 14.3% in 2008
compared to 14.1% in 2007.
Interest Income
Our interest income increased to US$2.0 million in 2008 from US$1.0 million in 2007. The increase
was due to an increase in our cash balances in 2008 compared to 2007.
Foreign Exchange Gain (Loss)
For 2008, we incurred foreign exchange gain of US$0.7 million, as compared to foreign exchange gain
of US$0.3 million for 2007. Our foreign exchange gain in 2008 was largely due to the appreciation
of the Japanese
yen.
59
Income Tax Expense
Our income tax expense increased to US$1.3 million for 2008 from US$0.2 million for 2007, primarily
due to the expiration of VanceInfo Beijing’s three-year tax exemption, which was in effect from
2005 to 2007. In 2008, VanceInfo Beijing, our major operating entity, was entitled to a 50%
reduction in its 15% preferential tax rate due to its recognition as a “new and high-technology
enterprise” located in the Beijing New Industry Development Pilot Zone.
Earnings in equity investment
We invested in Link Result in 2008 and account for our investment in Link Result under the equity
method. For 2008, we shared earnings in Link Result in the amount of US$20,000.
Minority Interest
In 2008, US$84,000 of loss in the subsidiaries was attributable to the minority interest. In 2007,
minority interest was US$52,000. We acquired a 75% equity interest in Shanghai VanceInfo in May
2007 and an additional 48.99% equity interest in VanceInfo Japan in May 2007. We acquired an
additional 10% equity interest in Shanghai VanceInfo in July 2008 and acquired the remaining 15%
equity interest in Shanghai VanceInfo in August 2008. Minority interest in 2007 represented
minority shareholders’ share of the net income of Shanghai VanceInfo and VanceInfo Japan.
Net Income
As a result of the foregoing, our net income was US$16.2 million in 2008, representing an increase
of 69.0% from US$9.6 million in 2007. Net income as a percentage of our net revenues increased to
15.8% in 2008 from 15.3% in 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Our results of operations for the year ended December 31, 2007 compared to the year ended December
31, 2006 were impacted by the inclusion of the operating results for 2007 of Prosoft, the IT
services business of SunBridges, ITC, Megainfo, Shanghai VanceInfo and Chosen, which we acquired in
September 2006, December 2006, March 2007, March 2007, May 2007 and July 2007, respectively.
Net Revenues
Our net revenues were US$62.7 million in 2007, representing an increase of 115.9% from our net
revenues of US$29.1 million in 2006. The growth in our net revenues was primarily due to an
increase in sales volumes, which was due primarily to a US$20.2 million increase in our sales to
our existing clients as of December 31, 2006, as a result of our enhanced relationships with these
clients, and to US$13.4 million of sales to new clients. The number of our clients increased to 205
for 2007 from 144 for 2006. In addition, the total number of clients that individually accounted
for over US$0.5 million of our net revenues on an annualized basis increased to 17 for 2007 from 8
for 2006.
We hired approximately 560 professionals through our acquisitions of ITC, Megainfo, Shanghai
VanceInfo and Chosen in 2007. These acquisitions strengthened our service line capabilities and
industry expertise, as well as broadened our client base. We were able to leverage the additional
capabilities and expertise to win new projects and to cross-sell our service offerings to our
broadened client base. Revenues from these acquired businesses’ client relationships also
contributed to our net revenues in 2007.
60
Cost of Revenues
In 2007, our cost of revenues was US$38.5 million, representing an increase of 114.6% from US$18.0
million in 2006. Cost of revenues represented 61.8% and 61.5% of our net revenues in 2006 and 2007,
respectively. The increase was primarily due to increases in compensation and benefit expenses of
our professionals, our subcontracting costs and our professionals’ travel expenses, as explained
further below.
In 2007, our compensation and benefit expenses in respect of our professionals, excluding
share-based compensation expenses, increased by 99.8% to US$27.7 million from US$13.8 million in
2006, primarily due to an increase in our number of professionals. Our cost of revenues in 2007 and
2006 also included US$0.1 million and US$45,000 of share-based compensation expenses arising from
share options granted to our professionals.
Our subcontracting costs increased by 208.6% to US$6.1 million in 2007 from US$2.0 million 2006,
primarily due to increases in business volumes and project scale.
Our travel expenses increased by 161.0% to US$3.1 million in 2007 from US$1.2 million in 2006, as
our professionals incurred more travel expenses with the growth of our overseas onsite services and
domestic enterprise solutions services.
Our depreciation expenses included in cost of revenues increased to US$0.6 million in 2007 from
US$0.4 million in 2006, primarily due to increased depreciation expenses relating to computers and
equipment used by our professionals.
Our acquisitions of ITC, Megainfo, Shanghai VanceInfo and Chosen in 2007 added approximately 560
professionals to our company and contributed to the increase of our cost of revenues for 2007.
Gross Profit
Our gross profit in 2007 was US$24.2 million, representing an increase of 118.0% from US$11.1
million in 2006. Gross profit as a percentage of our net revenues increased to 38.5% in 2007 from
38.2% in 2006.
General and Administrative Expenses
Our general and administrative expenses were US$13.8 million in 2007, representing an increase of
125.4% from US$6.1 million in 2006.
Compensation and benefit expenses in respect of administrative employees, excluding share-based
compensation expenses, increased by 169.1% to US$4.3 million in 2007 from US$1.6 million in 2006,
primarily due to an increase in our number of administrative employees from 328 as of December 31,
2006 to 451 as of December 31, 2007. The increase in compensation and benefit expenses was also
attributable to an increase in the average salary of our administrative employees. Our general and
administrative expenses in 2007 also included US$0.8 million of share-based compensation expenses
arising from share options granted to our administrative employees in 2007 compared to US$0.6
million of share-based compensation expenses in 2006. Rental expenses increased to US$3.2 million
in 2007 from US$1.4 million in 2006, primarily due to our entering into new leases in major cities
across China, and in Seattle in the second half of 2006 and the first half of 2007.
61
Selling and Marketing Expenses
In 2007, our selling and marketing expenses increased to US$2.3 million from US$0.7 million in
2006.
Compensation and benefit expenses in respect of selling and marketing employees, excluding
share-based compensation expenses, increased to US$1.0 million in 2007 from US$0.3 million in 2006,
as we hired more selling and marketing employees and their average salary increased. Our selling
and marketing expenses in
2007 and 2006 included US$77,000 and US$35,000, respectively, of share-based compensation expenses
arising from share options granted to our selling and marketing employees. Our amortization of
intangible assets acquired in mergers and acquisitions increased to US$0.6 million in 2007 from
US$0.1 million in 2006 as a result of our acquisitions in 2007. Our travel and advertising expenses
also increased in 2007 compared to 2006 primarily due to enhanced marketing efforts.
Other Operating Income
Other operating income generated primarily from the governmental subsidies. In 2007, our government
subsidies were US$0.9 million, an increase from US$54,000 in 2006. In 2007, we were granted
government subsidies for obtaining certain technological certification, improving our internal
process management system and for part of the Company’s training costs incurred in 2007. In 2006,
we were granted government subsidies for our participation in an overseas industry exhibition and
certain marketing activities.
Income from Operations
Our income from operations was US$8.9 million in 2007, representing an increase of 104.7% from
US$4.3 million in 2006. The increase was due to our higher net revenues in 2007 compared to 2006,
partly offset by the increases in our cost of revenues and operating expenses during the same
period. Income from operations as a percentage of net revenues decreased slightly to 14.1% in 2007
from 14.9% in 2006.
Interest Income
Our interest income increased to US$1.0 million in 2007 from US$0.6 million in 2006. The increase
was due to an increase in our cash balances in 2007 compared to 2006.
Foreign Exchange Gain (Loss)
For 2007, we incurred foreign exchange gain of US$0.3 million, as compared to foreign exchange
losses of US$93,000 for 2006. Our foreign exchange gain in 2007 was largely due to the appreciation
of our net asset positions in Japanese Yen and the RMB against the U.S. dollar in our operating
subsidiaries during the year.
Change in Fair Value of Warrants
We had recorded the warrants we issued to purchase our Series B-3 preferred shares as a liability
and a derivative financial instrument. Changes in fair value of the warrants of US$0.4 million and
US$0.4 million were charged to our consolidated statement of operations for 2007 and 2006,
respectively.
Income Tax Expense
Our income tax expense increased to US$0.2 million for 2007 from US$2,000 for 2006, primarily due
to an increase in our deferred tax expense resulting from adjustments to our deferred tax
liabilities primarily due to the enactment of the new EIT Law in China in March 2007 and certain
tax benefits granted to us.
Minority Interest
For 2006, minority interest represented the minority shareholders’ 49% share of the net loss of
VanceInfo Japan. We acquired a 75% equity interest in Shanghai VanceInfo in May 2007 and an
additional 48.99% equity interest in VanceInfo Japan in May 2007. For 2007, minority interest
represented the minority shareholders’ share of the net income of Shanghai VanceInfo and VanceInfo
Japan.
62
Net Income
As a result of the foregoing, our net income was US$9.6 million in 2007, representing an increase
of 118.7% from US$4.4 million in 2006. Net income as a percentage of our net revenues increased to
15.3% in 2007 from 15.1% in 2006.
B. Liquidity and Capital Resources
Cash Flows and Working Capital
Our operations and growth have been financed by cash generated from operations, from private
placements of our preferred shares and from our IPO proceeds. As of December 31, 2008, we had
US$80.0 million in cash and cash equivalents, compared to US$76.8 million as of December 31, 2007
and US$20.6 million as of December 31, 2006. The increase in our cash and cash equivalents from
December 31, 2007 to December 31, 2008 was primarily due to cash flows from our expanded operation
in 2008. The increase in our cash and cash equivalents from December 31, 2006 to December 31, 2007
was primarily due to cash flows from our expanded operation in 2007 and net proceeds from our
initial public offering in December 2007.
Our working capital as of December 31, 2006, 2007 and 2008 was US$28.0 million, US$91.7 million and
US$99.6 million, respectively. We had US$0.3 million, US$1.2 million and US$1.5 million in
outstanding bank borrowings as of such dates.
The following table shows our cash flows with respect to operating activities, investing activities
and financing activities in 2006, 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Net cash provided by operating activities
|
|
|
2,427
|
|
|
|
7,479
|
|
|
|
15,404
|
|
|
Net cash used in investing activities
|
|
|
(3,729
|
)
|
|
|
(9,275
|
)
|
|
|
(10,128
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
17,363
|
|
|
|
57,741
|
|
|
|
(2,826
|
)
|
|
Effect of exchange rate changes
|
|
|
67
|
|
|
|
325
|
|
|
|
678
|
|
|
Net increase in cash and cash equivalents
|
|
|
16,061
|
|
|
|
55,945
|
|
|
|
2,450
|
|
|
Cash and cash equivalents at the beginning of the
year/period
|
|
|
4,437
|
|
|
|
20,565
|
|
|
|
76,835
|
|
|
Cash and cash equivalents at the end of the year/period
|
|
|
20,565
|
|
|
|
76,835
|
|
|
|
79,963
|
|
Operating Activities
Net cash provided by operating activities for 2008 amounted to US$15.4 million, compared to US$7.5
million for 2007. Net cash provided by operating activities for the 2008 was primarily attributable
to net income of US$16.2 million; partially offset by an increase of the net working capital
requirement as a result of an increase in the scale of our business.
Our growing business generated substantial net cash inflow as our net revenues increased from
US$62.7 million for 2007 to US$102.7 million for 2008, while cost of revenues and operating
expenses, after deducting non-cash items and items that did not affect our operating cash flow,
increased to US$83.5 million for 2008 from US$51.2 million for 2007. As of December 31, 2008, our
days of sales outstanding were 106 days, as compared to 104 days at the end of the year 2007.
Net cash provided by operating activities for 2007 amounted to US$7.5 million, compared to US$2.4
million for 2006. Net cash provided by operating activities for the 2007 was primarily attributable
to net income of US$9.6 million; depreciation and amortization of property and equipment of US$1.8
million and share-based compensation expenses of US$1.0 million, which did not affect our operating
cash flow; and an increase of US$1.9 million in accrued expenses and other payables; partially
offset by an increase of US$7.9 million in accounts receivable as a result of an increase in sales,
particularly sales in the fourth quarter of 2007 for which payment had not been received by the end
of the quarter, and an increase of US$1.0 million in prepaid expenses and other current assets
incurred by us, including expenses for purchases of computers for our clients, advances to our
employees for their
travel expenses and prepayments to service providers, which negatively affected operating cash
flow.
63
Our growing business generated substantial net cash inflow as our net revenues increased from
US$29.1 million for 2006 to US$62.7 million for 2007, while cost of revenues and operating
expenses, after deducting non-cash items and items that did not affect our operating cash flow,
increased to US$51.2 million for 2007 from US$23.2 million for 2006.
Net cash provided by operating activities for the year ended December 31, 2006 was primarily
attributable to net income of US$4.4 million; an increase of US$0.9 million in accrued expenses and
other payables to our professionals and our business development managers for their travel
expenses; an increase of US$0.5 million in accounts payable to our service providers; depreciation
and amortization of property and equipment of US$0.7 million and share-based compensation expenses
of US$0.7 million, which did not affect our operating cash flow; partially offset by an increase of
US$4.7 million in accounts receivable as a result of an increase in sales, particularly sales in
the fourth quarter of 2006 for which payment had not been received by the end of 2006, and an
increase of US$0.4 million in prepaid expenses and other current assets, which negatively affected
operating cash flow.
Investing Activities
Net cash used in investing activities was US$10.1 million for 2008, primarily attributable to
US$6.7 million of consideration paid for business acquisitions, US$6.1 million for purchase of
property and equipment, partly offset by US$3.6 million in repayments of loans to shareholders.
Loans to shareholders were made in connection with some of our acquisitions, all of which were
repaid in 2008. See “Related Party Transactions—Transactions with Certain Directors, Shareholders
and Affiliates.” Net cash used in purchase of property and equipment was primarily due to purchase
of fixed assets and improvement of leased premises as we set up new offices in major cities across
China in 2008. Net cash paid for business acquisitions was primarily for our acquisitions of WIT
and Tianchuang and additional consideration paid in relation to our acquisitions of Shanghai
VanceInfo, Megainfo, VanceInfo Japan and Chosen.
Net cash used in investing activities was US$9.3 million for 2007, primarily attributable to US$3.7
million for purchase of property and equipment, US$3.9 million of consideration paid for business
acquisitions, and US$4.1 million of loans to shareholders, partly offset by US$3.7 million
repayments of loans to shareholders. Loans to shareholders were made in connection with some of our
acquisitions, which are generally due within 12 months. See “Related Party
Transactions—Transactions with Certain Directors, Shareholders and Affiliates.” Net cash used in
purchase of property and equipment was primarily due to purchase of fixed assets and improvement of
leased premises as we set up new offices in major cities across China and in Seattle in 2007. Net
cash paid for business combinations was primarily for acquisitions of ITC, Megainfo and Chosen.
Net cash used in investing activities was US$3.7 million for the year ended December 31, 2006. Net
cash used in investing activities in 2006 included US$3.6 million for purchase of fixed assets and
improvement of leased premises as we entered into new leases in China; and US$0.9 million paid for
acquisitions of Prosoft and SunBridges, partly offset by US$0.6 million repaid by Team Dragon in
May 2006.
Financing Activities
Net cash used in financing activities was US$2.8 million for 2008, compared to net cash provided by
financing activities of US$57.7 million for 2007. Net cash used by financing activities for 2008
was primarily due to our repurchase of ordinary shares of US$2.0 million, repayment of government
subsidized short-term loans of US$1.3 million and our payment of IPO-related expenses of US$1.1
million, partially offset by our receipt of a government subsidized short-term loan of US$1.5
million.
Net cash provided by financing activities was US$57.7 million for 2007, compared to net cash
provided by financing activities of US$17.4 million for 2006. Net cash provided by financing
activities for 2007 was primarily due to US$55.8 million of net proceeds we received from our
initial public offering in December 2007, US$1.8 million of proceeds we received upon exercising
warrants to purchase Series B-3 preferred shares by warrant
holders, and a government subsidized short-term loan of US$1.2 million, partially offset by
repayment of US$0.5 million loans of Prosoft and Shanghai VanceInfo that we assumed after we
acquired these two companies and payments of US$0.5 million to certain shareholders to repurchase
their shares during 2007.
64
Net cash provided by financing activities was US$17.4 million for the year ended December 31, 2006.
We received net proceeds of US$24.3 million from the issuance and allotment of our Series B-1 and
Series B-2 preferred shares for the year ended December 31, 2006. We paid US$6.6 million in 2006 to
repurchase certain of our ordinary shares from Team Dragon. See “Related Party
Transaction—Transactions with Certain Directors, Shareholders and Affiliates.”
Capital Expenditures
Our capital expenditures in 2006, 2007 and 2008 were US$3.6 million, US$3.7 million and US$6.1
million, respectively. Our capital expenditures related primarily to purchase of computers and
improvement of leased premises. We expect our capital expenditures to increase in the future as we
expand our business to implement our growth strategy.
We believe that our current cash and cash equivalents and anticipated cash flow from operations
will be sufficient to meet our anticipated cash needs, including our cash needs for working capital
and capital expenditures, for at least the next 12 months. We may, however, require additional cash
due to changing business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our existing cash is insufficient to meet our
requirements, we may seek to sell additional equity securities, debt securities or borrow from
lending institutions. We cannot assure you that financing will be available in the amounts we need
or on terms acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute our shareholders. The incurrence of debt would divert
cash for working capital and capital expenditures to service debt obligations and could result in
operating and financial covenants that restrict our operations and our ability to pay dividends to
our shareholders. If we are unable to obtain additional equity or debt financing as required, our
business operations and prospects may suffer.
We are a holding company, and we rely substantially on dividends from our subsidiaries in China for
our cash requirements, including any debt we may incur. Current PRC regulations permit our
subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries
in China is required to set aside a certain amount of its after-tax profits each year, if any, to
fund certain statutory reserves. These reserves are not distributable as cash dividends.
Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the
instruments governing the debt may restrict their ability to pay dividends or make other payments
to us. These regulations have not had a material adverse impact on our ability to meet our cash
obligations and we do not expect them to have a material adverse impact in the future.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in
certain cases, the remittance of currency out of China. We receive a substantial portion of our
revenues in RMB. Under our current structure, our income will be substantially derived from
dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries and our VIE to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign currency dominated
obligations. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and expenditures from trade-related transactions,
can be made in foreign currencies without prior approval from SAFE by complying with certain
procedural requirements. However, for most capital account items, approval from appropriate
government authorities is required where RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. These controls have not had a material adverse impact
on our ability to meet our cash obligations and we do not expect them to have a material adverse
impact in the future.
65
C.
Research and Development
We focus on developing and refining our methodologies, tools and techniques, implementing metrics,
improving
estimation processes, ensuring the quality of our product and managing the project delivery
process. Our professionals conduct short-term and long-term research in the areas of knowledge
management, performance testing, and education and training methodologies. Our professionals
compile training materials for our on-campus programs from time to time.
D.
Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends,
uncertainties, demands, commitments or events for the period from January 1, 2006 to December 31,
2008 that are reasonably likely to have a material adverse effect on our net revenues, income,
profitability, liquidity or capital resources, or that caused the disclosed financial information
to be not necessarily indicative of future operating results or financial conditions.
E.
Off-Balance Sheet Arrangements
We have not entered into any financial guarantees or other commitments to guarantee the payment
obligations of any third parties. In addition, we have not entered into any derivative contracts
that are indexed to our own shares and classified as shareholder’s equity, or that are not
reflected in our consolidated financial statements. Furthermore, we do not have any retained or
contingent interest in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity. Moreover, we do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or credit support to us
or engages in leasing, hedging or research and development services with us.
F.
Tabular Disclosure of Contractual Obligations
Contingent Acquisition Payments
As of December 31, 2008, in connection with our recent acquisitions, we agreed to make contingent
payments of up to US$6.6 million in a mix of cash and our ordinary shares, of which up to US$3.9
million may be paid with cash, and up to US$2.7 million may be paid with our ordinary shares, in
each case subject to the achievement of certain financial performance targets from 2008 to 2011.
These contingent payments, if made, will be reflected as an increase of goodwill.
Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of
December 31, 2008:
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Payment Due by Period
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Less than
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More than 5
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Total
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1 Year
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1-3 Years
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3-5 Years
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Years
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|
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Operating leases
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9,033
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4,156
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3,939
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938
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—
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Purchase obligations
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127
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127
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—
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—
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—
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Total contractual obligations
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9,160
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4,283
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3,939
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938
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—
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Other than non-current deferred tax liabilities, the obligations set forth above and the contingent
payments described under “—Contingent Acquisition Payments,” we did not have any long-term debt
obligations, operating lease obligations, purchase obligations or other long-term liabilities as of
December 31, 2008.
66
G.
Safe Harbor
This annual report on Form 20-F contains statements of a forward-looking nature. These statements
involve known and unknown risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from those expressed or implied by the
forward-looking statements. These statements are
made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of
1995. You can identify these forward-looking statements by terminology such as “may,” “will,”
“expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or
other and similar expressions. The accuracy of these statements may be impacted by a number of
risks and uncertainties that could cause actual results to differ materially from those projected
or anticipated. Such risks and uncertainties include, but are not limited to, the following:
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•
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our anticipated growth strategy;
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•
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our plans to recruit more employees;
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•
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our plans to invest in research and development to enhance our service lines;
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•
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our future business development, results of operations and financial condition;
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•
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expected changes in our net revenues and certain cost or expense items;
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•
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our ability to attract and retain clients; and
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•
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trends and competition in the offshore IT services industry.
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These risks are not exhaustive. We operate in an emerging and evolving environment. New risk
factors emerge from time to time and it is impossible for our management to predict all risk
factors, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
This annual report on Form 20-F also contains estimates, projections and statistical data related
to the IT services market in China. You should not place undue reliance on these forward-looking
statements.
We would like to caution you not to place undue reliance on forward-looking statements and you
should read these statements in conjunction with the risk factors disclosed in Item 3 of this
annual report, “Key Information—Risk Factors.” We do not undertake any obligation to update or
revise the forward-looking statements except as required under applicable law.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The following table sets forth information regarding our executive officers and directors as of the
date of this report.
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Directors and Executive Officers
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Age
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Position/Title
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Chris Shuning Chen
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45
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Chairman and Chief Executive Officer
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David Lifeng Chen
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40
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Director and President
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Hao Chen
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42
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Director
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Ruby Lu
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38
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Director
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Kui Zhou
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41
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Director
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Daniel Mingdong Wu
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42
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Director
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Samuelson S.M. Young
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58
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Director
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Dr. Penghui Liu
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44
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Director
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Sidney Xuande Huang
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43
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Chief Operating Officer and Chief Financial Officer
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Junbo Liu
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46
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Executive Vice President
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Gerry Jianxin Lu
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42
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Executive Vice President
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Jeff Jian Wu
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41
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Executive Vice President
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Kevin Zhong Liu
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37
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Executive Vice President
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Stanley Ying Zhou
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46
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Chief Administrative Officer
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67
Biographical Information
Directors
Mr. Chris Shuning Chen
is our founder, chairman and chief executive officer. He co-founded our
company in 1995, served as a managing director from 1995 to 1999 and became the chief executive
officer in 1999. Prior to founding our company, Mr. Chen worked as a senior software developer at
Great Wall Computer Software & System Co., Ltd., a Chinese company specializing in computer
software and system integration, from 1989 to 1995, and spent two years on an assignment in the
United States. He also participated in the development of the IBM OS/2 operating system from 1994
to 1995. Mr. Chen received his master’s degree in engineering from Huazhong University of Science &
Technology and his bachelor’s degree in mechanical engineering from Tsinghua University.
Mr. David Lifeng Chen
is our president and has been working with us since 2001. He also has been a
director of our company since 2008. He co-founded Heteng Software in 2001. Mr. Chen served as a
development manager at Asera, a leading B2B software company based in California in the United
States, from 1999 to 2001. He worked for IBM Crossworlds as a product manager, a management
consultant at KPMG Consulting, from 1997 to 1999. He served as a software engineer of the ERP
development group at Oracle, a leading provider of enterprise resources planning software based in
the United States, from 1995 to 1997. Mr. Chen received his master’s of science degree in computer
engineering from the University of California, Irvine and his bachelor’s of science degree in
electrical engineering from Tongji University.
Mr. Hao Chen
has been a director of our company since 2005. Mr. Chen is a co-founder of Legend
Capital, a China based private investment fund, and has served as its managing director and head of
investment since 2001. He also serves as a director of Spreadtrum Communications, Inc., a company
listed on Nasdaq Global Market, Fujian Xinocom Technologies Co., Ltd., Beijing Kaiotne Information
Technologies Co., Ltd., Beijing Zhongsou Online Software Limited, EYANG Technology Development Co.,
Ltd., a company listed on the Hong Kong Stock Exchange, Beijing Dianji Technology Co., Ltd., KML
Company Ltd. and Boke Company Ltd., all of which are technology companies in which Legend Capital
has invested. From 2000 to 2001, Mr. Chen served as a deputy director of Corporate Planning
Department and Human Resource General Manager of Legend Group, which was renamed as Lenovo Group
Limited in 2004, a Chinese leading IT product manufacturer. From 1992 to 2000, Mr. Chen was general
manager of Legend Advanced System Ltd., a subsidiary of Legend Group specializing in system
integration. From 1988 to 1992, Mr. Chen worked as manager in Shenzhen Electronics Group Co., Ltd.,
a Chinese company that is engaged in manufacture and sales of computer and electronics equipment.
Mr. Chen received his bachelor’s degree in computer and application from Huazhong University of
Science & Technology.
Ms. Ruby Lu
has been a director of our company since May 2007. Ms. Lu is a partner at DCM, a
venture capital investment company headquartered in Silicon Valley. Ms. Lu also serves on the board
of directors of other DCM portfolio companies, including Dang Dang, a leading e-commerce retailer
in China; Bitauto, a media player focusing on auto industry; and Wikinvest, Inc., a user generated
financial information website in the United States. Prior to joining DCM in 2003, Ms. Lu was a vice
president in the technology, media and telecommunications investment banking group of Goldman Sachs
& Co. During her tenure at Goldman Sachs & Co. from 1996-2003, Ms. Lu advised clients on projects
ranging from privatization restructuring, corporate finance, mergers and acquisitions. Ms. Lu
received her Bachelor’s degree in Economics with honors from the University of Maryland and
Master’s degree in International Economics as well as Energy, Environment, Science and Technology
from Johns Hopkins University, School of Advanced International Studies.
68
Mr. Kui Zhou
has been a director of our company since 2006. Mr. Zhou has been a principal of
Sequoia Capital China since 2005 and a partner of Sequoia Capital China since May 2007. He is also
a director of HDT Holding Technologies Inc., a China- based online advertising and marketing
company; SppayTech Holding Co. Ltd., a China-based mobile application company; Best Partners
Limited, a China-based mobile application company; Beijing Bihu.com Holding Ltd., a China-based
Internet media company; Ever Grow Limited, a China-based media
company; Profit Star Limited, a China-based mobile application company; Xiamen Changelight Co.,
Ltd., a China-based LED and solar cell research and manufacturing company; Shanghai Hintsoft
Software Co., Ltd., a China-based Internet cafe software provider; and Excel PharmaStudies, Inc., a
China-based clinical research outsourcing services provider; all of which are invested by Sequoia
Capital China. Prior to joining Sequoia Capital China, Mr. Zhou served as a senior vice president
at Legend Capital from 2001 to 2005. From 1999 to 2001, he served as a manager of corporate
business development department of Legend Holdings Ltd. He was a deputy general manager of
manufacture department of Zhongshan Telecom Device Limited, a Chinese company specializing in
telecom device manufacture, from 1992 to 1997. From 1989 to 1992, Mr. Zhou worked as a director of
power workshop for Southeast Tungsten Metallurgy, a Chinese metallurgy company. Mr. Zhou received
his bachelor’s degree in electrical automation from Wuhan Technology University and his master’s of
business administration degree from Tsinghua University.
Mr. Daniel Mingdong Wu
has been our director since October 2007. Mr. Wu served as chief financial
officer of Focus Media Holdings Limited, a China-based advertising company listed on the Nasdaq
Global Market, from 2005 to January 2009. Mr. Wu was chief financial officer and a director of
Harbour Networks Ltd. from 2004 until 2005. Prior to that, Mr. Wu was a partner of Bridgecross Ltd.
from 2001 until 2003 and acted as chief financial officer of Wi-Comm United Communications Inc.
from 2003 until 2004. From 2000 to 2001, Mr. Wu was a vice president for technology investment
banking at Merrill Lynch (Asia Pacific) Ltd. From 1996 to 2000, Mr. Wu worked in the global
communications group of Lehman Brothers Inc. Mr. Wu holds a bachelor’s degree from the State
University of New York at Buffalo and a master’s of business administration degree from Columbia
Business School.
Mr. Samuelson S. M. Young
has been our director since December 2007. Mr. Young has years of
experience in information technology, financial services and business management. Mr. Young has
been the Chairman of Ebridge Investments Limited, a China-based investment firm, since 2006. He is
also the founding partner of Xanadu Ventures and has been with Xanadu Partners since 2007. He also
has served as a director of International Integrated Systems Inc., a Taiwan-based software
development and IT services provider, since 2007. He served as a senior advisor for the Greater
China region of Silver Lake Partners, a U.S.-based private equity firm, from 2006 to 2008. From
1978 to 2005, Mr. Young worked in various business divisions of IBM in Taiwan, Tokyo, and Hong
Kong, and also in a joint venture of IBM in Tianjin, and was promoted to vice president of the
Financial Services Sector of IBM Asia Pacific in 2001. From 1995 to 1997, Mr. Young was a member of
the General Committee of the Hong Kong Arts Festival Association and a consultant to The Hong Kong
University of Science & Technology’s master of business administration program. Mr. Young received
his bachelor’s degree in Applied Mathematics from the National Chung Hsing University, Taiwan.
Dr. Penghui Liu
has been our director since December 2008. Dr. Liu, has served as the
editor-in-chief of Strategy and Management Journal since 2003 and the director of the Shanghai
Pacific Institute for International Strategy since 2006. Dr. Liu has served as an independent
non-executive director of Gome Electrical Appliances Holding Limited, a company listed in the Hong
Kong Stock Exchange, since November 2006. Dr. Liu was also a member of several research
institutions and think tanks in China from 1999 to 2006. From 1999 to 2006, Dr. Liu was the
director of the Beijing Pacific Institute for International Strategy. Prior to that, he was a
research fellow for the Institute of American Studies under the Chinese Academy of Social Sciences
from 1991 to 1999. Dr. Liu received his Ph.D. degree in international relations from the Graduate
School of Chinese Academy of Social Sciences.
Executive Officers
Mr. Sidney Xuande Huang
has been our chief financial officer since 2006 and our chief operating
officer since 2008. Prior to joining us, he was the chief financial officer of Longtop Financial
Technologies Limited, a China-based software development and IT services provider, from 2005 to
2006. From 2004 to 2005, he served as the chief financial officer of 800buy China Limited, an
e-commerce company in China. Mr. Huang was an investment banker with Citigroup Global Markets Inc.
in New York from 2002 to 2004. He served as an audit manager of KPMG LLP from 1996 to 2000 and is a
Certified Public Accountant in the State of New York. Mr. Huang serves as a director of Etonkids
Educational Group, a China-based education services provider, since 2008. Mr. Huang obtained his
master’s of business administration with distinction from the Kellogg School of Management at
Northwestern University as an Austin Scholar. He received his bachelor’s degree in accounting from
Bernard M. Baruch College in New York City, where he graduated as class valedictorian.
69
Mr. Junbo Liu
is our executive vice president and is in charge of our business development and
software service business. He was in charge of our research and development service business from
January 2007 to December 2008. He has been working with us since 2005. Prior to working with us,
Mr. Liu served as a senior vice president of SureKAM, a Chinese IT services company. Mr. Liu served
as a member of the selection committee of the California NGI program in 2002. He obtained a U.S.
Air Force software award for his outstanding work in building a high performance resource
allocation system in 1999. Mr. Liu received his Ph.D. degree in computer science from the
University of Bremen.
Mr. Gerry Jianxin Lu
is our executive vice president and has been in charge of IBM practice and
co-head of our IT service practice since 2007. He has been general manager of our Shanghai
operations since 2005. He has been working with us since 1999. Mr. Lu received his bachelor’s
degree in materials engineering from Tongji University.
Mr. Jeff Jian Wu
is our executive vice president and is in charge of our Microsoft, mobile internet
and telecommunications business. He has been in charge of our Microsoft business since 2005. Prior
to that role, Mr. Wu was the center head of Peoplesoft China development center and vice president
of corporate business development from 2004 to 2005. Before joining us, he served as the vice
president of marketing at Wenditel Inc., an e-commerce company specializing in online payment in
the United States from 2002 to 2004. He served as the chief technology officer of Ospect Inc, a
US-based CRM software company, from 2000 to 2002. Previously, Mr. Wu worked for Cambridge
Technology Partners, EDS, Chordiant and Ariba in various leading roles of product development,
professional services and business line management. Mr. Wu received his master’s degree in computer
science from the University of Southern California and his bachelor’s degree in computer science
from Tongji University.
Mr. Kevin Zhong Liu
is our executive vice president and is in charge of human resources and
corporate training. He has been working with us since 1998. From 1996 to 1998, Mr. Liu was a
software engineer, and then a project manager of Hong Kong Royton Technologies, a Hong Kong company
engaged in computer data storage system integration and service. Mr. Liu worked for Great Wall
Software Co., Ltd., a Chinese company specializing in computer software and system integration, as
a software engineer in the localization project of the OS/2 kernel, from 1995 to 1996. He was a
software engineer of Yige Software Co., Ltd., a Chinese company specializing in computer system
integration, from 1994 to 1995. Mr. Liu received his bachelor’s degree in computer science from
Xi’an Jiaotong University.
Mr. Stanley Ying Zhou
is our chief administrative officer and has been working with us since 1999.
Mr. Zhou founded the localization business division of Shanghai Science and Technology University
Development Co., Ltd., a Chinese technology company, in 1995. Prior to that, Mr. Zhou was an
associate professor in the computer science department at the Shanghai University of Science and
Technology, from 1984 to 1999. Mr. Zhou received his bachelor’s degree in Computer Science from
Shanghai University of Science and Technology.
There is no family relationship between any of our directors or executive officers.
B. Compensation of Directors and Executive Officers
For the fiscal year ended December 31, 2008, we paid an aggregate of approximately US$0.8 million
in cash to our senior executive officers, and we did not pay any cash compensation to our
non-executive directors. For the fiscal year ended December 31, 2008, we paid an aggregate of
approximately US$20,000 for the pension and other social insurance contributions for our
executives. For option grants to our officers and directors, see Item 6, “Directors, Senior
Management and Employees — Compensation of Directors and Executive Officers — Share Incentive
Plan.”
Employment Agreements
We have entered into employment agreements with each of our senior executive officers. We may
terminate a senior executive officer’s employment for cause, at any time, without prior notice or
remuneration, for certain acts of the officer, including, but not limited to, material violation of
our regulations, failure to perform agreed duties or embezzlement that cause material damage to us
and conviction of a crime. A senior executive officer may terminate his or her employment at any
time by 60-day prior written notice. Each senior executive officer is entitled to certain
benefits upon termination, including a severance payment equal to a certain specified number of
months of his or her then salary, if he or she resigns for certain good reasons specified by the
agreement or the relevant rules or if we terminate his or her employment without any of the above
causes.
70
Pursuant to the employment agreement between us and our chief financial officer, Mr. Sidney Xuande
Huang, in the case of termination of employment or removal from the current position due to a
change-in-control event, all options granted to Mr. Huang shall become vested immediately and
remain exercisable for a period of 12 months. In addition, Mr. Huang will be entitled to a
severance payment in an amount equal to his then three-month base salary. For the purpose of this
clause, a change-in-control event refers to acquisition by a third party of 51% or more beneficial
ownership or voting securities of our company, a change in a majority of the incumbent directors
resulted from a tender offer, proxy contest, merger or similar transaction, or liquidation, sale or
otherwise disposition of all or substantially all of our total assets.
Share Incentive Plans
Grants Under 2005 Stock Plan
In November 2005, we adopted our 2005 Stock Plan and supplemented and amended the plan in April and
May 2006, respectively. As of March 31, 2009, there are 3,728,379 ordinary shares issuable upon
exercise of outstanding options under our 2005 Stock Plan.
2007 Share Incentive Plan
We have adopted a 2007 Share Incentive Plan to motivate, attract and retain employees and directors
and promote the success of our business. Our board of directors has authorized the issuance of up
to 1,100,000 ordinary shares plus an annual 3% increase of then total outstanding shares on the
first business day of each calendar year beginning in 2008, upon exercise of awards granted under
our 2007 share incentive plan. As of March 31, 2009, there are 2,065,415 ordinary shares issuable
upon exercise of our outstanding options and restricted share units under our 2007 Share Incentive
Plan.
Plan Administration
. Our board of directors, or our compensation committee will administer the 2007
Share Incentive Plan. The compensation committee or the full board of directors, as appropriate,
will determine the provisions and terms and conditions of our awards.
Types of Awards.
The following briefly describe the principal features of the various awards
that may be granted under our 2007 Share Incentive Plan.
|
•
|
|
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.
|
71
Termination of the Share Incentive Plan.
Unless terminated earlier, the 2007 Share Incentive Plan
will expire in 2016. Our board of directors has the authority to amend or terminate the 2007 Share
Incentive Plan subject to shareholder approval with respect to certain amendments. However, no such
action may impair the rights of any recipient of the awards unless agreed by the recipient.
The following table summarizes, as of March 31, 2009, the outstanding options that we granted to
our directors and officers under our share incentive plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Price
|
|
|
|
|
Expiration
|
|
|
Name
|
|
Outstanding Options
|
|
|
(US$/Share)
|
|
|
Grant Date
|
|
Date
|
|
|
Chris Shuning Chen
|
|
|
50,000
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
50,000
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
500,000
|
|
|
|
2.00
|
|
|
December 29, 2006
|
|
|
**
|
|
|
|
|
|
80,000
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
40,000
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
David Lifeng Chen
|
|
|
20,000
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
80,000
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
40,100
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
25,000
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
40,000
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Hao Chen
|
|
|
*
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
Daniel Mingdong Wu
|
|
|
*
|
|
|
|
8.50
|
|
|
September 30, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
Samuelson S.M. Young
|
|
|
*
|
|
|
|
8.50
|
|
|
September 30, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
Penghui Liu
|
|
|
*
|
|
|
|
6.05
|
|
|
November 28, 2008
|
|
|
****
|
|
|
Sidney Xuande Huang
|
|
|
*
|
|
|
|
0.97
|
|
|
June 11, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
1.60
|
|
|
September 15, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
7.50
|
|
|
August 31, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Junbo Liu
|
|
|
*
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
1.60
|
|
|
September 15, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Gerry Jianxin Lu
|
|
|
*
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
1.60
|
|
|
September 15, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Price
|
|
|
|
|
Expiration
|
|
|
Name
|
|
Outstanding Options
|
|
|
(US$/Share)
|
|
|
Grant Date
|
|
Date
|
|
|
Jeff Jian Wu
|
|
|
*
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
1.60
|
|
|
September 15, 2006
|
|
|
**
|
|
|
|
|
|
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Kevin Zhong Liu
|
|
|
20,000
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
60,000
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
28,200
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
10,000
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
5,000
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Stanley Ying Zhou
|
|
|
20,000
|
|
|
|
0.30
|
|
|
January 7, 2006
|
|
|
**
|
|
|
|
|
|
60,000
|
|
|
|
0.30
|
|
|
June 6, 2006
|
|
|
**
|
|
|
|
|
|
28,200
|
|
|
|
3.00
|
|
|
February 15, 2007
|
|
|
**
|
|
|
|
|
|
10,000
|
|
|
|
5.35
|
|
|
February 4, 2008
|
|
|
***
|
|
|
|
|
|
12,000
|
|
|
|
4.91
|
|
|
December 5, 2008
|
|
|
****
|
|
|
Directors and Executive officers as a group
|
|
|
2,832,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Each of these directors and officers beneficially owns less than 1% of our outstanding
ordinary shares.
|
|
|
|
**
|
|
Expiration date for the options will be the earlier of the tenth anniversary of the effective
date of the grant of such options or the termination of the optionholder’s services.
|
|
|
|
***
|
|
Expiration date for the options will be the earlier of one year after such shares are vested
or the termination of the optionholder’s services.
|
|
|
|
****
|
|
Expiration date for the options will be the earlier of the fifth anniversary of the effective
date of the grant of such options or the termination of the optionholder’s services.
|
C.
Board Practices
In 2008, most of our directors attended all the meetings of our board and its committees on which
they served after becoming members of our board. No director is entitled to any severance benefits
upon termination of his directorship with us.
Board of Directors
Our board of directors currently consists of eight directors. A director is not required to hold
any shares in the company by way of qualification. A director may vote with respect to any
contract, proposed contract or arrangement in which he is materially interested, provided he has
declared his interest in accordance with our Articles of Association. Our board of directors may
exercise all the powers of the company to borrow money, mortgage its undertaking, property and
uncalled capital and issue debentures or other securities whenever money is borrowed or as security
for any obligation of the company or of any third party. There is no contract between us or any of
our directors providing for benefits upon termination of employment.
Committees of the Board of Directors
We have established three committees under the board of directors: the audit committee, the
compensation committee and the corporate governance and nominating committee. We also adopted a
charter for each of the three committees. Each committee’s members and functions are described
below.
73
Audit Committee
Our audit committee consists of Mr. Daniel Mingdong Wu, Mr. Samuelson S. M. Young and Mr. Penghui
Liu. Mr. Wu is the chairman of our audit committee. Mr. Wu is a director with accounting and
financial management expertise as required by the Corporate Governance Rules of the New York Stock
Exchange, or the NYSE Rules. Messrs. Wu, Young and Liu satisfy the “independence” requirements of
Section 303A of the NYSE Rules and Rule
10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. The audit
committee will oversee our accounting and financial reporting processes and the audits of the
financial statements of our company. The audit committee will be responsible for, among other
things:
|
•
|
|
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.
|
Compensation Committee
Our compensation committee consists of Mr. Kui Zhou, Ms. Ruby Lu, Mr. Hao Chen and Mr. Daniel
Mingdong Wu. Mr. Zhou is the chairman of our compensation committee. Messrs. Zhou, Chen and Wu and
Ms. Lu satisfy the “independence” requirements of Section 303A of the NYSE Rules. The compensation
committee will assist the board in reviewing and approving the compensation structure, including
all forms of compensation, relating to our directors and executive officers. Our chief executive
officer may not be present at any committee meeting during which his compensation is deliberated.
The compensation committee will be responsible for, among other things:
|
•
|
|
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.
|
Corporate Governance and Nominating Committee
Our corporate governance and nominating committee consists of Mr. Hao Chen, Mr. Daniel Mingdong Wu
and Mr. Samuelson S. M. Young. Mr. Chen is the chairman of our corporate governance and nominating
committee. Messrs. Chen, Wu and Young satisfy the “independence” requirements of Section 303A of
the NYSE Rules. The corporate governance and nominating committee will assist the board of
directors in selecting individuals qualified to become our directors and in determining the
composition of the board and its committees. The corporate governance and nominating committee will
be responsible for, among other things:
|
•
|
|
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;
|
74
|
•
|
|
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.
|
Duties of Directors
Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a
view to the best interests of our company. Our directors also have a duty to exercise the skill
they actually possess and such care and diligence that a reasonably prudent person would exercise
in comparable circumstances. Our directors must ensure compliance with our memorandum and articles
of association. A shareholder has the right to seek damages on behalf of our company if a duty owed
by our directors is breached.
Terms of Directors and Officers
Our shareholders have designated our directors into three classes, namely Class A directors, Class
B directors and Class C directors, who shall retire from office and be eligible for re-election at
the first, second and third annual general meeting after our initial public offering, respectively.
Mr. Chris Shuning Chen, Mr. David Lifeng Chen and Mr. Penghui Liu have been designated as Class A
directors. Mr. Hao Chen, Mr. Kui Zhou and Ms. Ruby Lu have been designated as Class B directors.
Mr. Daniel Mingdong Wu and Mr. Samuelson S.M. Young have been designated as Class C directors. At
each subsequent annual general meeting after the third annual general meeting after our initial
offering, the directors of the class who have been longest in office shall retire and shall be
eligible for re-election. A director may only be removed by the shareholders. Officers are elected
by and serve at the discretion of the board of directors.
D.
Employees
We view our employees as critical to our business operations and future prospects. We are committed
to remaining among the industry’s preferred employers in China. As of December 31, 2006, 2007 and
2008, we employed 2,290, 3,675 and 5,457 employees, including 1,962, 3,224 and 4,841 professionals,
respectively. As of March 31, 2009, we employed 6,075 employees, including over 5,400
professionals.
75
E.
Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary
shares as of the date of May 12, 2009, by:
|
•
|
|
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)
|
|
|
4,186,462
|
|
|
|
10.6
|
|
|
David Lifeng Chen
(4)
|
|
|
457,935
|
|
|
|
1.2
|
|
|
Hao Chen
(5)
|
|
|
4,420,892
|
|
|
|
11.3
|
|
|
Ruby Lu
(6)
|
|
|
6,024,748
|
|
|
|
15.4
|
|
|
Kui Zhou
(7)
|
|
|
5,135,194
|
|
|
|
13.1
|
|
|
Daniel Mingdong Wu
(8)
|
|
|
*
|
|
|
|
*
|
|
|
Samuelson S.M. Young
(9)
|
|
|
*
|
|
|
|
*
|
|
|
Penghui Liu
|
|
|
—
|
|
|
|
—
|
|
|
Sidney Xuande Huang
(10)
|
|
|
*
|
|
|
|
*
|
|
|
Junbo Liu
(11)
|
|
|
*
|
|
|
|
*
|
|
|
Gerry Jianxin Lu
(12)
|
|
|
*
|
|
|
|
*
|
|
|
Jeff Jian Wu
(13)
|
|
|
*
|
|
|
|
*
|
|
|
Kevin Zhong Liu
(14)
|
|
|
492,969
|
|
|
|
1.3
|
|
|
Stanley Ying Zhou
(15)
|
|
|
492,969
|
|
|
|
1.3
|
|
|
All Directors and Executive Officers as a Group
(16)
|
|
|
21,734,317
|
|
|
|
54.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
DCM IV, L.P.
(17)
|
|
|
5,875,334
|
|
|
|
15.0
|
|
|
DCM Affiliates Fund IV, L.P.
(18)
|
|
|
149,414
|
|
|
|
0.4
|
|
|
Sequoia
(19)
|
|
|
5,523,843
|
|
|
|
14.1
|
|
|
LC Fund II
(20)
|
|
|
4,416,100
|
|
|
|
11.3
|
|
|
Button Software Ltd.
(21)
|
|
|
3,760,420
|
|
|
|
9.6
|
|
|
Inno Global Technology Limited
(22)
|
|
|
2,715,200
|
|
|
|
6.9
|
|
|
|
|
|
|
*
|
|
Less than 1%
|
|
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment owner with respect to the securities.
|
|
|
|
(2)
|
|
For each person and group included in this table, percentage ownership was calculated by
dividing the number of shares beneficially owned by such person or group by the sum of
39,120,879, being the number of ordinary shares outstanding as of May 12, 2009, and the number
of ordinary shares underlying share options held by such person or group that are exercisable
within 60 days after May 12, 2009.
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(3)
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Represents 3,760,420 ordinary shares held by Button Software Ltd., a British Virgin Islands
company, and 426,042 ordinary shares issuable upon exercise of options within 60 days after
May 12, 2009 held by TAIRON INVESTMENTS LIMITED, a British Virgin Islands company. 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 and, as such, exercises voting power on behalf of these two Shareholders on all
matters of VanceInfo requiring shareholder approval. The business address for Mr. Chen is 3/F,
Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of
China.
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(4)
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Represents 343,400 ordinary shares held by Mr. David Lifeng Chen’s family trust, 107,535
ordinary shares issuable upon exercise of options within 60 days after May 12, 2009 held by
Mr. Chen, and 7,000 ADSs held by Mr. Chen. The business address for Mr. Chen is 3/F, Building
8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.
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(5)
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Represents 4,416,100 ordinary shares held by LC Fund II and 4,792 ordinary shares issuable
upon exercise of options within 60 days after May 12, 2009 held by Mr. Hao Chen. Mr. Chen
disclaims beneficial ownership with respect to the above shares except to the extent of his
pecuniary interest therein. The business address for Mr. Chen is the 10/F, Tower A, Raycom
Info Tech Park, No. 2 Kexueyuan Nanlu Zhongguancun, Haidian District, Beijing 100080, People’s
Republic of China.
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(6)
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Represents 6,024,748 ordinary shares held by DCM IV, L.P. and DCM Affiliates Fund IV, L.P.
Ms. Ruby Lu disclaims beneficial ownership with respect to the above shares except to the
extent of her pecuniary interest therein. 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)
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Represents 5,135,194 ordinary 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 Partners III, L.P., and Sequoia Capital Growth
III Principals Fund. Mr. Kui Zhou disclaims beneficial ownership with respect to the above
shares except to the extent of his pecuniary interest therein. The business address for Mr.
Zhou is Room 2408, Air China Plaza, 36 Xiaoyun Road, Chao Yang District, Beijing 100027,
People’s Republic of China.
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(8)
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Represents ordinary shares issuable upon exercise of options within 60 days after May 12,
2009 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.
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(9)
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Represents ordinary shares issuable upon exercise of options within 60 days after May 12,
2009 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.
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(10)
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Represents ordinary shares issuable upon exercise of options within 60 days after May 12,
2009 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.
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(11)
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Represents ordinary shares and ordinary shares issuable upon exercise of options within 60
days after May 12, 2009 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.
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(12)
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Represents ordinary shares and ordinary shares issuable upon exercise of options within 60
days after May 12, 2009 held by Newrise Investments limited, a British Virgin Islands company
wholly owned and controlled by Mr. Gerry Jianxin Lu. The business address for Mr. Lu is 3/F,
Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of
China.
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(13)
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Represents ordinary shares and ordinary shares issuable upon exercise of options within 60
days after May 12, 2009 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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(14)
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Represents 406,065 ordinary shares and 86,904 ordinary shares issuable upon exercise of
options within 60 days after May 12, 2009 held by Longsea Management Limited, a British Virgin
Islands company wholly owned and controlled by Mr. Kevin Zhong Liu. The business address for
Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193,
People’s Republic of China.
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(15)
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Represents 406,065 ordinary shares and 86,904 ordinary shares issuable upon exercise of
options within 60 days after May 12, 2009 held by Charlene Limited, a British Virgin Islands
company wholly owned and controlled by Mr. Stanley Ying Zhou. The business address for Mr.
Zhou is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193,
People’s Republic of China.
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(16)
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Represents ordinary shares held by all of our directors and executive officers as a group and
ordinary shares issuable upon exercise of options within 60 days after May 12, 2009 held by
all of our directors and executive officers as a group.
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(17)
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Represents 5,875,334 ordinary shares held by DCM IV, L.P., a limited partnership incorporated
in the Cayman Islands. The General Partner of DCM IV, L.P. is DCM Investment Management IV,
L.P., which in turn is controlled by its managing members consisting of Katsujin David Chao,
Dixon R. Doll, Peter W. Moran, Thomas B. Blaisdell, Carlton G. Amdahl and Hurst F. Lin. Each
managing member disclaims beneficial ownership of the shares held by DCM Funds, except to the
extent of each member’s pecuniary interest therein. The business address for DCM IV, L.P. is
2420 Sand Hill Road, Suite 200, Menlo Park, CA 94025, United States of America.
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(18)
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Represents 149,414 ordinary shares held by DCM Affiliates Fund IV, L.P., a limited
partnership incorporated in the Cayman Islands. The General Partner of DCM Affiliates Fund IV,
L.P. is DCM Investment Management IV, L.P., which in turn is controlled by its managing
members consisting of Katsujin David Chao, Dixon R. Doll, Peter W. Moran, Thomas B. Blaisdell,
Carlton G. Amdahl and Hurst F. Lin. Each managing member disclaims beneficial ownership of the
shares held by DCM Funds, except to the extent of each member’s pecuniary interest therein.
The business address for the DCM Affiliates Fund IV, LP is 2420 Sand Hill Road, Suite 200,
Menlo Park, CA 94025, United States of America.
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(19)
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Represents 2,275,022, 352,083, 261,407, 2,119,608, 103,741, 23,333, 142,593, 50,608, 78,728,
45,016, 34,216, and 37,488 ordinary shares, held by Sequoia Capital China I, L.P., Sequoia
Capital China Principals Fund I, L.P., Sequoia Capital China Partners Fund I, L.P., Sequoia
Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund, Sequoia Capital
Growth Partners III, L.P., Neil Nanpeng Shen, Michael Moritz, Douglas Leone, Mark Kvamme,
James Goetz, and Roelof Botha, respectively.
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Sequoia Capital China Management I, L.P. is the general partner of Sequoia Capital China I,
L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I,
L.P. and is ultimately controlled by its managing member, Neil Nanpeng Shen. Mr. Shen disclaims
beneficial ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia
Capital China Principals Fund I, L.P. and Sequoia Capital China Partners Fund I, L.P. except to
the extent of his individual pecuniary interest therein. The business address for Sequoia
Capital China I, L.P., Sequoia Capital China Principals Fund I, L.P. and Sequoia Capital China
Partners Fund I, L.P., each of which is a limited partnership incorporated in the Cayman
Islands, is 2408 Air China Plaza, No. 36 Xiaoyun Road, Chaoyang District, Beijing 100027,
People’s Republic of China.
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77
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SCGF III Management, LLC is the general partner of Sequoia Capital Growth Fund III, L.P. and
Sequoia Capital Growth Partners III, L.P., and is the managing member of Sequoia Capital Growth
III Principals Fund. The managing members of SCGF III Management, LLC are Michael Moritz,
Douglas Leone, Michael Goguen, Mark Kvamme, James Goetz, J. Scott Carter and Roelof Botha.
These management members disclaim beneficial ownership with respect to the shares held by
Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia
Capital Growth Partners III, L.P. except to the extent of their pecuniary interest therein. The
business address for Sequoia Capital Growth Fund III, L.P., Sequoia Capital Growth III
Principals Fund and Sequoia Capital Growth Partners III, L.P., each of which is an investment
fund incorporated in the state of Delaware, USA, is 3000 Sand Hill Road, 4-180, Menlo Park, CA
94025, United States of America.
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(20)
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Represents 4,416,100 ordinary shares held by LC Fund II. LC Fund II is a Cayman Islands
company majority owned by Right Lane Limited, which is ultimately controlled by Chinese
Academy of Sciences, an academic institution owned by Chinese government as well as its
employees. The business address for LC Fund II is 10th Floor, Tower A, Raycom Info. Tech
Center No. 2 Ke Xue Yuan Nan Lu, Zhong Guan Cun, Haidian District, Beijing 100080, People’s
Republic China.
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(21)
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Represents 3,760,420 ordinary shares held by Button Software Ltd., a British Virgin Islands
company ultimately owned by Mr. Chris Shuning Chen’s family trust. The business address for
Button Software Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin
Islands.
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(22)
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Represents 2,715,200 ordinary shares held by Inno Global Technology Limited, a British Virgin
Islands company wholly owned and controlled by Mr. Baoguo Zhu. The business address for Inno
Global Technology Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola,
British Virgin Islands.
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None of our existing shareholders has different voting rights from other shareholders. We are not
aware of any arrangement that may, at a subsequent date, result in a change of control of our
company.
As of May 12, 2009, 39,120,879 of our ordinary shares were issued and outstanding. To our
knowledge, approximately 63.3% of our total outstanding ordinary shares were held by eleven
record shareholders in the United States, including approximately 34.6% held by JPMorgan Chase
Bank, N.A., the depositary of our ADS program. The number of beneficial owners of our shares in
the United States is likely to be much larger than the number of record holders of our ordinary
shares in the United States.
For the options granted to our directors, officers and employees, please refer to “—B.
Compensation of Directors and Executive Officers.”
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
See Item 6, “Directors, Senior Management and Employees — Share Ownership.”
B.
Related Party Transactions
Transactions with Certain Directors, Shareholders and Affiliates
In March 2007, we entered into a loan agreement to lend RMB20.0 million to Airland International
Limited, or Airland, and Bizexpress Limited, or Bizexpress, two holders of our ordinary shares, at
an annual interest rate of 5%. The loans were secured by pledges over our ordinary shares held by
Airland and Bizexpress. The loan was repaid in August 2008.
In April 2007, we lent RMB3.2 million to One Silver Development Limited, or One Silver, a holder of
our ordinary shares, at an annual interest rate of 5%. The loan was secured by pledges on our
ordinary shares held by One Silver. The loan was repaid in June 2008.
From time to time we provide various IT services to Lenovo (Beijing) Co., Ltd., Beijing Lenovo
Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd. and Lenovo (Dalian) Technologies Service
Co., Ltd., affiliates of LC Fund II, a holder of our ordinary shares. The terms and pricing of the
transaction was determined on an arms’-length basis between the contractual parties and we believe
the terms are comparable to terms that could have been obtained from independent third parties.
78
In August 2008, we entered into an agreement to repurchase 172,919 and 53,703 shares of our
ordinary shares from Airland and Bizexpress, respectively. Airland and Bizexpress used all of the
proceeds from the repurchase to repay part of the loan borrowed from us. These ordinary shares were
automatically cancelled upon our purchase in September 2008.
In 2008, we provided system testing services in the amount of US$40,000 to A-IT (Shanghai) Software
Services Co., Ltd., a subsidiary of Link Result. The terms and pricing of the transaction were
determined on an arms’-length basis between the contractual parties and we believe the terms are
comparable to terms that could have been obtained from independent third parties.
Other Share Issuances
In June 2008, we issued 58,348 ordinary shares to NEC System in connection with our acquisition of
10% equity interest in Shanghai VanceInfo. In September 2008, we issued 87,045 ordinary shares to
One Silver Development Limited as a part of the additional consideration for the acquisition of
Megainfo. In the same month, we issued 3,201 ordinary shares to Global Mission Limited as a part of
the additional consideration for the acquisition of Vanceinfo Japan.
Contractual Arrangements with Megainfo and Its Shareholder
Megainfo was liquidated in January 2009 and was our variable interest entity before its
liquidation. Our previous relationships with Megainfo and its shareholder were governed by certain
contractual arrangements. Under PRC laws, each of VanceInfo Beijing and Megainfo was then an
independent legal person and neither of them was liable for debts incurred by the other party.
Other than pursuant to the contractual arrangements between VanceInfo Beijing and Megainfo,
Megainfo did not transfer any other funds generated from its operations to VanceInfo Beijing.
On March 31, 2007, VanceInfo Beijing entered into an exclusive technology development and
consultation agreement with Megainfo and Mr. Ming Zhao, its shareholder. The term of the exclusive
technology development and consultation agreement was 10 years, unless terminated by VanceInfo
Beijing by giving of a thirty days’ written notice. Mr. Zhao also executed a power of attorney in
favor of Mr. Chris Shuning Chen. We were able to control Megainfo and the economic benefits of
Megainfo through the following arrangements:
Equity Pledge.
Mr. Zhao pledged his 100% equity interest in Megainfo to guarantee the performance
of Mr. Zhao and Megainfo’s obligations under the exclusive technology development and consultation
agreement. If Megainfo or Mr. Zhao breached its respective contractual obligations under the
exclusive technology development and consultation agreement, VanceInfo Beijing, as pledgee, would
be entitled to certain rights, including the right to sell the pledged equity interests. Mr. Zhao
agreed not to transfer, sell, pledge, dispose of or otherwise create any new encumbrance on his
equity interest in Megainfo without the prior written consent of VanceInfo Beijing.
Call Option.
Mr. Zhao irrevocably granted VanceInfo Beijing or its designated person an option to
purchase, all or part of the equity interests in Megainfo. Subject to PRC laws then in effect, the
exercise price for purchasing all of the share capital of Megainfo was RMB1.00. Pursuant to this
call option, without the prior written consent of VanceInfo Beijing:
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neither Mr. Zhao nor Megainfo may sell, transfer, pledge or otherwise dispose of, or permit
any security interests to be imposed on Megainfo’s any assets, business or income;
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•
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except for the indebtedness created in the ordinary course of business, neither Mr. Zhao
nor Megainfo may borrow or lend to any third party, or provide security to any third party;
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•
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Megainfo may not distribute any profits or dividends;
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neither Mr. Zhao nor Megainfo may change any director, supervisor or executive manager of
Megainfo; and
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•
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neither Mr. Zhao nor Megainfo may make any material decision or alteration with respect to
Megainfo’s operations or financial management.
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79
Power of Attorney.
Mr. Zhao executed a power of attorney in favor of Mr. Chris Shuning Chen
irrevocably authorizing Mr. Chen to vote as his attorney-in-fact on all of the matters regarding
Megainfo requiring shareholder approval, as long as Mr. Zhao was a shareholder of Megainfo.
Exclusive Technology Development and Consultation Services.
VanceInfo Beijing had the exclusive and
irrevocable right to provide Megainfo with IT consulting services in regard to its IT solutions as
well as related technical consulting services. Megainfo agreed to pay monthly service fees to
VanceInfo Beijing according to the actual services VanceInfo Beijing had provided in each month. In
addition, from time to time VanceInfo Beijing may, at its sole discretion, from time to time adjust
the services fees according to its actual service scope and content.
Employment Agreements
See Item 6, “Directors, Senior Management and Employees — Compensation of Directors and Executive
Officers — Employment Agreements.”
Stock Option Grants
See Item 6, “Directors, Senior Management and Employees — Compensation of Directors and Executive
Officers — Share Incentive Plan.”
C.
Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
From time to time, we may be subject to legal proceedings, investigations and claims incidental to
the conduct of our business. We are not currently a party to any legal proceeding or investigation
that, in the opinion of our management, is likely to have a material adverse effect on our business
or financial condition.
In August 2004, VanceInfo Beijing, our wholly owned subsidiary, acquired the IT services business
and related assets from our predecessor, Wensi Chuangyi and its subsidiaries. On December 3, 2007,
we received a letter from a law firm in California purporting to set forth a notice of claim on
behalf of Mr. Jonathan Jianguo Jiang. Among others, this letter alleged that 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., or Heteng
Software; and Heteng Software owns 100% of Wensi Chuangyi, our predecessor. 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 Software and its joint venture partners. This unspecified proprietary
information allegedly has been utilized by Worksoft California and continues to be used by a
Delaware subsidiary of VanceInfo. The letter stated 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 Software 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
letter did not specify the amount of any claimed damages or costs.
80
We believe that the claims made in the letter are without merit. We have been advised by our PRC
counsel, Jun He Law Offices, that the August 2004 transaction in which we acquired the IT services
business and related assets of our predecessor was duly authorized and approved by both the seller,
Wensi Chuangyi and its subsidiaries, and the buyer, VanceInfo Beijing, in accordance with PRC law,
and that the transaction was effected in compliance with all applicable PRC laws and regulations.
In addition, we believe that the level of share ownership in Octiga claimed by Mr. Jiang is
substantially overstated.
Dividend Policy
We have no present plan to declare and pay any dividends on our shares or ADSs in the near future.
We currently intend to retain most, if not all, of our available funds and any future earnings to
operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely on dividends from VanceInfo
Beijing, our subsidiary in China. Current PRC regulations permit our subsidiaries to pay dividends
to us only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, our subsidiary in China is required to set aside a certain
amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves.
These reserves may not be distributed as cash dividends. Further, if our subsidiary in China incurs
debt on its own behalf, the instruments governing the debt may restrict its ability to pay
dividends or make other payments to us.
Our board of directors has complete discretion as to whether to distribute dividends, subject to
the approval of our shareholders. Even if our board of directors decides to pay dividends, the
form, frequency and amount will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions and other factors
that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders
to the same extent as holders of our ordinary shares, subject to the terms of the deposit
agreement, including the fees and expenses payable thereunder. Cash dividends on our ADSs and
ordinary shares, if any, will be paid in U.S. dollars.
B.
Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant
changes since the date of our audited consolidated financial statements included in this annual
report.
ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our ADSs, each representing one ordinary share, have been listed on the NYSE since December 2007.
Our ADSs trade under the symbol “VIT.”
For the period from December 12, 2007 to May 13, 2009, the trading price of our ADSs on the NYSE
has ranged from US$13.98 to US$4.20 per ADS. For the year ended December 31, 2008, the trading
price ranged from US$13.98 to US$4.28 per ADS.
81
The following table sets forth, for the periods indicated, the high and low trading prices on the
NYSE for our ADSs.
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Trading Price ($)
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High
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Low
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2007 (from December 12, 2007 to December 31, 2007)
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10.95
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8.51
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2008
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13.98
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4.28
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First quarter
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9.25
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4.90
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Second quarter
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13.98
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6.45
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Third quarter
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10.19
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5.80
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Fourth quarter
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8.28
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4.28
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October
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8.28
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5.14
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November
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8.02
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5.48
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December
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6.25
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4.28
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2009
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8.26
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4.20
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First quarter
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6.00
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4.20
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January
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6.00
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4.55
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February
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5.09
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4.20
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March
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5.47
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4.31
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April
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8.26
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4.95
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May (through May 13)
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8.14
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6.74
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B.
Plan of Distribution
Not applicable.
C.
Markets
Our ADSs, each representing one ordinary share, have been listed on the NYSE since December 2007
and have been trading under the symbol “VIT.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issues
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated
memorandum of association contained in our F-1 registration statement (File No. 333-147601)
originally filed with the SEC on November 23, 2007.
C.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and
other than those described in Item 4, “Information on the Company” or elsewhere in this annual
report on Form 20-F.
82
D.
Exchange Controls
China’s government imposes control over the convertibility of RMB into foreign currencies. The
conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates
announced by the People’s Bank of China. On July 21, 2005, the PRC government changed its
decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy,
the Renminbi was permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy caused the Renminbi to
appreciate approximately 21.5% against the U.S. dollar over the following three years. Since
reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a
narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding
it. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely
traded currencies, in tandem with the U.S. dollar. For example, the Renminbi depreciated
approximately 9% against the Japanese Yen between July 2008 and November 2008. During the same
period, the Renminbi appreciated approximately 27% against the Euro. It is difficult to predict how
long the current situation may last and when and how it may change again.
Pursuant to the Foreign Exchange Control Regulations issued by the State Council on January 29,
1996, and effective as of April 1, 1996 (and amended on January 14, 1997 and August 5, 2008
respectively) and the Administration of Settlement, Sale and Payment of Foreign Exchange
Regulations which came into effect on July 1, 1996 regarding foreign exchange control, or the
Regulations, conversion of RMB into foreign exchange by foreign investment enterprises for current
account items, including the distribution of dividends and profits to foreign investors of joint
ventures, is permissible. Foreign investment enterprises are permitted to remit foreign exchange
from their foreign exchange bank account in China on the basis of, inter alia, the terms of the
relevant joint venture contracts and the board resolutions declaring the distribution of the
dividend and payment of profits. On January 14, 1997, the State Council amended the Foreign
Exchange Control Regulations and added, among other things, an important provision, as Article 5
provides that the State shall not impose restrictions on recurring international current account
payments and transfers. Conversion of RMB into foreign currencies and remittance of foreign
currencies for capital account items, including direct investment, loans, security investment, is
still subject to the approval of the SAFE, in each such transaction.
Under the Regulations, foreign investment enterprises are required to open and maintain separate
foreign exchange accounts for capital account items (but not for other items). In addition, foreign
investment enterprises may only buy, sell and/or remit foreign currencies at those banks authorized
to conduct foreign exchange business upon the production of valid commercial documents and, in the
case of capital account item transactions, document approval from the SAFE.
Currently, foreign investment enterprises are required to apply to the SAFE for “foreign exchange
registration certificates for foreign investment enterprises” (which are granted to foreign
investment enterprises, upon fulfilling specified conditions and which are subject to review and
renewal by the SAFE on an annual basis). With such foreign exchange registration certificates and
required underlying transaction documents, or with approval documents from the SAFE if the
transactions are under capital account (which are obtained on a transaction-by-transaction basis),
foreign-invested enterprises may enter into foreign exchange transactions at banks authorized to
conduct foreign exchange business to obtain foreign exchange for their needs.
E.
Taxation
The following summary of the material Cayman Islands and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this report, all of which are subject to
change. This summary does not deal with all possible tax consequences relating to an investment in
our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws. To
the extent that the discussion relates to matters of Cayman Islands tax law, it represents the
opinion of Conyers Dill & Pearman, our Cayman Islands counsel.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits,
income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate
duty. There are no other taxes likely to be material to us levied by the government of the Cayman
Islands except for stamp duties which may be applicable on instruments executed in, or brought
within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax
treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.
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United States Federal Income Taxation
The following discussion describes certain material U.S. federal income tax consequences to U.S.
Holders (as defined below) under present law of an investment in the ADSs or ordinary shares. This
discussion applies only to U.S. Holders that hold the ADSs or ordinary shares as capital assets and
that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of
the United States in effect as of the date of this annual report and on U.S. Treasury regulations
in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial
and administrative interpretations thereof available on or before such date. All of the foregoing
authorities are subject to change, which change could apply retroactively and could affect the tax
consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or to
persons in special tax situations such as:
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financial institutions;
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regulated investment companies;
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real estate investment trusts;
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traders that elect to mark to market;
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persons liable for alternative minimum tax;
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persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or
integrated transaction;
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persons that actually or constructively own 10% or more of the total combined voting power
of all classes of our voting stock;
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persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share
option or otherwise as compensation; or
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persons holding ADSs or ordinary shares through partnerships or other pass-through
entities.
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INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX
RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S. AND OTHER TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to
you if you are the beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income
tax purposes,
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an individual who is a citizen or resident of the United States;
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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;
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an estate, the income of which is subject to U.S. federal income taxation regardless of its
source; or
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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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The discussion below assumes that the representations contained in the deposit agreement are true
and that the obligations in the deposit agreement and any related agreement have been and will be
complied with in accordance with their terms. If you hold ADSs, you should be treated as the holder
of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the
holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are
inconsistent with the beneficial ownership of the underlying security (for example, pre-releasing
ADSs to persons that do not have the beneficial ownership of the securities underlying the ADSs).
Accordingly, the availability of the reduced tax rate for dividends received by certain
non-corporate U.S. Holders, including individuals U.S. Holders (as discussed below), could be
affected by actions taken by intermediaries in the chain of ownership between the holders of ADSs
and our company if as a result of such actions the holders of ADSs are not properly treated as
beneficial owners of underlying ordinary shares.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the PFIC rules discussed below, the gross amount of any distributions we make to you
with respect to the ADSs or ordinary shares generally will be includible in your gross income as
dividend income on the date of receipt by the depositary, in the case of ADSs, or by you, in the
case of ordinary shares, but only to the extent that the distribution is paid out of our current or
accumulated earnings and profits (as determined under U.S. federal income tax principles). The
dividends will not be eligible for the dividends-received deduction allowed to corporations in
respect of dividends received from other U.S. corporations. To the extent that the amount of the
distribution exceeds our current and accumulated earnings and profits (as determined under U.S.
federal income tax principles), such excess amount will be treated first as a tax-free return of
your tax basis in your ADSs or ordinary shares, and then, to the extent such excess amount exceeds
your tax basis in your ADSs or ordinary shares, as capital gain. We currently do not, and we do not
intend to, calculate our earnings and profits under U.S. federal income tax principles. Therefore,
a U.S. Holder should expect that a distribution will generally be reported as a dividend even if
that distribution would otherwise be treated as a non-taxable return of capital or as capital gain
under the rules described above.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable
years beginning before January 1, 2011, dividends may be taxed at the lower capital gains rate
applicable to “qualified dividend income,” provided that (1) either (a) the ADSs or ordinary
shares, as applicable, are readily tradable on an established securities market in the United
States or (b) we are eligible for the benefits of a qualifying income tax treaty with the United
States that includes an exchange of information program, (2) we are neither a PFIC nor treated as
such with respect to you (as discussed below) for the taxable year in which the dividend was paid
and the preceding taxable year, and (3) certain holding period requirements are met. Under U.S.
Internal Revenue Service authority, ADSs will be considered for purposes of clause (1) above to be
readily tradable on an established securities market in the United States if they are listed on the
New York Stock Exchange, as are our ADSs. If we are treated as a “resident enterprise” for PRC tax
purposes under the New EIT Law, we may be eligible for the benefits of the income tax treaty
between the United States and the PRC. You should consult your tax advisors regarding the
availability of the lower capital gains rate applicable to qualified dividend income for dividends
paid with respect to our ADSs or ordinary shares.
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Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the
dividends are taxed
as qualified dividend income (as discussed above), the amount of the dividend taken into account
for purposes of calculating the foreign tax credit limitation will in general be limited to the
gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend
income and divided by the highest tax rate normally applicable to dividends. The limitation on
foreign taxes eligible for credit is calculated separately with respect to specific classes of
income. For this purpose, dividends distributed by us with respect to the ADSs or ordinary shares
will generally constitute “passive category income” but could, in the case of certain U.S. Holders,
constitute “general category income.”
If PRC withholding taxes apply to dividends paid to you with respect to our ADSs or ordinary
shares, subject to certain conditions and limitations, such PRC withholding taxes may be treated as
foreign taxes eligible for credit against your U.S. federal income tax liability. The rules
relating to the determination of the foreign tax credit are complex and you should consult your tax
advisors regarding the availability of a foreign tax credit in your particular circumstances,
including the effects of any applicable income tax treaties.
Taxation of Disposition of ADSs or Ordinary Shares
Subject to the PFIC rules discussed below, you will recognize taxable gain or loss on any sale,
exchange or other taxable disposition of an ADS or ordinary share equal to the difference between
the amount realized (in U.S. dollars) for the ADS or ordinary share and your tax basis (in U.S.
dollars) in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If
you are a non-corporate U.S. Holder, including an individual U.S. Holder, that has held the ADS or
ordinary share for more than one year, you may be eligible for reduced tax rates. The deductibility
of capital losses is subject to limitations. Any gain or loss that you recognize on a disposition
of ADSs or ordinary shares will generally be treated as U.S. source income or loss for foreign tax
credit limitation purposes. However, if we are treated as a “resident enterprise” for PRC tax
purposes, we may be eligible for the benefits of the income tax treaty between the United States
and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the
ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty
between the United States and the PRC may elect to treat the gain as PRC source income. You should
consult your tax advisors regarding the proper treatment of gain or loss in your particular
circumstances, including the effects of any applicable income tax treaties.
Passive Foreign Investment Company
Based on the market price of our ADSs, the value of our assets, and the composition of our income
and assets, we do not believe we were a PFIC for U.S. federal income tax purposes for our taxable
year ended December 31, 2008. However, the application of the PFIC rules is subject to uncertainty
in several respects, including how the contractual arrangements between us and our affiliated
entities will be treated for purposes of the PFIC rules, and we cannot assure you that the U.S.
Internal Revenue Service will not take a contrary position. A non-U.S. corporation will be a PFIC
for U.S. federal income tax purposes for any taxable year if either:
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at least 75% of its gross income for such year is passive income; or
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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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For this purpose, we will be treated as owning our proportionate share of the assets and earning
our proportionate share of the income of any other corporation in which we own, directly or
indirectly, more than 25% (by value) of the stock. In applying this rule, however, it is not clear
whether the contractual arrangements between us and our affiliated entities will be treated as
ownership of stock.
We must make a separate determination after the close of each taxable year as to whether we were a
PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be
determined by reference to the market price of our ADSs and ordinary shares, our PFIC status will
depend in large part on the market price of the ADSs and ordinary shares, which may fluctuate
significantly.
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If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally
will continue to
be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or
ordinary shares, unless we cease to be a PFIC and you make a “deemed sale” election with respect to
the ADSs or ordinary shares. If such election is made, you will be deemed to have sold ADSs or
ordinary shares you hold at their fair market value and any gain from such deemed sale would be
subject to the consequences described below. After the deemed sale election, your ADSs or ordinary
shares with respect to which the deemed sale election was made will not be treated as shares in a
PFIC unless we subsequently become a PFIC.
For each taxable year that we are treated as a PFIC with respect to you, you will be subject to
special tax rules with respect to any “excess distribution” that you receive and any gain you
realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares,
unless you make a “mark-to-market” election as discussed below. Distributions you receive in a
taxable year that are greater than 125% of the average annual distributions you received during the
shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares
will be treated as an excess distribution. Under these special tax rules:
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the excess distribution or gain will be allocated ratably over your holding period for the
ADSs or ordinary shares;
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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
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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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The tax liability for amounts allocated to taxable years prior to the year of disposition or excess
distribution cannot be offset by any net operating losses for such years, and gains (but not
losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if
you hold the ADSs or ordinary shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year, to the extent any of our
subsidiaries are also PFICs, you may be deemed to own shares in such lower-tier PFICs that are
directly or indirectly owned by us in that proportion which the value of the ADSs or ordinary
shares you own bears to the value of all of our ADSs and ordinary shares, and you may be subject to
the adverse tax consequences described above with respect to the shares of such lower-tier PFICs
that you would be deemed to own. You should consult your tax advisors regarding the application of
the PFIC rules to any of our subsidiaries.
A U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election
for such stock to elect out of the tax treatment discussed above. If you make a mark-to-market
election for the ADSs or ordinary shares, you will include in income for each year that we are
treated as a PFIC with respect to you an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis
in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the
adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the
taxable year. However, deductions will be allowable only to the extent of any net mark-to-market
gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on the actual sale or
other disposition of the ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss
treatment will also apply to the deductible portion of any mark-to-market loss on the ADSs or
ordinary shares, as well as to any loss realized on the actual sale or disposition of the ADSs or
ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary
shares will be adjusted to reflect any such income or loss amounts. The tax rules that apply to
distributions by corporations which are not PFICs would apply to distributions by us, except that
the lower capital gains rate applicable to qualified dividend income (discussed above under
“—Taxation of dividends and other distributions on the ADSs or ordinary shares”) would not apply.
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The mark-to-market election is available only for “marketable stock,” which is stock that is
regularly traded on a qualified exchange or other market, as defined in applicable U.S. Treasury
regulations. Our ADSs are listed on the
New York Stock Exchange, which is a qualified exchange or other market for these purposes.
Consequently, if the ADSs continue to be listed on the New York Stock Exchange and are regularly
traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available
to you if we were to become a PFIC. Because a mark-to-market election cannot be made for equity
interests in any lower-tier PFICs that we own, a U.S. Holder may continue to be subject to the PFIC
rules with respect to its indirect interest in any investments held by us that are treated as an
equity interest in a PFIC for U.S. federal income tax purposes. You should consult your tax
advisors as to the availability and desirability of a mark-to-market election, as well as the
impact of such election on interests in any lower-tier PFICs.
Alternatively, if a non-U.S. corporation is a PFIC, a holder of shares in that corporation may
avoid taxation under the rules described above by making a “qualified electing fund” election to
include in income its share of the corporation’s income on a current basis. However, you may make a
qualified electing fund election with respect to your ADSs or ordinary shares only if we agree to
furnish you annually with certain tax information, and we currently do not intend to prepare or
provide such information.
If you hold ADSs or ordinary shares in any year in which we are treated as a PFIC with respect to
you, you will be required to file U.S. Internal Revenue Service Form 8621 regarding distributions
received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or
ordinary shares.
You are strongly urged to consult your tax advisor regarding the application of the PFIC rules to
your investment in ADSs or ordinary shares.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or
redemption of ADSs or ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding
will not apply, however, to a U.S. Holder that furnishes a correct taxpayer identification number
and makes any other required certification or that is otherwise exempt from backup withholding.
U.S. Holders that are required to establish their exempt status generally must provide such
certification on U.S. Internal Revenue Service Form W-9. U.S. Holders should consult their tax
advisors regarding the application of the U.S. information reporting and backup withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited
against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for refund with the
U.S. Internal Revenue Service and furnishing any required information in a timely manner.
F.
Dividends and Paying Agents
Not Applicable.
G.
Statement by Experts
Not Applicable.
H.
Documents on Display
We previously filed with the SEC our registration statement on Form F-1 (Registration No.
333-147601, as amended) and the prospectus under the Securities Act of 1933, with respect to our
ordinary shares. We have also filed with the SEC a related registration statement on F-6
(Registration No. 333-147602) to register the ADSs.
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We are subject to the periodic reporting and other informational requirements of the Exchange Act.
Under the Exchange Act, we are required to file reports and other information with the SEC.
Specifically, we are required to file annually a Form 20-F: (1) within six months after the end of
each fiscal year, which is December 31 for us, for fiscal years ending before December 15, 2011;
and (2) within four months after the end of each fiscal year for fiscal
years ending on or after December 15, 2011. Copies of reports and other information, when so filed,
may be inspected without charge and may be obtained at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also maintains a web site at
www.sec.gov that contains reports, proxy and information statements, and other information
regarding registrants that make electronic filings with the SEC using its EDGAR system.
Our Internet website is www.vanceinfo.com. We make available free of charge on our website our
annual reports on Form 20-F and any amendments to such reports as soon as reasonably practicable
following the electronic filing of such report with the SEC. In addition, we provide electronic or
paper copies of our filings free of charge upon request. The information contained on our website
is not part of this or any other report filed with or furnished to the SEC.
As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the
furnishing and content of quarterly reports and proxy statements, and officers, directors and
principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports, which will include a review of operations and
annual audited consolidated financial statements prepared in conformity with U.S. GAAP.
I.
Subsidiary Information
For a listing of our subsidiaries, see Item 4, “Information on the Company — Organizational
Structure.”
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to interest income generated by excess cash
invested in money market securities or demand deposits with original maturities of three months or
less. Interest earning instruments carry a degree of interest rate risk. A 1% decrease in each
applicable interest rate would deduct US$0.8 million from our interest income in 2008. We have not
used derivative financial instruments to manage our interest rate risk exposure. Most of our
borrowings bear fixed interest rates.
We have not been exposed to material risks due to changes in market interest rates. However, our
future interest expense may increase and interest income may fall due to changes in market interest
rates.
Foreign Exchange Risk
A majority of our revenues and expenses are denominated in Renminbi, while a significant portion of
our revenues and expenses are denominated in U.S. dollars. The value of the Renminbi against the
U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in
China’s political and economic conditions. The conversion of Renminbi into foreign currencies,
including U.S. dollars, has been based on rates set by the People’s Bank of China. On July 21,
2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the
U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. This change in policy caused the
Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years.
Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within
a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never
exceeding it. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other
freely traded currencies, in tandem with the U.S. dollar. For example, the Renminbi depreciated
approximately 9% against the Japanese Yen between July 2008 and November 2008. During the same
period, the Renminbi appreciated approximately 27% against the Euro. It is difficult to predict
how long the current situation may last and when and how it may change again.
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The results of our operations could be adversely affected by appreciation of the Renminbi against
the U.S. dollar. Our exchange rate risk primarily arises from our foreign currency revenues,
receivables, costs and expenses, payables and other foreign currency assets and liabilities. To the
extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the
Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive
from the conversion. As of December 31, 2008, we had a Renminbi denominated cash balance of RMB33.4
million and a U.S. dollar denominated cash balance of US$7.1 million. Assuming we had converted the
U.S. dollar denominated cash balance of US$7.1 million as of December 31, 2008 into Renminbi at the
exchange rate of US$1.00 for RMB6.8225 as of December 31, 2008, this cash balance would have been
RMB81.8 million. Assuming a further 1% appreciation of the Renminbi against the U.S. dollar, this
cash balance would have decreased to RMB81.4 million as of December 31, 2008. Conversely, if we
decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends
on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar
against the Renminbi would have a negative effect on the U.S. dollar amount available to us. We
also receive a portion of our revenues in Japanese Yen and Euro. Any significant depreciation of
Japanese Yen or Euro against the Renminbi or U.S. dollar would adversely affect our revenues in
Renminbi or U.S. dollar terms, respectively. We have not used any forward contracts or currency
borrowings to hedge our exposure to foreign currency exchange risk.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
See “Item 10. Additional Information” for a description of the rights of securities holders, which
remain unchanged.
The effective date of the registration statement on Form F-1 (File number: 333-147601) for which
use of proceeds information is being disclosed was December 11, 2007. We offered our ordinary
shares, in the form of ADSs, in our initial public offering in December 2007. We registered and
sold 6,300,000 ADSs, representing 6,300,000 ordinary shares, at US$8.50 per ADS and issued
additional 1,147,500 ADSs, representing 1,147,500 ordinary shares, upon exercise of over-allotments
by the underwriters. We received net proceeds of approximately US$55.8 million from our initial
public offering.
We used the net proceeds received from our initial public offering as follows:
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approximately US$6.1 million to establish new offices and to fund other capital
expenditures; and
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approximately US$6.7 million to fund strategic acquisitions.
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As of December 31, 2008, approximately US$14.8 million of the net offering proceeds from our
initial public offering had been applied and paid to others, including consultants and advisors.
Proceeds from our initial public offering that have yet to be applied have been invested in money
market funds or bank deposits. Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated were the managing underwriters for our initial public offering.
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ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this annual report, our management, with the participation
of our chief executive officer and chief financial officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and
15d-15(e) of the Exchange Act. They have concluded that, as of the end of the fiscal year covered
by this annual report, our disclosure controls and procedures were designed, and were effective, to
give reasonable assurance that the information required to be disclosed by us in reports that we
file under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and were also effective to ensure that information
required to be disclosed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure.
In addition, since March 2008, we have engaged an advisory firm to advise us about complying with
requirements of the Sarbanes-Oxley Act, have formed a task force led by senior management members
in pursuing compliance with the requirements of the Sarbanes-Oxley Act and are currently continuing
to recruit more senior level staff to ensure we complete the process according to the timetable.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation and fair presentation of its
published consolidated financial statements. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective may
not prevent or detect misstatements and can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Our management conducted an assessment of the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, it used the criteria established
within the Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, our management has
concluded that, as of December 31, 2008, our internal control over financial reporting was
effective.
Our independent registered public accounting firm, Deloitte Touche Tohmatsu CPA Ltd., who also
audited our consolidated financial statements, independently assessed the effectiveness of our
internal control over financial reporting as of December 31, 2008, as stated in their report which
is included in this annual report.
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VANCEINFO TECHNOLOGIES INC.
We have audited the internal control over financial reporting of VanceInfo Technologies Inc., its
subsidiaries and its variable interest entity (collectively the “Group”) as of December 31, 2008,
based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Group’s internal control over financial reporting
based on our audit.
91
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of director, management and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Group maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2008 of the Group and our report dated May 15, 2009 expressed an unqualified opinion on
those financial statements.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
May 15, 2009
Changes in Internal Control over Financial Reporting
There were no adverse changes in our internal control over financial reporting during 2008 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Daniel Mingdong Wu, a member of our audit committee,
is our audit committee financial expert.
ITEM 16B. CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers,
employees and agents, including certain provisions that specifically apply to our chief executive
officer, chief financial officer, and any other persons who perform similar functions for us. We
hereby undertake to provide to any person without charge, a copy of our code of business conduct
and ethics within ten working days after we receive such
person’s written request.
92
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with
certain professional services rendered by Deloitte Touche Tohmatsu CPA Ltd., our principal external
auditors, for the periods indicated.
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|
|
|
|
|
|
|
|
|
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|
|
2007
|
|
|
2008
|
|
|
|
|
(in US$ thousands)
|
|
|
Audit fees
(1)
|
|
|
2,140
|
|
|
|
1,185
|
|
|
Tax fees
(2)
|
|
|
109
|
|
|
|
14
|
|
|
|
|
|
|
(1)
|
|
“Audit fees” means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements, the review of our interim financial statements, and also other assurance services
rendered in connection with our initial public offering in 2007 and filing of various
registration statements.
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|
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|
(2)
|
|
“Tax fees” means fees billed for tax compliance, tax advice, and tax planning services.
|
The policy of our audit committee is to pre-approve all audit and non-audit services provided by
Deloitte Touche Tohmatsu CPA Ltd., including audit services, audit-related services, tax services
and other services as described above, other than those for de minimis services which are approved
by our audit committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
None.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
On February 21, 2009, our board of directors approved a share repurchase program. Under the
program, we are authorized to acquire up to US$10 million worth of our outstanding ADSs within the
next 12 months following the plan’s approval date. We expect the repurchases to be made from time
to time in the open market or in negotiated transactions, and will be funded from the company’s
available cash.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G
.
CORPORATE GOVERNANCE
The New York Stock Exchange requires companies with listed shares to comply with its corporate
governance standards. As a foreign private issuer, we are not required to comply with all of the
rules that apply to listed U.S. companies. However, we have generally chosen to comply with the New
York Stock Exchange’s corporate governance rules as though we were a U.S. company. Accordingly, we
do not believe there are any significant differences between our corporate governance practices and
those that would typically apply to a U.S. domestic issuer under the New York Stock Exchange
corporate governance rules.
93
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
The consolidated financial statements of VanceInfo and its subsidiaries are included at the end of
this annual report.
ITEM 19. EXHIBITS
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Exhibit
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Number
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Description of Document
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1.1
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|
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).
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2.1
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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).
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2.2
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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).
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2.3
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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).
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4.1
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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).
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4.2
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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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4.3
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|
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).
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|
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4.4
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|
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).
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|
|
|
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4.5
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|
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).
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|
|
|
|
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4.6
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|
|
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).
|
94
|
|
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|
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Exhibit
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Number
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Description of Document
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4.7
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Form of Employment Contract between the Registrant and a Senior Executive Officer of the
Registrant (incorporated by reference to Exhibit 10.4 from our Registration Statement on
Form F-1 (file no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
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4.8
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|
|
English Translation of Form of Employment Contract between Worksoft Creative Software
Technology Ltd. and a Senior Executive Officer of it (incorporated by reference to
Exhibit 10.5 from our Registration Statement on Form F-1 (file no. 333-147601) filed
with the Securities and Exchange Commission on November 23, 2007).
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4.9
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|
|
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).
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|
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|
|
|
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|
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4.10
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|
|
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).
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|
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|
|
|
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|
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4.11
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|
|
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).
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|
|
|
|
|
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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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|
|
|
|
|
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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).
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|
|
|
|
|
|
|
|
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).
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|
|
|
|
|
|
|
|
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).
|
95
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|
|
|
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|
|
Exhibit
|
|
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|
Number
|
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Description of Document
|
|
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|
|
|
|
|
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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).
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|
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|
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|
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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).
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|
|
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4.21
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|
|
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).
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|
|
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4.22*
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|
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.
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|
|
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8.1*
|
|
|
Subsidiaries of the Registrant.
|
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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).
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|
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|
|
|
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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 Jun He Law Offices.
|
|
|
|
|
|
|
|
|
15.3*
|
|
|
Consent of Deloitte Touche Tohmatsu CPA Ltd.
|
|
|
|
|
|
*
|
|
Filed with this Annual Report on Form 20-F.
|
96
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
|
|
|
|
|
|
|
|
VANCEINFO TECHNOLOGIES INC.
|
|
|
|
By:
|
/s/ Chris Shuning Chen
|
|
|
|
|
Name:
|
Chris Shuning Chen
|
|
|
|
|
Title:
|
Chairman and Chief Executive Officer
|
|
|
|
Date:
May 15, 2009
97
VANCEINFO TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
|
|
|
|
|
|
|
CONTENTS
|
|
PAGE(S)
|
|
|
|
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
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|
|
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F-2
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VANCEINFO TECHNOLOGIES INC.
We have audited the accompanying consolidated balance sheets of VanceInfo Technologies Inc.,
its subsidiaries and its variable interest entity (collectively, the “Group”) as of December
31, 2007 and 2008 and the related consolidated statements of operations, shareholders’
equity and comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the responsibility of the Group’s
management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Group as of December 31, 2007 and 2008, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2008 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2 to the consolidated financial statements, effective on January 1,
2007, the Group adopted the recognition and measurement methods under Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109”.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Group’s internal control over financial reporting as of
December 31, 2008, based on the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated May 15, 2009 expressed an unqualified opinion on the Group’s internal control over
financial reporting.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
May 15, 2009
F-1
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
76,835
|
|
|
|
79,963
|
|
|
Term deposit
|
|
|
1,371
|
|
|
|
1,466
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
$342 in 2007 and $587 in 2008
|
|
|
24,708
|
|
|
|
36,827
|
|
|
Prepaid expenses and other current assets
|
|
|
2,584
|
|
|
|
3,084
|
|
|
Loans to shareholders
|
|
|
3,277
|
|
|
|
—
|
|
|
Deferred income tax assets
|
|
|
18
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
108,793
|
|
|
|
121,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental deposits and prepaid rentals
|
|
|
583
|
|
|
|
2,010
|
|
|
Property and equipment, net
|
|
|
7,999
|
|
|
|
11,260
|
|
|
Acquired intangible assets, net
|
|
|
4,618
|
|
|
|
4,158
|
|
|
Goodwill
|
|
|
7,083
|
|
|
|
15,537
|
|
|
Long-term investment
|
|
|
—
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
129,076
|
|
|
|
155,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,326
|
|
|
|
3,203
|
|
|
Accrued expenses and other payables
|
|
|
14,310
|
|
|
|
16,452
|
|
|
Income tax payable
|
|
|
341
|
|
|
|
2,275
|
|
|
Deferred income tax liability-current
|
|
|
137
|
|
|
|
—
|
|
|
Deferred income-current
|
|
|
—
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,114
|
|
|
|
22,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities-non current
|
|
|
954
|
|
|
|
737
|
|
|
Deferred income-non-current
|
|
|
—
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
18,068
|
|
|
|
23,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 20, 21 and 22)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
630
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.001 par value, 70,000,000 shares authorized;
37,198,907 and 39,120,879 shares issued
and outstanding in 2007 and 2008, respectively)
|
|
|
37
|
|
|
|
39
|
|
|
Additional paid-in capital
|
|
|
98,706
|
|
|
|
101,184
|
|
|
Shares issuable in connection with business acquisitions
|
|
|
—
|
|
|
|
1,527
|
|
|
Accumulated other comprehensive income
|
|
|
2,285
|
|
|
|
4,863
|
|
|
Statutory reserves
|
|
|
924
|
|
|
|
1,316
|
|
|
Retained earnings
|
|
|
8,426
|
|
|
|
22,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
110,378
|
|
|
|
131,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and shareholders’ equity
|
|
|
129,076
|
|
|
|
155,451
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars in thousands, except share and share related data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
30,126
|
|
|
|
64,458
|
|
|
|
105,556
|
|
|
Business tax
|
|
|
(1,075
|
)
|
|
|
(1,744
|
)
|
|
|
(2,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
29,051
|
|
|
|
62,714
|
|
|
|
102,663
|
|
|
|
|
|
|
|
|
Cost of revenues (including share-based compensation of $45, $111 and $265
in 2006, 2007 and 2008, respectively)
|
|
|
(17,961
|
)
|
|
|
(38,544
|
)
|
|
|
(62,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,090
|
|
|
|
24,170
|
|
|
|
39,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses (including share-based compensation
of $632, $808 and $950 in 2006, 2007 and 2008, respectively)
|
|
|
(6,140
|
)
|
|
|
(13,838
|
)
|
|
|
(21,625
|
)
|
|
Selling and marketing expenses (including share-based compensation
of $36, $77 and $176 in 2006, 2007 and 2008, respectively)
|
|
|
(681
|
)
|
|
|
(2,342
|
)
|
|
|
(4,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(6,821
|
)
|
|
|
(16,180
|
)
|
|
|
(25,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
54
|
|
|
|
860
|
|
|
|
858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,323
|
|
|
|
8,850
|
|
|
|
14,705
|
|
|
Interest income
|
|
|
592
|
|
|
|
1,032
|
|
|
|
2,028
|
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(47
|
)
|
|
|
(69
|
)
|
|
Exchange differences
|
|
|
(93
|
)
|
|
|
317
|
|
|
|
703
|
|
|
Change in fair value of warrants
|
|
|
(405
|
)
|
|
|
(357
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
4,413
|
|
|
|
9,795
|
|
|
|
17,367
|
|
|
Income tax expense
|
|
|
(2
|
)
|
|
|
(174
|
)
|
|
|
(1,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
4,411
|
|
|
|
9,621
|
|
|
|
16,069
|
|
|
Minority interest in net income of consolidated subsidiary, net of tax
|
|
|
(35
|
)
|
|
|
(52
|
)
|
|
|
84
|
|
|
Earnings in equity method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,376
|
|
|
|
9,569
|
|
|
|
16,173
|
|
|
Deemed dividend on Series A convertible redeemable preferred
shares-accretion of redemption premium
|
|
|
(611
|
)
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to holders of ordinary shares
|
|
|
3,765
|
|
|
|
8,937
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-ordinary share
|
|
|
0.08
|
|
|
|
0.22
|
|
|
|
0.43
|
|
|
Basic-Series A convertible redeemable preferred share
|
|
|
0.24
|
|
|
|
0.40
|
|
|
|
N/A
|
|
|
Basic-Series B-1 convertible redeemable preferred share
|
|
|
0.25
|
|
|
|
0.40
|
|
|
|
N/A
|
|
|
Basic-Series B-2 convertible redeemable preferred share
|
|
|
0.33
|
|
|
|
0.51
|
|
|
|
N/A
|
|
|
Basic-Series B-3 convertible redeemable preferred share
|
|
|
N/A
|
|
|
|
0.22
|
|
|
|
N/A
|
|
|
Diluted-ordinary share
|
|
|
0.07
|
|
|
|
0.19
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-ordinary share
|
|
|
9,605,507
|
|
|
|
11,426,183
|
|
|
|
37,276,306
|
|
|
Basic-Series A convertible redeemable preferred share
|
|
|
7,175,000
|
|
|
|
6,860,247
|
|
|
|
N/A
|
|
|
Basic-Series B-1 convertible redeemable preferred share
|
|
|
1,998,795
|
|
|
|
2,867,123
|
|
|
|
N/A
|
|
|
Basic-Series B-2 convertible redeemable preferred share
|
|
|
4,265,112
|
|
|
|
6,117,988
|
|
|
|
N/A
|
|
|
Basic-Series B-3 convertible redeemable preferred share
|
|
|
N/A
|
|
|
|
77,704
|
|
|
|
N/A
|
|
|
Diluted-ordinary share
|
|
|
10,205,449
|
|
|
|
13,446,087
|
|
|
|
40,695,982
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
in connection
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
|
Ordinary shares
|
|
|
Subscription
|
|
|
paid-in
|
|
|
with business
|
|
|
comprehensive
|
|
|
Statutory
|
|
|
Retained
|
|
|
shareholders’
|
|
|
comprehensive
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
receivable
|
|
|
capital
|
|
|
acquisitions
|
|
|
income
|
|
|
reserves
|
|
|
earnings
|
|
|
equity
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
11,500,000
|
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
3,145
|
|
|
|
81
|
|
|
|
121
|
|
|
|
52
|
|
|
|
2,763
|
|
|
|
6,165
|
|
|
|
|
|
|
Issuance of ordinary shares
|
|
|
186,219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
208
|
|
|
|
(81
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
127
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(2,990,000
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(787
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,803
|
)
|
|
|
(6,593
|
)
|
|
|
|
|
|
Collection of subscription receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
713
|
|
|
|
|
|
|
Deemed dividend on Series A convertible redeemable preferred
shares-accretion of redemption premium
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(611
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
454
|
|
|
|
—
|
|
|
|
—
|
|
|
|
454
|
|
|
|
454
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,376
|
|
|
|
4,376
|
|
|
|
4,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
8,696,219
|
|
|
|
9
|
|
|
|
—
|
|
|
|
3,279
|
|
|
|
—
|
|
|
|
575
|
|
|
|
55
|
|
|
|
722
|
|
|
|
4,640
|
|
|
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(86,219
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(127
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(304
|
)
|
|
|
(431
|
)
|
|
|
|
|
|
Repurchase of Series A convertible redeemable preferred shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(60
|
)
|
|
|
(60
|
)
|
|
|
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
2,369,569
|
|
|
|
2
|
|
|
|
—
|
|
|
|
4,525
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,527
|
|
|
|
|
|
|
Deemed dividend on Series A convertible redeemable preferred shares
-accretion of redemption premium
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(632
|
)
|
|
|
(632
|
)
|
|
|
|
|
|
Removal of redemption rights of Series B-3 convertible redeemable
preferred shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,260
|
|
|
|
|
|
|
Conversion of preferred shares upon the initial public offering (“IPO”)
|
|
|
18,771,838
|
|
|
|
19
|
|
|
|
—
|
|
|
|
33,993
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34,012
|
|
|
|
|
|
|
Issuance of ordinary shares upon IPO
|
|
|
7,447,500
|
|
|
|
7
|
|
|
|
—
|
|
|
|
54,780
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
54,787
|
|
|
|
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
996
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
996
|
|
|
|
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
869
|
|
|
|
(869
|
)
|
|
|
—
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,710
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,710
|
|
|
|
1,710
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,569
|
|
|
|
9,569
|
|
|
|
9,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
37,198,907
|
|
|
|
37
|
|
|
|
—
|
|
|
|
98,706
|
|
|
|
—
|
|
|
|
2,285
|
|
|
|
924
|
|
|
|
8,426
|
|
|
|
110,378
|
|
|
|
11,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
2,578
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,173
|
|
|
|
16,173
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
39,120,879
|
|
|
|
39
|
|
|
|
—
|
|
|
|
101,184
|
|
|
|
1,527
|
|
|
|
4,863
|
|
|
|
1,316
|
|
|
|
22,574
|
|
|
|
131,503
|
|
|
|
18,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,376
|
|
|
|
9,569
|
|
|
|
16,173
|
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
35
|
|
|
|
52
|
|
|
|
(84
|
)
|
|
Share-based compensation
|
|
|
713
|
|
|
|
996
|
|
|
|
1,391
|
|
|
Depreciation and amortization of property and equipment
|
|
|
749
|
|
|
|
1,776
|
|
|
|
2,896
|
|
|
Amortization of intangible assets
|
|
|
116
|
|
|
|
761
|
|
|
|
823
|
|
|
Loss on disposal of property and equipment
|
|
|
3
|
|
|
|
189
|
|
|
|
219
|
|
|
Allowance for doubtful accounts
|
|
|
—
|
|
|
|
287
|
|
|
|
210
|
|
|
Change in fair value of loans to shareholders
|
|
|
(104
|
)
|
|
|
(83
|
)
|
|
|
—
|
|
|
Change in fair value of warrants
|
|
|
405
|
|
|
|
357
|
|
|
|
—
|
|
|
Earnings in equity method investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental deposits and prepaid rentals
|
|
|
(148
|
)
|
|
|
(107
|
)
|
|
|
(1,321
|
)
|
|
Accounts receivable
|
|
|
(4,745
|
)
|
|
|
(7,910
|
)
|
|
|
(9,580
|
)
|
|
Accrued interest income
|
|
|
—
|
|
|
|
(96
|
)
|
|
|
(100
|
)
|
|
Prepaid expenses and other current assets
|
|
|
(395
|
)
|
|
|
(968
|
)
|
|
|
(323
|
)
|
|
Deferred tax assets-current
|
|
|
—
|
|
|
|
(18
|
)
|
|
|
(257
|
)
|
|
Accounts payable
|
|
|
526
|
|
|
|
734
|
|
|
|
192
|
|
|
Accrued expenses and other payables
|
|
|
894
|
|
|
|
1,815
|
|
|
|
4,258
|
|
|
Income tax payable
|
|
|
2
|
|
|
|
30
|
|
|
|
1,470
|
|
|
Deferred tax liability-current
|
|
|
—
|
|
|
|
132
|
|
|
|
(145
|
)
|
|
Deferred tax liability-non current
|
|
|
—
|
|
|
|
(37
|
)
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,427
|
|
|
|
7,479
|
|
|
|
15,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(3,637
|
)
|
|
|
(3,681
|
)
|
|
|
(6,144
|
)
|
|
Purchase of long-term investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(841
|
)
|
|
Loans to shareholders
|
|
|
—
|
|
|
|
(4,086
|
)
|
|
|
—
|
|
|
Repayments from shareholders for loans advanced
|
|
|
635
|
|
|
|
3,713
|
|
|
|
3,579
|
|
|
Consideration paid for business acquisitions (net of cash
acquired of $169 , $2,214 and $891 in 2006, 2007 and 2008, respectively)
|
|
|
(819
|
)
|
|
|
(3,852
|
)
|
|
|
(6,738
|
)
|
|
Proceeds from disposal of property and equipment
|
|
|
92
|
|
|
|
2
|
|
|
|
15
|
|
|
Term deposit
|
|
|
—
|
|
|
|
(1,371
|
)
|
|
|
(1,463
|
)
|
|
Cash received upon maturity of term deposit
|
|
|
—
|
|
|
|
—
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,729
|
)
|
|
|
(9,275
|
)
|
|
|
(10,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of options
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
Repayments of loans assumed in business acquisition
|
|
|
(362
|
)
|
|
|
(517
|
)
|
|
|
(200
|
)
|
|
Collection of subscription receivable
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
Proceeds from issuance of Series B-1, B-2 and B-3 convertible redeemable
preferred shares and warrants
|
|
|
24,309
|
|
|
|
1,761
|
|
|
|
—
|
|
|
Proceeds from issuance of common stock upon IPO
(net of $7,469 and $1,054 issuance costs paid in 2007 and 2008, respectively)
|
|
|
—
|
|
|
|
55,835
|
|
|
|
(1,054
|
)
|
|
Repurchase of ordinary shares
|
|
|
(6,593
|
)
|
|
|
(431
|
)
|
|
|
(2,020
|
)
|
|
Repurchase of Series A convertible redeemable preferred shares
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
—
|
|
|
Proceeds from short-term borrowings
|
|
|
—
|
|
|
|
1,183
|
|
|
|
1,463
|
|
|
Repayments of short-term borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
17,363
|
|
|
|
57,741
|
|
|
|
(2,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
67
|
|
|
|
325
|
|
|
|
678
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
4,437
|
|
|
|
20,565
|
|
|
|
76,835
|
|
|
Net increase in cash and cash equivalents
|
|
|
16,061
|
|
|
|
55,945
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
20,565
|
|
|
|
76,835
|
|
|
|
79,963
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — continued
(In U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
2
|
|
|
|
26
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
37
|
|
|
|
39
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of ordinary shares issued and to be issued
|
|
|
127
|
|
|
|
4,528
|
|
|
|
2,701
|
|
|
Cash consideration paid
|
|
|
988
|
|
|
|
6,066
|
|
|
|
3,645
|
|
|
Outstanding consideration payable
|
|
|
63
|
|
|
|
3,867
|
|
|
|
3,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired (including intangible assets of $254,
$3,203 and $58, in 2006, 2007 and 2008, respectively)
|
|
|
1,178
|
|
|
|
14,461
|
|
|
|
9,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for purchase of property and equipment
|
|
|
143
|
|
|
|
96
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Removal of redemption rights of Series B-3 convertible redeemable preferred
shares (Note 17)
|
|
|
N/A
|
|
|
|
1,260
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued issuance costs related to IPO
|
|
|
N/A
|
|
|
|
1,048
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(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.
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 market value at the
date of acquisition. Before the acquisition of Wensi Chuangyi, the Group did not have
significant operations.
VanceInfo, its subsidiaries and its variable interest entity (the “VIE”) (collectively the
“Group”) are 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, 2008, the Group’s subsidiaries and VIE were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage
|
|
|
|
|
acquisition/
|
|
establishment/
|
|
of beneficial
|
|
|
Subsidiaries
|
|
incorporation
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Beijing
|
|
July 2, 2004
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Japan Inc. (“VanceInfo Japan”)
|
|
November 25, 2004
|
|
Japan
|
|
|
99.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Creative Software Technology Ltd.
(“VanceInfo BVI”)
|
|
August 6, 2004
|
|
BVI
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Technologies Inc.
(“VanceInfo US”)
|
|
November 29, 2005
|
|
United States of
America (“US”)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Technologies Limited
|
|
March 27, 2007
|
|
Hong Kong
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Technologies Limited
|
|
November 15, 2007
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai VanceInfo Technologies Limited
(“Solutions”)
|
|
May 29, 2007
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Beijing Chosen Technology Co., Ltd. (“Chosen”)
|
|
July 31, 2007
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai VanceInfo Creative Software
Technology Limited
|
|
September 9, 2008
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Wireless Info Tech, Ltd. (“WIT”)
|
|
October 1, 2008
|
|
US
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo Malaysia Inc. Sdn. Bhd.
|
|
October 9, 2008
|
|
Malaysia
|
|
|
100
|
%
|
F-7
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES — continued
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage
|
|
|
|
|
acquisition/
|
|
establishment/
|
|
of beneficial
|
|
|
Subsidiaries
|
|
incorporation
|
|
incorporation
|
|
ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenzhen VanceInfo Creative Software Technology Limited
|
|
October 28, 2008
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Nanjing VanceInfo Creative Software Technology Limited
|
|
December 19, 2008
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
VIE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Megainfo Tech Co., Ltd. (“Megainfo”)
|
|
April 1, 2007
|
|
PRC
|
|
|
100
|
%
|
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 and its
majority owned subsidiaries and 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, economic lives of intangible assets, valuations of goodwill and intangible assets,
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.
F-8
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
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.
Fair value
The Group adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,
Fair
Value Measurements
on January 1, 2008 for all financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements.
SFAS No. 157 defines fair value as 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.
SFAS No. 157 establishes 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. SFAS No. 157
establishes three levels of inputs that may be used to measure fair value:
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.
F-9
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Accounts receivable
Accounts receivable represents those receivables derived in the ordinary course of business.
The Group conducts credit evaluations of customers and generally do not require collateral
or other security from their customers. The Group establishes an allowance for doubtful
accounts based upon estimates, historical experience and other factors surrounding the
credit risk of specific customers.
Movement of allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
beginning of
|
|
|
Charge to
|
|
|
Exchange
|
|
|
end of
|
|
|
|
|
the year
|
|
|
expense
|
|
|
adjustment
|
|
|
the year
|
|
|
|
|
|
|
|
|
2007
|
|
|
53
|
|
|
|
287
|
|
|
|
2
|
|
|
|
342
|
|
|
2008
|
|
|
342
|
|
|
|
210
|
|
|
|
35
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
Acquired intangible assets with finite lives, net
Acquired intangible assets with finite lives, net are carried at cost less accumulated
amortization. Amortization of finite-lived intangible assets is computed using the
straight-line method over the following estimated economic lives:
|
|
|
|
|
|
|
Contract backlog
|
|
0.17-1 year
|
|
Customer base and relationship
|
|
3-10 years
|
|
Non-compete agreement
|
|
2-5 years
|
F-10
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
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.
Impairment of long-lived assets
The Group reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Group measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
undiscounted cash flow is less than the carrying amount of the assets, the Group would
recognize an impairment loss based on the fair value of the assets.
Impairment of goodwill and indefinite-lived intangible assets
The Group annually, or more frequently if the Group believes indicators of impairment exist,
reviews the carrying value of intangible assets not subject to amortization, including
goodwill, to determine whether impairment may exist.
Specifically, goodwill impairment is determined using a two-step process. The first step
compares the fair values 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.
F-11
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Impairment of goodwill and indefinite-lived intangible assets
— continued
The impairment test for other intangible asset not subject to amortization consists of a
comparison of the fair value of the intangible asset with its carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. The estimates of fair value of intangible
assets not subject to amortization are determined using various discounted cash flow
valuation methodologies. Significant assumptions are inherent in this process, including
estimates of discount rates. Discount rate assumptions are based on an assessment of the
risk inherent in the respective intangible assets.
The Group has determined to perform the annual impairment tests on December 31 of each year.
The Group did not incur any impairment loss on goodwill or other intangible assets not
subject to amortization for the years ended December 31, 2006, 2007 or 2008.
Revenue recognition
The Group derives revenues from IT services.
The majority of the contracts are for the provision of services performed on a
time-and-material basis. For time-and-material contracts, the Group may render initial
development and maintenance services, typically for a period of less than one year and are
subject to the terms of the master agreement which fixes the billing rates for man-hours
based on level of experience of the engineers regardless of the type of engaged services.
The Group bills customers for related service performance based on pre-agreed charge rates.
Customers may terminate contracts before completion and revenue is considered to be
realizable and earned when all of the following criteria are met: persuasive evidence of a
sales arrangement exists; delivery has occurred or services have been rendered; the price is
fixed or determinable; and collectability is reasonably assured. Thus, the revenues from
this type of contract are recognized as the billable services are rendered. Software
developed by the Group on behalf of its customers is transferred in its entirety to the
customer. Revenues recognized for time-and-material contracts amounted to $29,243, $58,361
and $93,525 for the years ended December 31, 2006, 2007 and 2008, respectively.
The remaining revenues are earned from fixed-price 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 $883, $6,097 and $12,031 for the years ended December 31, 2006, 2007
and 2008, respectively.
F-12
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Revenue recognition
— continued
The Group does not normally enter into maintenance service arrangements for fixed-price
contracts. In 2007, the Group performed one contract which involved initial IT services,
software resale, and maintenance service which is considered postcontract customer supports
(“PCS”). Since the Group did not establish the vender-specific objective evidence of the
fair value of each element of the contract, the contract amount was recognized as revenue
ratably over the period of PCS, which was the only undelivered element in the arrangement,
in accordance with guidance of AICPA Statement of Position 97-2,
Software Revenue
Recognition.
Reimbursable out-of-pocket expenses and material costs are recognized as revenues when
billed in accordance with Emerging Issues Task Force (“EITF”) 01-14,
Income Statement
Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred
.
The Group accounts for volume discounts and pricing incentives to customers using the
guidance of EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products)
. 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.
Business tax
The Group’s PRC subsidiaries and VIE are subject to business tax at rate of 5% of total
revenues for certain type of contracts. Certain contracts under specific formalities are
exempted from business tax in accordance with the PRC tax laws. Business tax is recorded as
a reduction in revenues when incurred.
Government subsidies
The Group receives non-repayable subsidies from PRC local government agencies after meeting
certain conditions, such as locating their office in a certain district or passing certain
technological certification. The subsidies are recorded in other operating income of the
consolidated statements of operations in the period in which the right to receive such
subsidies is established.
Operating leases
Leases where substantially all the rewards and risks of ownership of assets remain with the
leasing company are accounted for as operating leases. Payments made under operating leases
are charged to the consolidated statements of operations on a straight-line basis over the
lease periods.
F-13
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Advertising costs
The Group expenses advertising costs as incurred. Total advertising expenses were $20, $52
and $8 for the years ended December 31, 2006, 2007 and 2008, respectively, and have been
included as part of selling and marketing 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.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.
48,
Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109
(“FIN No. 48”) which clarifies the accounting for uncertainty in income taxes recognized in
any entity’s financial statements in accordance with SFAS No. 109,
Accounting for Income
Taxes
and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Under
FIN No. 48, 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. Additionally, FIN No. 48 provides
guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006. The Group adopted the provisions of FIN No. 48 effective January
1, 2007. The adoption of FIN No. 48 did not result in a cumulative adjustment on January 1,
2007 and had no significant impact on the Group’s accounting for income taxes for the years
ended December 31, 2007 and 2008. The Group did not incur any interest or penalties related
to potential underpaid income tax expenses and also does not expect to have a significant increase or decrease on unrecognized tax benefits
within 12 months from December 31, 2008. The Group classifies interest and penalties, if any, as a
component of its income tax provision.
Foreign currency translation
VanceInfo, VanceInfo BVI, VanceInfo US and WIT use the United States dollar (“U.S. dollar”)
as their functional currency. Monetary assets and liabilities denominated in currencies
other than the U.S. dollar are translated into U.S. dollar at the rates of exchange ruling
at the balance sheet date. Transactions in currencies other than U.S. dollar during the
year are converted into U.S. dollar at the applicable rates of exchange prevailing at the
dates of the transactions. Transaction gains and losses are recognized in the consolidated
statements of operations.
F-14
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Foreign currency translation
— continued
The functional currency for some of the Group’s entities is the local currency. Assets and
liabilities are translated at the exchange rates at the balance sheet date, equity accounts
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 reflected as a separate component of
comprehensive income in the consolidated statements of shareholders’ equity and
comprehensive income.
The Group uses the U.S. dollar as its reporting currency.
Comprehensive income
Comprehensive income includes net income and foreign currency translation adjustments.
Comprehensive income is reported in the consolidated statements of shareholders’ equity 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 financial institutions.
Details of customers accounting for 10% or more of total revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
25
|
|
|
|
14
|
|
|
|
11
|
|
|
B
|
|
|
28
|
|
|
|
20
|
|
|
|
18
|
|
|
C
|
|
|
2
|
|
|
|
3
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of customers accounting for 10% or more of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
39
|
|
|
|
18
|
|
|
|
13
|
|
|
B
|
|
|
18
|
|
|
|
13
|
|
|
|
9
|
|
|
C
|
|
|
3
|
|
|
|
6
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Fair value of financial instruments
The carrying value of cash and cash equivalents, accounts receivable and accounts payable
approximates their fair value due to their short-term maturities.
The carrying value of loans to shareholders, which is based on discounted cash flows using
current interest rates, approximates their fair value.
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.
Share-based payments
Share-based payment transactions with employees are measured based on the grant date fair
value of the equity instrument issued in accordance with the SFAS No. 123(R),
Share-Based
Payment
, and recognized as compensation expense over the requisite service period based on
a graded vesting attribution method, with a corresponding impact reflected in additional
paid-in capital. SFAS No. 123(R) was effective for the year beginning after January 1,
2006, with early adoption permitted. The Group early adopted the provision of SFAS No.
123(R) in 2005 when the Group adopted 2005 Stock Option Plan, the first share-based payment
arrangement of the Group.
Share-based payment transactions with non-employees are accounted for as share based
compensation expense in accordance with EITF 96-18,
Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
Net income per share
The Group has determined that its convertible redeemable preferred shares are participating
securities as the preferred shares participate in undistributed earnings on an
as-if-converted basis. Accordingly, the Group has used the two-class method of computing
net income per share, for ordinary and preferred shares according to participation rights in
undistributed earnings. Under this method, undistributed net income is allocated on a pro
rata basis to the ordinary and preferred shares to the extent that each class may share
income for the period; whereas undistributed net loss is allocated to ordinary shares
because preferred shares are not contractually obligated to share the loss.
The Group had convertible redeemable preferred shares, stock options, warrants, nonvested
shares, and ordinary shares to be issued contingent upon the satisfaction of certain
conditions in connection with business acquisitions, which could potentially dilute basic
earnings per share in the future. To calculate the number of shares for diluted income per
share, the effect of the convertible redeemable preferred shares is computed using the
if-converted method; the effect of the warrants, stock options and nonvested shares is
computed using the treasury stock method.
F-16
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Recently issued accounting standards
In September 2006, FASB issued SFAS No. 157, effective January 1, 2008, the Group adopted
the measurement and disclosure other than those requirements related to nonfinancial assets
and liabilities in accordance with guidance from FASB Staff Position (“FSP”) 157-2,
Effective Date of FASB Statement No. 157
,which delayed the effective date of SFAS No.157 for
all nonfinancial assets and nonfinancial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least
annually), until the beginning of fiscal year 2009. The Group does not expect the adoption
of SFAS No. 157 for nonfinancial assets and liabilities will have a significant effect on
the Group’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141,
Business Combinations
: (Revised 2007). SFAS
No. 141R is relevant to all transactions or events in which one entity obtains control over
one or more other businesses. SFAS No. 141R requires an acquirer to recognize any assets
and noncontrolling interest acquired and liabilities assumed to be measured at fair value as
of the acquisition date. Liabilities related to contingent consideration are recognized and
measured at fair value on the date of acquisition rather than at a later date when the
amount of the consideration may be resolved beyond a reasonable doubt. This revised
approach replaces SFAS No. 141’s cost allocation process in which the cost of an acquisition
was allocated to the individual assets acquired and liabilities assumed based on their
respective fair value. SFAS 141R requires any acquisition-related costs and restructuring
costs to be expensed as incurred as opposed to allocating such costs to be assets acquired
and liabilities assumed as previously required by SFAS No. 141. Under SFAS No. 141R, an
acquirer recognizes liabilities for a restructuring plan in purchase accounting only if the
requirements of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities
, are met. SFAS No. 141R allows for the recognition of pre-acquisition
contingencies are likely to materialize. If this criterion is not met at the acquisition
date, then the acquirer accounts for the non-contractual contingencies in accordance with
recognition criteria set forth under SFAS No. 5,
Accounting for Contingencies
, in which case
no amount should be recognized in purchase accounting. SFAS No. 141R is effective as of the
beginning of an entity’s first fiscal year that begins after December 15, 2008. The Group
does not expect the adoption of SFAS No. 141R to have a material impact on its financial
statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements-an Amendment of ARB No. 51
. This Statement amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity and should be reported as
equity on the financial statements. SFAS No. 160 requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interest. Furthermore, disclosure of the consolidated net income
attributable to the parent and to the noncontrolling interest is required on the face of the
financial statements. SFAS No. 160 is effective as of the beginning of an entity’s first
fiscal year that begins after December 15, 2008. The Group does not expect the adoption of
SFAS No. 160 to have a material impact on its financial statements.
F-17
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(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 April 2008, the FASB issued FSP FAS142-3:
Determination of the Useful Life of Intangible
Assets
. The FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS No.142,
Goodwill and Other Intangible Assets
. This FSP is effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. The guidance for determining the useful life of a recognized
intangible asset in this FSP shall be applied prospectively to intangible assets acquired
after the effective date. The Group does not expect the adoption of this FSP to have a
material impact on its financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1,
Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
. This FSP gives guidance on
the computation of earnings per share and the impact of share-based instruments that contain
certain nonforfeitable rights to dividends or dividend equivalents. The FSP is effective
for fiscal years beginning after December 31, 2008 and early application is prohibited. The
Group does not expect the adoption of this FSP to have a material impact on its financial
statements.
At a November 24, 2008 meeting, the FASB ratified the consensus reached by the Task Force in
Issue EITF 08-6:
Equity Method Investment Accounting Considerations
. Because of the
significant changes to the guidance on subsidiary acquisitions and subsidiary equity
transactions and the increased use of fair value measurements as a result of SFAS No. 141R
and SFAS No. 160, questions have arisen regarding the application of that accounting
guidance to equity method investments. EITF 08-6 provides guidance for entities that
acquire or hold investments accounted for under the equity method. This issue is effective
for transactions occurring in fiscal years and interim periods beginning on or after
December 15, 2008. Early adoption is not permitted. The Group does not expect the adoption
of EITF 08-6 to have a material impact on its financial statements.
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
Recognition and Presentation
of Other-Than-Temporary Impairments
. This FSP amends the other-than-temporary impairment
guidance in U.S. GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This FSP does not amend existing recognition
and measurement guidance related to other-than-temporary impairments of equity securities.
The FSP will be effective on April 1, 2009. This FSP does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In periods after
initial adoption, this FSP requires comparative disclosures only for periods ending after
initial adoption. The Group does not expect the adoption of this FAS to have a material
impact on its financial statements.
F-18
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
Recently issued accounting standards
— continued
On April 9, 2009, the FASB issued FSP FAS 157-4,
Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly
. This FSP provides additional guidance for estimating
fair value in accordance with SFAS No. 157 when the volume and level of activity for the
asset or liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes
that even if there has been a significant decrease in the volume and level of activity for
the asset or liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the measurement date
under current market conditions. This FSP will be effective on April 1, 2009 and will be
applied prospectively. This FSP does not require disclosures for earlier periods presented
for comparative purposes at initial adoption. In periods after initial adoption, this FSP
requires comparative disclosures only for periods ending after initial adoption. The Group
does not expect the adoption of this FSP to have a material impact on its financial
statements.
3. SEGMENT INFORMATION
In accordance with SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
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; hence, the Group has only one operating
segment.
Geographic information
Although the Group has subsidiaries and VIE in the PRC, Japan, the US, Hong Kong and
Malaysia, the Group’s long lived assets are primarily located in the PRC.
The following table summarizes the Group’s net revenues in different geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
US
|
|
|
24,717
|
|
|
|
43,153
|
|
|
|
56,175
|
|
|
PRC
|
|
|
2,065
|
|
|
|
7,329
|
|
|
|
22,045
|
|
|
Europe
|
|
|
714
|
|
|
|
6,284
|
|
|
|
14,991
|
|
|
Japan
|
|
|
1,548
|
|
|
|
5,828
|
|
|
|
9,157
|
|
|
Others
|
|
|
7
|
|
|
|
120
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,051
|
|
|
|
62,714
|
|
|
|
102,663
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
3. SEGMENT INFORMATION — continued
Geographic information
— continued
Geographic area data are 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 revenue by service lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
Research & development services
|
|
|
18,266
|
|
|
|
36,013
|
|
|
|
60,808
|
|
|
Globalization & localization
|
|
|
3,086
|
|
|
|
3,886
|
|
|
|
4,259
|
|
|
Enterprise solutions
|
|
|
2,163
|
|
|
|
8,748
|
|
|
|
13,553
|
|
|
Application development & maintenance
|
|
|
2,328
|
|
|
|
9,348
|
|
|
|
17,242
|
|
|
Quality assurance & testing
|
|
|
3,208
|
|
|
|
4,719
|
|
|
|
6,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
29,051
|
|
|
|
62,714
|
|
|
|
102,663
|
|
|
|
|
|
|
|
|
|
|
|
|
4. ACQUISITIONS
The Group had the following acquisitions in 2006, 2007 and 2008:
Acquisition of Envisys’s business
On January 1, 2006, the Group acquired the operating business of Envisys Inc. (“Envisys”),
an enterprise solutions service company for a cash consideration of $200 and 86,219 ordinary
shares of VanceInfo at a fair value of $1.47 per ordinary share as of the acquisition date.
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 an acquisition of a business and accordingly the purchase method
of accounting has been applied in accordance with SFAS No. 141,
Business Combinations
. The
acquired net assets were recorded at their fair market value at the date of acquisition.
The aggregate purchase price of $327 consisted of the following:
|
|
|
|
|
|
|
Cash consideration
|
|
|
200
|
|
|
Value of ordinary shares
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
327
|
|
|
|
|
|
|
F-20
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Envisys’s business
— continued
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
2
|
|
|
0.33 year
|
|
|
Customer base and relationship
|
|
|
44
|
|
|
3 years
|
|
|
Non-compete agreement
|
|
|
1
|
|
|
3 years
|
|
|
Goodwill
|
|
|
281
|
|
|
|
|
|
|
Other net liabilities acquired
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Prosoft’s equity interest
On September 19, 2006, the Group acquired a 100% equity interest in Beijing Prosoft Software
Technology Co., Ltd (“Prosoft”), a software development outsourcing service provider focused
on telecom research and development, for an initial cash consideration of $627, which was
paid in 2006. The transaction was considered an acquisition of a business and accordingly
the purchase method of accounting has been applied in accordance with SFAS No. 141. The
acquired net assets were recorded at their fair market value at the date of acquisition.
The aggregate purchase price of $660 consisted of the following:
|
|
|
|
|
|
|
Cash consideration
|
|
|
627
|
|
|
Cost of transaction
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
660
|
|
|
|
|
|
|
F-21
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Prosoft’s business
— continued
The purchase price was allocated by the Group after considering an appraisal provided by a
third party valuation firm, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
|
169
|
|
|
|
|
|
|
Accounts receivable
|
|
|
964
|
|
|
|
|
|
|
Other current assets
|
|
|
131
|
|
|
|
|
|
|
Property and equipment
|
|
|
240
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
5
|
|
|
0.4 year
|
|
|
Customer base and relationship
|
|
|
125
|
|
|
5.3 years
|
|
|
Non-compete agreement
|
|
|
6
|
|
|
3 years
|
|
|
Goodwill
|
|
|
76
|
|
|
|
|
|
|
Short-term loans
|
|
|
(612
|
)
|
|
|
|
|
|
Other current liabilities
|
|
|
(435
|
)
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 1, 2007, in light of the attainment of the 2006 operating objective and 2007
revenue outlook, the Group agreed to accelerate the contingent payment and settled the final
payment for the acquisition of Prosoft with additional cash of $508 and 155,901 ordinary
shares of VanceInfo at a fair value of $1.71 per ordinary share. The total amount of $774
was recorded as an addition to the goodwill in 2007.
F-22
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Prosoft’s business
— continued
The following unaudited pro forma information summarizes the results of operations for the
year ended December 31, 2006 of the Group as if the acquisition had occurred on January 1,
2006. 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,
|
|
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
32,375
|
|
|
Pro forma net income
|
|
|
4,474
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.08
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.25
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.26
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.33
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.08
|
|
|
|
|
|
|
In December 2008, to simplify the corporate structure of the Group, the Group liquidated
Prosoft, after the transfer and integration of all the operating net assets and business of
Prosoft into another operating entity of the Group. No significant gain or loss was
resulted from the liquidation.
F-23
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of SunBridges’s business
On December 1, 2006, the Group acquired the operating business of SunBridges Technology Ltd.
(“SunBridges”), an outsourcing service company, for an initial cash consideration of $191
which was paid in 2006. The transaction was considered an acquisition of a business and
accordingly the purchase method of accounting has been applied in accordance with SFAS No.
141. The acquired net assets were recorded at their fair market value at the date of
acquisition. The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
18
|
|
|
1 year
|
|
|
Customer base and relationship
|
|
|
47
|
|
|
5 years
|
|
|
Non-compete agreement
|
|
|
6
|
|
|
3 years
|
|
|
Goodwill
|
|
|
8
|
|
|
|
|
|
|
Other net assets acquired
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 1, 2007, the Group settled the final payment for the acquisition of SunBridge with
additional cash of $107 and 2,331 ordinary shares of VanceInfo at a fair value of $1.71 per
ordinary share. The total amount of $111 was recorded as an addition to the goodwill in
2007.
The unaudited pro forma information of the SunBridges acquisition as if the acquisition had
occurred on January 1, 2006 is not presented because the Group believes it is impracticable
to do so.
Acquisition of ITC’s equity interest
On March 19, 2007, the Group acquired a 100% equity interest in Beijing Innovation
Technology Co., Ltd. (“ITC”), a professional outsourcing service provider, for an initial
equity consideration of 793,548 ordinary shares of VanceInfo at a fair value of $1.71 per
ordinary share as of the date of acquisition. 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 an acquisition of a
business and accordingly the purchase method of accounting has been applied in accordance
with SFAS No. 141. In accordance with SFAS No. 141, $1,810 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.
F-24
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of ITC’s equity interest
— continued
The acquired net assets were recorded at their fair market value at the date of acquisition.
The aggregate purchase price consisted of the following:
|
|
|
|
|
|
|
Value of ordinary shares
|
|
|
1,357
|
|
|
Contingent consideration recognized
|
|
|
1,810
|
|
|
Cost of transaction
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,243
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
|
226
|
|
|
|
|
|
|
Loans to shareholders
|
|
|
1,313
|
|
|
|
|
|
|
Other current assets
|
|
|
810
|
|
|
|
|
|
|
Property and equipment
|
|
|
158
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
103
|
|
|
0.3 year
|
|
|
Customer base and relationship
|
|
|
1,153
|
|
|
7.8 years
|
|
|
Non-compete agreement
|
|
|
282
|
|
|
3.8 years
|
|
|
Deferred income tax liabilities
|
|
|
(252
|
)
|
|
|
|
|
|
Current liabilities
|
|
|
(550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of original purchase agreement, in addition to the initial share
consideration, an additional cash consideration, based on the earnings of ITC for 2007, was
determined to be $4,649, of which $3,456 was paid as of December 31, 2007, and $1,193 was
paid in 2008. The additional cash consideration, after netting off the $1,810 contingent
consideration recorded as of the date of acquisition, was recorded as an addition to the
goodwill in 2007.
F-25
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of ITC’s equity interest
— continued
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2006 and 2007 of the Group as if the acquisition had occurred on
January 1, 2006 and 2007. 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,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
32,120
|
|
|
|
65,171
|
|
|
Pro forma net income
|
|
|
4,831
|
|
|
|
9,658
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.10
|
|
|
|
0.23
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.26
|
|
|
|
0.40
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.27
|
|
|
|
0.40
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.35
|
|
|
|
0.52
|
|
|
Pro forma net income per Series B-3
convertible redeemable preferred share-basic
|
|
|
N/A
|
|
|
|
0.23
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.09
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
In February 2008, to simplify the corporate structure, the Group transferred all equity
interest in ITC, after integration of all the operating net assets and business of ITC into
another operating entity of the Group, to two third parties. No significant gain or loss
and cash flow were resulted from the transfer.
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 an acquisition of a business and accordingly the purchase method of
accounting has been applied in accordance with SFAS No. 141. In accordance with SFAS No.
141, 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.
F-26
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Solutions’ equity interest
— continued
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 market value at the date of acquisition.
The aggregate initial purchase price of $2,014 consisted of the following:
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
Minority interest
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 in
accordance with SFAS No. 141.
F-27
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Solutions’ equity interest
— continued
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2006 and 2007 of the Group as if the acquisition had occurred on
January 1, 2006 and 2007. 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,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
34,577
|
|
|
|
65,890
|
|
|
Pro forma net income
|
|
|
4,916
|
|
|
|
9,505
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.10
|
|
|
|
0.22
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.26
|
|
|
|
0.39
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.28
|
|
|
|
0.40
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.36
|
|
|
|
0.51
|
|
|
Pro forma net income per Series B-3
convertible redeemable preferred share-basic
|
|
|
N/A
|
|
|
|
0.22
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.09
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Value of ordinary shares
|
|
|
412
|
|
|
Cost of transaction
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,348
|
|
|
|
|
|
|
F-28
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Solutions’ equity interest
— continued
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract Backlog
|
|
|
1
|
|
|
0.17 year
|
|
|
Non-compete agreement
|
|
|
6
|
|
|
2.4 years
|
|
|
Goodwill
|
|
|
795
|
|
|
|
|
|
|
Minority interest
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Megainfo
Megainfo is a professional outsourcing service provider. On March 31, 2007, the Group
entered into a series of agreements with Megainfo and the shareholder of Megainfo, through
which Megainfo became the consolidated VIE of the Group. The acquisition was accounted for
as a business combination in accordance with SFAS No. 141.
Megainfo and its shareholder entered into an exclusive technology development and consulting
agreement with VanceInfo Beijing on March 31, 2007:
|
|
•
|
|
Service fees:
VanceInfo Beijing provides exclusive technology development and
consulting services to Megainfo. Megainfo pays VanceInfo Beijing monthly service fees
in the amount determined by VanceInfo Beijing.
|
|
|
|
|
•
|
|
Call option:
The shareholder of Megainfo irrevocably granted VanceInfo Beijing or
its designated third party an exclusive option to purchase from Megainfo’s shareholder,
to the extent permitted under the laws of the PRC, all or part of the equity interests
in Megainfo, for consideration of RMB1.
|
|
|
|
|
•
|
|
Equity pledge:
Under the equity pledge, the shareholder of Megainfo pledged all of
his equity interests, including the right to receive declared dividends, in Megainfo to
Vanceinfo Beijing to guarantee Megainfo and its shareholder’s performance of their
obligations under the exclusive technology development and consulting agreement.
|
F-29
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Megainfo
— continued
The term of the exclusive technology development and consultation agreement is ten years,
unless terminated by VanceInfo Beijing by giving a thirty days’ written notice.
Further, the shareholder of Megainfo also signed an authorization letter on March 31, 2007,
according to which the shareholder has executed a power of attorney in favor of a designee
of Vanceinfo Beijing irrevocably authorizing the designee to vote as his attorney-in-fact on
all of the matters regarding Megainfo requiring shareholder approval, as long as he is a
shareholder of Megainfo.
Through the above contractual arrangements, the Group has obtained a 100% shareholders’
voting interest in Megainfo and may receive substantially all of the net income of Megainfo
through the service fees as determined by the Group. As a result, the Group receives
substantially all of Megainfo’s expected residual returns and is the primary beneficiary of
Megainfo. Pursuant to FIN No. 46 (Revised 2003),
Consolidation of Variable Interest
Entities-an interpretation of ARB No. 51
, which requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity investors in the
entity do not have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties, the Group consolidated Megainfo as of
March 31, 2007, the date of acquisition.
Other than the contractual arrangements described above, the Group did not provide
significant financial or other supports to Megainfo for the years ended December 31, 2006,
2007 and 2008, respectively, except that, for Group management purpose, certain employees of
the Group also served in Megainfo. The financial position and operating result of Megainfo
are insignificant to the Group.
The Group acquired Megainfo with an initial cash consideration of $776 and 147,272 ordinary
shares of VanceInfo at a fair value of $1.71 per ordinary share as of the date of
acquisition. 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 an acquisition of a business and accordingly the
purchase method of accounting has been applied in accordance with SFAS No. 141. In
accordance with SFAS No. 141, $79 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 acquired net assets were recorded at their fair market value at the date of acquisition.
The aggregate purchase price of $1,165 consisted of the following:
|
|
|
|
|
|
|
Cash consideration
|
|
|
776
|
|
|
Value of ordinary shares
|
|
|
252
|
|
|
Contingent consideration recognized
|
|
|
79
|
|
|
Cost of transaction
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,165
|
|
|
|
|
|
|
F-30
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Megainfo
— continued
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
220
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
5
|
|
|
0.3 year
|
|
|
Customer base and relationship
|
|
|
534
|
|
|
4.8 years
|
|
|
Non-compete agreement
|
|
|
43
|
|
|
3 years
|
|
|
Deferred income tax liabilities
|
|
|
(154
|
)
|
|
|
|
|
|
Other net assets acquired
|
|
|
517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2006 and 2007 of the Group as if the acquisition had occurred on
January 1, 2006 and 2007. 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,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
33,059
|
|
|
|
65,070
|
|
|
Pro forma net income
|
|
|
4,498
|
|
|
|
9,244
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.08
|
|
|
|
0.21
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.25
|
|
|
|
0.38
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.26
|
|
|
|
0.39
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.33
|
|
|
|
0.50
|
|
|
Pro forma net income per Series B-3
convertible redeemable preferred share-basic
|
|
|
N/A
|
|
|
|
0.21
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.08
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
F-31
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Megainfo
— continued
Pursuant to the terms of original purchase agreement, in addition to the initial
consideration, an additional consideration, based on the earnings of Megainfo for the twelve
months ended March 31, 2008, was determined to be $1,262 in cash and 87,045 ordinary shares
of Vanceinfo at a fair value of $8.42 per share, which were paid and issued as of December
31, 2008. The total additional consideration of $1,995, after netting off the $79
contingent consideration recorded as of the date of acquisition, was recorded as an addition
to the goodwill in 2008.
Acquisition of Additional Equity Interest of VanceInfo Japan
On May 31, 2007, the Group acquired an additional 48.99% equity interest in VanceInfo Japan,
a subsidiary of the Company, for an initial consideration of $111 in cash and 49,141
ordinary shares of VanceInfo at a fair value of $1.99 per ordinary share as of the date of
acquisition. 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. Upon the completion of the transaction, the Group’s total equity interest in
VanceInfo Japan increased from 51% to 99.99%. The acquired net assets were recorded at
their fair market value at the date of acquisition. The aggregate purchase price of $217
consisted of the following:
|
|
|
|
|
|
|
Cash consideration
|
|
|
111
|
|
|
Value of ordinary shares
|
|
|
98
|
|
|
Cost of transaction
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
217
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
7
|
|
|
5.6 years
|
|
|
Non-compete agreement
|
|
|
6
|
|
|
3.6 years
|
|
|
Goodwill
|
|
|
16
|
|
|
|
|
|
|
Minority interest
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of original purchase agreement, in addition to the initial
consideration, an additional consideration, based on the earnings of Vanceinfo Japan for the
twelve months ended May 31, 2008, was determined to be $138 in cash and 3,201 ordinary
shares of Vanceinfo at a fair value of $9.1 per share, which were paid and issued as of
December 31, 2008. The total additional consideration of $167 was recorded as an addition
to the goodwill in 2008.
F-32
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Chosen’s equity interest
On July 31, 2007, the Group acquired a 100% equity interest in Chosen, a company engaged in
SAP consulting and implementation services, for an initial consideration of $858 in cash and
307,983 ordinary shares of VanceInfo at a fair value of $3.21 per ordinary share as of the
date of acquisition. 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 an acquisition of a business and
accordingly the purchase method of accounting has been applied in accordance with SFAS No.
141. The acquired net assets were recorded at their fair market value at the date of
acquisition. The aggregate purchase price of $1,897 consisted of the following:
|
|
|
|
|
|
|
Cash consideration
|
|
|
858
|
|
|
Value of ordinary shares
|
|
|
989
|
|
|
Cost of transaction
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,897
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
|
82
|
|
|
|
|
|
|
Other current assets
|
|
|
1,185
|
|
|
|
|
|
|
Property and equipment
|
|
|
62
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
1,061
|
|
|
5.4 years
|
|
|
Non-compete agreement
|
|
|
132
|
|
|
4 years
|
|
|
Goodwill
|
|
|
354
|
|
|
|
|
|
|
Current liabilities
|
|
|
(674
|
)
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Chosen’s equity interest
— continued
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2006 and 2007 of the Group as if the acquisition had occurred on
January 1, 2006 and 2007. 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,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
30,815
|
|
|
|
66,885
|
|
|
Pro forma net income
|
|
|
4,240
|
|
|
|
10,073
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.07
|
|
|
|
0.24
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.24
|
|
|
|
0.41
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.25
|
|
|
|
0.42
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.32
|
|
|
|
0.53
|
|
|
Pro forma net income per Series B-3
convertible redeemable preferred share-basic
|
|
|
N/A
|
|
|
|
0.24
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.07
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of original purchase agreement, in addition to the initial share and
cash consideration, an additional cash consideration, based on earnings of Chosen for the
six-month period ended December 31, 2007, was determined to be $2,533, which was paid in
2008. The additional cash consideration was recorded as an addition to the goodwill in
2007.
Further, an additional consideration, based on earnings of Chosen for the twelve-month
period ended December 31, 2008, was determined to be $4,616, of which $3,089 was in cash and
$1,527 in ordinary shares of the Company. The additional consideration will be paid and
issued in 2009 and the number of ordinary shares to be issued was determined based on the average
closing market price of VanceInfo’s ordinary shares of the last
ten trading days in March 2009, which was $4.77 per share.
The additional consideration of $4,616 was recorded as an addition to the goodwill in 2008.
F-34
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of Tianchuang’s business
On May 1, 2008, the Group acquired the operating business of Tianchuang Software Development
Co., Ltd., (“Tianchuang”), an outsourcing service company, for an initial cash consideration
of $243 which was paid in 2008. The transaction was considered an acquisition of a business
and accordingly the purchase method of accounting has been applied in accordance with SFAS
No. 141. The acquired net assets were recorded at their fair market value at the date of
acquisition. The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
1
|
|
|
0.67 year
|
|
|
Non-compete agreement
|
|
|
2
|
|
|
2 years
|
|
|
Goodwill
|
|
|
203
|
|
|
|
|
|
|
Other net assets acquired
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of the original purchase agreement, in addition to the initial cash
consideration, an additional cash consideration, based on the attrition rate of the core
team members of Tianchuang from the date of acquisition to December 31, 2008, was determined
to be $15, which will be paid in 2009. The additional consideration was recorded as an
addition to the goodwill in 2008.
The unaudited pro forma information of the Tianchuang acquisition as if the acquisition had
occurred on January 1, 2007 and 2008 is not presented because the Group believes it is
impracticable to do so.
Acquisition of WIT’s equity interest
On October 1, 2008, the Group acquired a 100% equity interest in WIT, a professional
outsourcing service provider, for an initial consideration of $1,080 in cash. Additional
cash and share contingent consideration to be determined based on specified earnings
objectives predefined for the six-month period ended March 31, 2009 and twelve-month period
ending March 31, 2010 will be paid in 2009 and 2010, respectively. The transaction was
considered an acquisition of a business and accordingly the purchase method of accounting
has been applied in accordance with SFAS No. 141. The acquired net assets were recorded at
their fair market 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
|
|
|
|
|
|
|
F-35
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
4. ACQUISITIONS — continued
Acquisition of WIT’s equity interest
— continued
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 following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2007 and 2008 of the Group as if the acquisition had occurred on
January 1, 2007 and 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,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma revenue
|
|
|
63,053
|
|
|
|
106,115
|
|
|
Pro forma net income
|
|
|
9,664
|
|
|
|
16,963
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.23
|
|
|
|
0.45
|
|
|
Pro forma net income per Series A
convertible redeemable preferred share-basic
|
|
|
0.40
|
|
|
|
N/A
|
|
|
Pro forma net income per Series B-1
convertible redeemable preferred share-basic
|
|
|
0.40
|
|
|
|
N/A
|
|
|
Pro forma net income per Series B-2
convertible redeemable preferred share-basic
|
|
|
0.52
|
|
|
|
N/A
|
|
|
Pro forma net income per Series B-3
convertible redeemable preferred share-basic
|
|
|
0.23
|
|
|
|
N/A
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.19
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
F-36
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances to employees
|
|
|
512
|
|
|
|
536
|
|
|
Prepaid rentals
|
|
|
209
|
|
|
|
1,054
|
|
|
Government subsidy receivable
|
|
|
558
|
|
|
|
—
|
|
|
Service agreement deposit
|
|
|
331
|
|
|
|
—
|
|
|
Incentive from American Depositary
Shares (“ADS”) depositary bank
|
|
|
—
|
|
|
|
664
|
|
|
Other prepaid expenses
|
|
|
974
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,584
|
|
|
|
3,084
|
|
|
|
|
|
|
|
|
|
Other prepaid expenses primarily consisted of prepaid miscellaneous general and
administrative expenses.
6. PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment
|
|
|
1,440
|
|
|
|
2,300
|
|
|
Motor vehicles
|
|
|
560
|
|
|
|
691
|
|
|
Computers and software
|
|
|
5,718
|
|
|
|
8,241
|
|
|
Leasehold improvements
|
|
|
3,266
|
|
|
|
5,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,984
|
|
|
|
17,034
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(2,985
|
)
|
|
|
(5,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,999
|
|
|
|
11,260
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses recorded for the years ended December 31, 2006, 2007
and 2008 were $749, $1,776 and $2,896, respectively.
F-37
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
7. ACQUIRED INTANGIBLE ASSETS, NET
The Group acquired trade name, contract backlog, non-compete agreement, and customer base
and relationship through various business combinations. The costs and accumulated
amortization of these acquired intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
685
|
|
|
|
732
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
144
|
|
|
|
156
|
|
|
Customer base and relationship
|
|
|
4,233
|
|
|
|
4,524
|
|
|
Non-compete agreement
|
|
|
503
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,565
|
|
|
|
6,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
(144
|
)
|
|
|
(156
|
)
|
|
Customer base and relationship
|
|
|
(707
|
)
|
|
|
(1,443
|
)
|
|
Non-compete agreement
|
|
|
(96
|
)
|
|
|
(249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(947
|
)
|
|
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets, net
|
|
|
4,618
|
|
|
|
4,158
|
|
|
|
|
|
|
|
|
|
The Group recorded amortization expenses of $116, $761 and $823 for the years ended December
31, 2006, 2007 and 2008, respectively. The Group expects to record amortization expenses of
$825, $812, $696, $514, and $579 for 2009, 2010, 2011, 2012, 2013 and thereafter,
respectively.
F-38
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
8. GOODWILL
The movement of the goodwill for the years ended December 31, 2007 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1,
|
|
|
373
|
|
|
|
7,083
|
|
|
Goodwill recognized in connection with acquisitions of:
|
|
|
|
|
|
|
|
|
|
Prosoft upon additional consideration payment
|
|
|
774
|
|
|
|
—
|
|
|
SunBridges upon additional consideration payment
|
|
|
111
|
|
|
|
—
|
|
|
Further interest in VanceInfo Japan
|
|
|
16
|
|
|
|
167
|
|
|
ITC upon additional consideration payment
|
|
|
2,839
|
|
|
|
—
|
|
|
Chosen upon initial consideration payment
|
|
|
354
|
|
|
|
—
|
|
|
Chosen upon additional consideration payment
|
|
|
2,533
|
|
|
|
4,616
|
|
|
Further interest in Solutions
|
|
|
—
|
|
|
|
795
|
|
|
Megainfo upon additional consideration payment
|
|
|
—
|
|
|
|
1,916
|
|
|
Tianchuang upon initial consideration payment
|
|
|
—
|
|
|
|
203
|
|
|
Tianchuang upon additional consideration payment
|
|
|
—
|
|
|
|
15
|
|
|
WIT upon initial consideration payment
|
|
|
—
|
|
|
|
214
|
|
|
Exchange differences
|
|
|
83
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
7,083
|
|
|
|
15,537
|
|
|
|
|
|
|
|
|
|
9. LOANS TO SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal:
|
|
|
|
|
|
|
|
|
|
One Silver Development Limited (“One Silver”)
|
|
|
439
|
(1)
|
|
|
—
|
|
|
Bizexpress Limited (“Bizexpress”)
|
|
|
738
|
(2)
|
|
|
—
|
|
|
Airland International Limited (“Airland”)
|
|
|
2,003
|
(2)
|
|
|
—
|
|
|
Add: Accrued interest at stated rate
|
|
|
97
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,277
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
F-39
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
9. LOANS TO SHAREHOLDERS — continued
|
|
(1)
|
|
In connection with the acquisition of Megainfo as set out in Note 4, in April
2007, the Group loaned $439 to One Silver, one of the shareholders of the Company, with
a fifteen month term at an annual interest rate of 5%. The loan was used by Mr. Zhao
Ming, the shareholder of One Silver, to acquire remaining shareholdings of Megainfo
prior to the acquisition of Megainfo by the Group. One Silver placed its 147,272
ordinary shares of the Company as collateral for the loan. Interest income recorded
for the years ended December 31, 2007 and 2008 was $16 and $12 respectively. This loan
to shareholders, $439 in principle, together with interest accrued of $28, were fully
settled in 2008.
|
|
|
|
|
(2)
|
|
In connection with the acquisition of Solutions as set out in Note 4, in June
2007, the Group loaned $738 and $2,003 to Bizexpress and Airland, two of the Company’s
shareholders, with a one-year term at an annual interest rate of 5%, respectively.
Bizexpress and Airland placed 246,007 and 667,386 ordinary shares of the Company,
respectively, as collateral of the loans. Interest income recorded for the years ended
December 31, 2007 and 2008 was $80 and $88, respectively. These loans to shareholders,
$2,741 in principle, together with interest accrued of $169, were fully settled in
2008.
|
10. LONG-TERM INVESTMENT
On October 1, 2008, the Group completed the purchase of a 33% equity interest in Link Result
Limited, 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 has the ability to
exercise significant influence over the investee.
The investment earnings generated from equity method investment for the year ended December
31, 2008 was $20.
F-40
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
11. ACCRUED EXPENSES AND OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and employee welfare
|
|
|
4,060
|
|
|
|
6,172
|
|
|
Accrued reimbursable operating costs
|
|
|
1,250
|
|
|
|
1,788
|
|
|
Business tax payable
|
|
|
938
|
|
|
|
1,238
|
|
|
Outstanding cash consideration in connection
with business acquisitions
|
|
|
3,890
|
|
|
|
3,105
|
|
|
Other taxes payable
|
|
|
300
|
|
|
|
382
|
|
|
Short-term bank loan
|
|
|
1,234
|
|
|
|
1,466
|
|
|
Accrued IPO costs
|
|
|
1,048
|
|
|
|
—
|
|
|
Other accrued liabilities
|
|
|
1,590
|
|
|
|
2,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,310
|
|
|
|
16,452
|
|
|
|
|
|
|
|
|
|
Accrued reimbursable operating costs represented the outstanding amounts claimed by
employees for business expenditures.
Short-term bank loan, amounting to $1,234 as of December 31, 2007, was borrowed from a PRC
bank with guarantee provided by China National Investment & Guaranty Co., Ltd. and pledge of
a time deposit of $1,371 of Solutions. The loan had an annual interest rate of 7.02% and
was fully settled in 2008.
Short-term bank loan, amounting to $1,466 as of December 31, 2008, was borrowed from a PRC
bank with guarantee provided by China National Investment & Guaranty Co., Ltd. and pledge of
a time deposit of $1,466 of Solutions. The loan had an annual interest rate of 5.31% and
will be due in December 2009.
12. INCOME TAXES
VanceInfo and VanceInfo BVI are tax exempted companies incorporated in the Cayman Islands
and the British Virgin Islands, respectively.
In 2006, the income tax provision of the Group was made for the operation of VanceInfo
Japan. In 2007 and 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.
Pursuant to the relevant tax rules and regulations applicable to VanceInfo Japan, VanceInfo
Japan was required to provide income tax of $2 for 2006 and 2007, respectively, and $26 for
2008.
F-41
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
12. INCOME TAXES — continued
VanceInfo US was 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 2006, 2007 and
2008. WIT was 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% in 2008.
Prior to January 1, 2008, companies established in the PRC were generally subject to a State
and local enterprise income tax, or EIT, at statutory rates of 30% and 3% respectively.
Under the applicable PRC rules and policies, an enterprise qualified as a “high and new
technology enterprise” located in the Beijing New Industry Development Pilot Zone was
entitled to a preferential EIT rate of 15% and was further entitled to a three-year EIT
exemption from either its first year of operation or, if it was incorporated in the second
half of a calendar year, its second year of operation if so selected, and a 50% reduction of
its applicable EIT rate for the succeeding three years. VanceInfo Beijing, Prosoft and ITC
were then qualified as “high and new technology enterprises” located in the Beijing New
Industry Development Pilot Zone, and enjoying preferential tax treatment as a result of this
status. VanceInfo Beijing was incorporated in the second half of 2004, and elected to be
exempted from EIT from 2005 to 2007. Prosoft and ITC were incorporated in June 2004, and
have been entitled to be exempted from EIT from 2004 to 2006 and be subject to a 7.5% EIT
rate in 2007. In addition, under the PRC rules and policies then effective, an enterprise
qualified as a “software enterprise” was entitled to an exemption from EIT for the first two
profitable years and a 50% reduction of its applicable EIT rate for the subsequent three
years. Solutions was incorporated in 2002 and was recognized as a “software enterprise” in
2003, and therefore, it was entitled to be exempted from EIT in 2003 and 2004, and subject
to a 16.5% EIT rate from 2005 to 2007.
The other PRC subsidiaries are subject to 33% EIT for the year of 2006 and 2007.
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 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.
Despite present uncertainties resulting from the limited PRC tax guidance, the Group
believed it is more likely than not that VanceInfo Beijing can continue to enjoy the
preferential tax rate of 7.5%, a 50% reduction of its applicable EIT rate of 15%, from 2008
to 2010. Solutions also obtained the certificate on high and new technology enterprises and
was subject to 15% EIT in 2008.
The applicable EIT rate for the other PRC subsidiaries is 25% in 2008.
F-42
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
12. INCOME TAXES — continued
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. The impact
on the deferred taxes resulting from the rate change as of January 1, 2007 was an adjustment
to the deferred tax liabilities of $129, representing an increase in deferred tax expense.
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. 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 EIT law provide that
non-resident legal entities will be considered China 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
residents for EIT law purposes. If the PRC tax authorities subsequently determine that the
Company and its subsidiaries registered outside the PRC should be deemed a resident
enterprise, 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 were to be non-resident for PRC tax purpose, dividends paid to it 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 $32,016 as of December 31, 2008. 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 under Accounting
Principles Board Opinion No. 23,
Accounting for Income Taxes — Special Areas
, and
accordingly, no provision has been made for the Chinese dividend withholding taxes as of
December 31, 2008.
Income tax expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2
|
|
|
|
57
|
|
|
|
2,078
|
|
|
Deferred
|
|
|
—
|
|
|
|
117
|
|
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
|
174
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
12. INCOME TAXES — continued
The principal components of deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
18
|
|
|
|
34
|
|
|
Accrued bonus
|
|
|
—
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
298
|
|
|
|
219
|
|
|
Property and Equipment
|
|
|
55
|
|
|
|
70
|
|
|
Valuation allowance
|
|
|
(298
|
)
|
|
|
(219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
73
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables of government subsidies
|
|
|
(137
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,009
|
)
|
|
|
(673
|
)
|
|
Property and equipment
|
|
|
—
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,009
|
)
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(1,146
|
)
|
|
|
(807
|
)
|
|
|
|
|
|
|
|
|
F-44
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
12. 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,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
18
|
|
|
|
34
|
|
|
Accrued bonus
|
|
|
—
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
18
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables of government subsidies
|
|
|
(137
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
298
|
|
|
|
219
|
|
|
Property and equipment
|
|
|
55
|
|
|
|
70
|
|
|
Valuation allowance
|
|
|
(298
|
)
|
|
|
(219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
55
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets acquired in business acquisitions
|
|
|
(1,009
|
)
|
|
|
(673
|
)
|
|
Property and Equipment
|
|
|
—
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities, net
|
|
|
(954
|
)
|
|
|
(737
|
)
|
|
|
|
|
|
|
|
|
A valuation allowance has been recognized for net operating losses carry forward of certain
subsidiaries and VIE 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
$1,196 and $902 as of December 31, 2007 and 2008, respectively, which included $1,196 as of
December 31, 2007 expiring on various dates throughout 2027, $831 as of December 31, 2008
expiring on various dates throughout 2013 and the remaining amounts will carry forward
indefinitely.
The increase in valuation allowance from 2006 to 2007 mainly related to the additional
operating losses. The valuation allowance decreased in 2008 from 2007 because the net
operating loss carry forward of VanceInfo US was utilized by offsetting the taxable profit
of WIT in 2008 and the valuation allowance for the net operating loss carry forward of
Prosoft was written off resulting from the its liquidation in December 2008.
F-45
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
12. INCOME TAXES — continued
A reconciliation between the statutory PRC enterprise income tax rate and the effective tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in PRC
|
|
|
33.00
|
|
|
|
33.00
|
|
|
|
25.00
|
|
|
Changes in valuation allowances
|
|
|
1.90
|
|
|
|
2.05
|
|
|
|
(0.45
|
)
|
|
Effect of income tax rate differences of subsidiaries
operating with different tax regulations
|
|
|
(17.66
|
)
|
|
|
(12.32
|
)
|
|
|
(10.30
|
)
|
|
Effect of change in exacted tax rate in PRC
|
|
|
—
|
|
|
|
1.32
|
|
|
|
—
|
|
|
Effect of tax holidays enjoyed by PRC subsidiaries
|
|
|
(17.20
|
)
|
|
|
(22.27
|
)
|
|
|
(6.79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.04
|
|
|
|
1.78
|
|
|
|
7.46
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended
December 31, 2006, 2007 and 2008, if the Company’s subsidiaries and VIE
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 year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in income tax expense
|
|
|
759
|
|
|
|
2,181
|
|
|
|
1,180
|
|
|
Net income per ordinary share-basic
|
|
|
0.05
|
|
|
|
0.15
|
|
|
|
0.40
|
|
|
Net income per Series A convertible redeemable
preferred share-basic
|
|
|
0.21
|
|
|
|
0.32
|
|
|
|
N/A
|
|
|
Net income per Series B-1 convertible redeemable
preferred share-basic
|
|
|
0.22
|
|
|
|
0.32
|
|
|
|
N/A
|
|
|
Net income per Series B-2 convertible redeemable
preferred share-basic
|
|
|
N/A
|
|
|
|
0.42
|
|
|
|
N/A
|
|
|
Net income per Series B-3 convertible redeemable
preferred share-basic
|
|
|
0.29
|
|
|
|
0.15
|
|
|
|
N/A
|
|
|
Net income per ordinary share-diluted
|
|
|
0.04
|
|
|
|
0.13
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group has various tax years from 2003 to 2008 which remain open in various tax
jurisdictions.
F-46
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
13. NET INCOME PER SHARE
The calculation of the net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,376
|
|
|
|
9,569
|
|
|
|
16,173
|
|
|
Deemed dividend on Series A convertible redeemable
preferred shares-accretion of redemption premium
|
|
|
(611
|
)
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to holders of ordinary shares
|
|
|
3,765
|
|
|
|
8,937
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator used in basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated for computing net income
per ordinary share-basic
|
|
|
737
|
(i)
|
|
|
2,558
|
(i)
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated for computing net income per
Series A convertible redeemable preferred share-basic
|
|
|
1,735
|
(i)
|
|
|
2,716
|
(i)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated for computing net income per
Series B-1 convertible redeemable preferred share-basic
|
|
|
505
|
(i)
|
|
|
1,147
|
(i)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-2 convertible redeemable preferred share-basic
|
|
|
1,399
|
(i)
|
|
|
3,131
|
(i)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B-3 convertible redeemable preferred share-basic
|
|
|
N/A
|
|
|
|
17
|
(i)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated for computing net income
per ordinary share-diluted
|
|
|
737
|
|
|
|
2,558
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used
in computing net income per ordinary share-basic
|
|
|
9,605,507
|
|
|
|
11,426,183
|
|
|
37,276,306(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income per Series A convertible redeemable
preferred share-basic
|
|
|
7,175,000
|
|
|
|
6,860,247
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income per Series B-1 convertible redeemable
preferred share-basic
|
|
|
1,998,795
|
|
|
|
2,867,123
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income per Series B-2 convertible redeemable
preferred share-basic
|
|
|
4,265,112
|
|
|
|
6,117,988
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing
net income per Series B-3 convertible redeemable
preferred share-basic
|
|
|
N/A
|
|
|
|
77,704
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used
in computing net income per ordinary share-diluted
|
|
10,205,449
|
(iii)
|
|
13,446,087
|
(iii)
|
|
40,695,982
|
(iii)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per ordinary share-basic
|
|
|
0.08
|
|
|
|
0.22
|
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Series A convertible redeemable
preferred share-basic
|
|
|
0.24
|
|
|
|
0.40
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Series B-1 convertible redeemable
preferred share-basic
|
|
|
0.25
|
|
|
|
0.40
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Series B-2 convertible redeemable
preferred share-basic
|
|
|
0.33
|
|
|
|
0.51
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Series B-3 convertible redeemable
preferred share-basic
|
|
|
N/A
|
|
|
|
0.22
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per ordinary share-diluted
|
|
|
0.07
|
|
|
|
0.19
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
13. NET INCOME PER SHARE — continued
|
|
(i)
|
|
The net income attributable to holders of ordinary shares was allocated between
ordinary shares and preferred shares on a pro rata basis on the dividend participating
right. The net income allocated for computing net income per Series A convertible
redeemable preferred share-basic also contained the deemed dividend for accretion of
the redemption premium.
|
|
|
|
|
(ii)
|
|
In June 2008, the Company issued 2,000,000 ordinary shares
for future delivery to employees and non-employees upon exercise of
vested stock options or grant of nonvested shares. As of December 31, 2008, 219,196
shares were transferred to the relevant employees. Accordingly, the 1,780,804
remaining shares were excluded in computation of basic net income per share in 2008.
|
|
|
|
|
(iii)
|
|
The Group had securities outstanding which could potentially dilute basic net
income per share in the future, but which were excluded from the computation of diluted
net income per share in the years ended December 31, 2006, 2007 and 2008 as their
effects would have been anti-dilutive. For year 2006, such outstanding securities
consisted of Series A convertible redeemable preferred shares of a weighted average
number of 7,715,000 and Series B-1 and B-2 convertible redeemable preferred shares of a
weighted average number of 6,263,907, warrants (Note 17) to purchase a weighted average
number of 689,750 Series B-3 convertible redeemable preferred shares and stock options
of a weighted average number of 248,574. For year 2007, such outstanding securities
consisted of Series A convertible redeemable preferred shares of a weighted average
number of 6,860,247, Series B-1 and B-2 convertible redeemable preferred shares of a
weighted average number of 8,985,111, warrants to purchase a weighted average number of
190,570 Series B-3 convertible redeemable preferred shares and stock options of a
weighted average number of 1,045,027. For year 2008, such outstanding securities
consisted of stock options of a weighted average number of 562,717.
|
|
|
|
|
|
|
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. Thus, other than a
weighted average number of 78,928 contingently issuable ordinary shares in connection
with the acquisition of Megainfo in 2007, the ordinary shares contingently issuable
were excluded from the computation of diluted net income per share in the periods
presented.
|
|
|
|
|
|
|
The calculation of the weighted average number of ordinary shares in 2006, 2007 and
2008 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 1,167,144, 3,025,849 and
4,909,091 which gives rise to an incremental weighted average number of 599,942,
1,793,342 and 3,100,092 ordinary shares from the assumed conversion of these stock
options and nonvested shares using the treasury stock method, respectively.
|
F-48
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
14. 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 employee 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-49
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
14. SHARES-BASED COMPENSATION — continued
I. Stock Options
— continued
Options to employees and non-employee directors
During the years ended December 31, 2006, 2007 and 2008, the Company granted a total of
3,011,700, 2,468,050 and 1,336,200 share options to employees and non-employee directors at
an exercise price ranging from $0.30 to $2.00 per share, $3.00 to $9.00 and $4.70 to $8.92
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, 2006
|
|
|
512,600
|
|
|
|
0.30
|
|
|
|
1.47
|
|
|
|
1.17
|
|
|
June 30, 2006
|
|
|
1,496,200
|
|
|
|
0.39
|
|
|
|
0.90
|
|
|
|
0.51
|
|
|
September 30, 2006
|
|
|
438,900
|
|
|
|
1.60
|
|
|
|
0.97
|
|
|
|
—
|
|
|
December 31, 2006
|
|
|
564,000
|
|
|
|
1.95
|
|
|
|
1.22
|
|
|
|
—
|
|
|
March 31, 2007
|
|
|
777,570
|
|
|
|
3.32
|
|
|
|
1.65
|
|
|
|
—
|
|
|
June 30, 2007
|
|
|
622,016
|
|
|
|
4.44
|
|
|
|
1.92
|
|
|
|
—
|
|
|
September 30, 2007
|
|
|
631,464
|
|
|
|
7.22
|
|
|
|
3.87
|
|
|
|
—
|
|
|
December 31, 2007
|
|
|
437,000
|
|
|
|
9.00
|
|
|
|
6.50
|
|
|
|
—
|
|
|
March 31, 2008
|
|
|
540,000
|
|
|
|
5.44
|
|
|
|
5.44
|
|
|
|
—
|
|
|
June 30, 2008
|
|
|
60,200
|
|
|
|
6.68
|
|
|
|
6.68
|
|
|
|
—
|
|
|
September 30, 2008
|
|
|
162,000
|
|
|
|
8.58
|
|
|
|
8.58
|
|
|
|
—
|
|
|
December 31, 2008
|
|
|
574,000
|
|
|
|
4.94
|
|
|
|
4.94
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,815,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average fair value
|
|
|
|
|
|
|
|
|
average
|
|
|
per ordinary
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
share at the
|
|
|
|
|
options
|
|
|
per option
|
|
|
grant dates
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2008
|
|
|
5,125,557
|
|
|
|
3.00
|
|
|
|
0.73
|
|
|
Granted
|
|
|
1,336,200
|
|
|
|
5.66
|
|
|
|
1.70
|
|
|
Forfeited
|
|
|
(307,018
|
)
|
|
|
5.70
|
|
|
|
1.06
|
|
|
Exercised
|
|
|
(215,696
|
)
|
|
|
1.40
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
5,939,043
|
|
|
|
3.51
|
|
|
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
14. 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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2008
|
|
|
exercisable
|
|
|
option
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
5,939,043
|
|
|
|
6.24
|
|
|
|
3.51
|
|
|
|
11,193
|
|
|
|
2,271,028
|
|
|
|
2.03
|
|
|
|
6,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2006,
2007 and 2008 was nil, nil and $1,617, respectively.
The range of fair value of the options as of their respective grant dates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
0.44-1.26
|
|
|
|
0.25-2.48
|
|
|
|
1.43-2.55
|
|
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 year ended December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate of return
|
|
|
4.30%-5.21
|
%
|
|
|
4.39%-5.36
|
%
|
|
|
3.18%-4.15
|
%
|
|
Expected term
|
|
5.9-6.1 years
|
|
|
4.1-6.1 years
|
|
|
2.72-3.61 years
|
|
|
Volatility
|
|
|
51.7%-58.0
|
%
|
|
|
38.9%-50.3
|
%
|
|
|
36.0%-40.8
|
%
|
|
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
|
|
|
|
|
|
|
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-51
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
14. 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
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 $713, $996 and $1,308 for options granted to
employees and non-employee directors for the year ended December 31, 2006, 2007 and 2008,
respectively, using the graded vesting attribution method.
There was $1,683 of total unrecognized compensation expense related to unvested share
options granted as of December 31, 2008. The expense is expected to be recognized over a
weighted-average period of 2.28 years according to the graded vesting schedule.
F-52
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
14. SHARES-BASED COMPENSATION — continued
II. Nonvested Shares
In December 2007 and 2008, the Company granted 20,000 and 17,480 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 at January 1, 2008
|
|
|
20,000
|
|
|
|
8.73
|
|
|
Granted
|
|
|
17,480
|
|
|
|
5.83
|
|
|
Vested
|
|
|
(3,500
|
)
|
|
|
8.56
|
|
|
Forfeitured
|
|
|
(6,000
|
)
|
|
|
9.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
27,980
|
|
|
|
7.80
|
|
|
|
|
|
|
|
|
|
The total fair value of nonvested shares vested during the years ended December 31, 2007 and
2008 was nil and $18, 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
2007 and 2008, the fair value at the date of grant ranged from $5.83 to $9.15. The related
compensation expense in 2007 is insignificant and the Company recorded $83 related
compensation expenses in 2008.
There was $122 of total unrecognized compensation expense related to nonvested share options
granted as of December 31, 2008. The expense is expected to be recognized over a
weighted-average period of 3.48 years according to the graded vesting schedule.
F-53
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
15. ORDINARY SHARES
The Company was incorporated in April 2004 with 50,000 ordinary shares authorized and 100
ordinary shares issued and outstanding with $1 par value.
In February 2005, the Company approved a split of 100:1 of its ordinary shares. The 100:1
share split has been retroactively reflected in the Company’s consolidated financial
statements.
In March 2005, the Company issued 1,140,000 ordinary shares at $0.01 par value
proportionately to the existing ordinary shareholders. Of the total consideration of $11,
$9 was paid off in 2006 and therefore was recorded as subscription receivable as of December
31, 2005.
In March 2005, in connection with the issuance of Series A preferred shares as set out in
Note 16, 717,500 Series A preferred shares were authorized out of the existing ordinary
share authorization. Therefore, after the Series A convertible
redeemable preferred shares (“Series A Shares”) issuance, the authorized ordinary
shares were reduced to 4,282,500.
In November 2005, the Company approved another share split of 10:1 of its ordinary shares
which has been retroactively reflected in the Company’s consolidated financial statements.
In February 2006, the Company issued 100,000 ordinary shares to Sures Corporation Limited,
as part of the consideration for the acquisition of the business of Beijing SureKAM
Technology Co., Ltd.
In April 2006, the Company repurchased 2,990,000 ordinary shares from Team Dragon
International Limited at a price of $2.20 per share. The excess, amounting to $5,803, of
the 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.
On April 28, 2006, the authorized ordinary shares of the Company increased to 70,000,000
ordinary shares pursuant to a shareholders’ resolution.
In July 2006, the Company issued 86,219 ordinary shares to Mr. Yonghui Zhu, as part of the
consideration for the acquisition of Envisys as set out in Note 4.
In March 2007, the Company issued 396,774 and 396,774 ordinary shares to Ultra Link Holding
Limited and Space Link Holding Limited, respectively, as part of the consideration for the
acquisition of ITC as set out in Note 4.
In April 2007, the Company issued 667,386 and 246,007 ordinary shares to Airland and
Bizexpress, respectively, as part of the consideration for the acquisition of Solutions as
set out in Note 4.
In April 2007, the Company issued 147,272 ordinary shares to One Silver as part of the
consideration for the acquisition of Megainfo as set out in Note 4.
F-54
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
15. ORDINARY SHARES — continued
In April 2007, the Company issued 155,901 ordinary shares as part of the additional payment
for the acquisition of Prosoft in 2006.
In April 2007 the Company issued 2,331 ordinary shares as part of the additional payment for
the acquisition of the operating business of SunBridges in 2006.
In June 2007, the Company issued 49,141 ordinary shares to Global Mission Limited as part of
the consideration for the acquisition of additional equity interest of VanceInfo Japan as
set out in Note 4.
In June 2007, the Company repurchased and cancelled 86,219 ordinary shares from an ordinary
shareholder at a total consideration of $431. The excess, amounting to $304, 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 July 2007, the Company issued 102,661, 102,661, 102,661 ordinary shares to Cypress Hill
Holdings Limited, Fortune Sea International Limited and Million International Limited
respectively as part of the consideration for the acquisition of Chosen as set out in Note
4.
In December 2007, the Company completed its IPO of ADSs and listed ADSs on the New York
Stock Exchange. Each ADS represent one ordinary share of the Company. 7,447,500 ordinary
shares were issued for total proceeds of $54,787, net of offering costs of $8,517. In
addition, all Series A, B-1, B-2, and B-3 convertible redeemable preferred shares were
automatically converted into 18,771,838 ordinary shares upon the IPO.
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 13.
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
as set out in Note 4.
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 up
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 Megainfo as set out
in Note 4.
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 as set out in
Note 4.
F-55
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
16. CONVERTIBLE REDEEMABLE PREFERRED SHARES
Series A Convertible Redeemable Preferred Shares
On March 10, 2005, the Company issued 717,500 Series A Shares
to three third party investors for $7,175 (after issuance cost,
net proceeds of $6,764), at $10 per share. In the same month, the Company had a one-to-ten
share split and accordingly it became 7,175,000 Series A Shares with par value of $0.001 and
original issue price of $1.
In April 2007, the Company repurchased and cancelled 30,000 Series A Shares from one of the
Series A share holders at total consideration of $90.
The rights, preferences and privileges with respect to the Series A Shares were as follows:
Voting right
Holders of the Series A Shares have voting rights equal to the number of ordinary shares
then issuable upon its conversion into ordinary shares. The Series A Shares generally vote
together with the ordinary shares and not as a separate class.
Dividends
Holders of Series A Shares are entitled to receive dividends at the rate of eight percent
(8%) of its issue price after dividend payment on Series B Shares (set out below in Note
16). Dividend is payable upon declaration by the board of directors and is noncumulative.
After payment of dividends on all preferred shares, the holders of Series A Shares
participates in dividend payment with other participative preferred shares and ordinary
shares on a pro rata and as-converted basis.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, either voluntary
or involuntary, after the full Series B-1, B-2 and B-3 preference amount on all outstanding
Series B-1 Shares, B-2 Shares and B-3 Shares has been paid, prior to any distribution of any
of the assets or surplus funds of the Company to other classes of the Company, the holders
of Series A Shares are entitled to receive, the full amount of the original issue price.
After such payment has been made to holders of the Series A Shares, any remaining assets or
proceeds of the Company will be distributed pro rata to holders of ordinary shares on an
if-converted basis.
F-56
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
16. CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued
Series A Convertible Redeemable Preferred Shares
— continued
Redemption
The Series A Shares are redeemable at the option of the holders 60 days after the Company
has redeemed Series B Shares, if not previously converted, for an amount equal to (original
issue price of Series A Shares x 108%
N
) plus all declared but unpaid dividends.
N refers to a fraction the numerator of which is the number of calendar days between March
10, 2005 and the redemption date and the denominator of which is 365.
The Group accrued the 8% premium over the redemption period as deemed dividends for the
years ended December 31, 2005, 2006 and 2007, respectively.
Conversion
The Series A Shares are convertible into ordinary shares of the Company on a one-for-one
basis, at the option of the holder anytime after issuance. Each automatically converts into
ordinary shares of the Company upon majority of the class of shareholders’ written consent
or an IPO on an internationally recognized stock exchange with market value of the Group
immediately after the IPO of no less than $300,000, including the ordinary shares converted
from the Group’s preferred shares.
As the effective conversion price exceeded the fair value of ordinary shares on commitment
day of November 10, 2005, there was no beneficial conversion feature upon issuance of Series
A Shares.
In December 2007, all Series A Shares were automatically converted into 7,145,000 ordinary
shares upon the IPO of the Company.
Series B-1, B-2 and B-3 Convertible Redeemable Preferred Shares
On May 2, 2006, the Company issued 2,990,000 Series B-1 convertible redeemable preferred
shares (“Series B-1 Shares”), 6,380,188 Series B-2 convertible redeemable preferred shares
(“Series B-2 Shares”) and warrants (Note 17) to purchase Series B-3 convertible redeemable
preferred shares (“Series B-3 Shares”) to a group of third party investors for a total
amount of $25,078 (after issuance cost, net proceeds of $24,309). The group of investors
had identical shareholding percentages in Series B-1 and Series B-2 Shares.
The Company had also authorized 1,000,000 Series B-3 Shares for the warrants set out in Note
17. Series B-1, Series B-2 and Series B-3 Shares are jointly referred as “Series B Shares”
with the same terms unless otherwise noted. Series B Shares had par value of $0.001, while
Series B-1 Shares issuance price was $2.20 and Series B-2 Shares issuance price was $2.8996.
F-57
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
16. CONVERTIBLE REDEEMABLE PREFERRED SHARES — continued
Series B-1, B-2 and B-3 Convertible Redeemable Preferred Shares
— continued
The rights, preferences and privileges with respect to the Series B Shares were as follows:
Voting rights
Holders of the Series B Shares have voting rights equal to the number of ordinary shares
then issuable upon its conversion into ordinary shares. The Series B Shares generally vote
together with the ordinary shares and not as a separate class.
Dividends
Holders of Series B Shares are entitled to receive dividends at the rate of eight percent
(8%) of its respective issue price prior and in preference to any dividend on any other
class, classes or series of shares. Dividend is payable upon declaration by the Board of
Directors and is noncumulative.
After payment of dividends on all preferred shares, the holders of Series B participates in
dividend payment with other participative preferred shares and ordinary shares on a pro rata
and as-converted basis.
Liquidation preference
In the event of any liquidation, dissolution or winding up of the Company, either voluntary
or involuntary, prior to any distribution of any of the assets or surplus funds of the
Company to other classes of the Company, the holders of Series B Shares are entitled to
receive the full amount of the original issue price. After such payment has been made to
holders of the Series A Shares, any remaining assets or proceeds of the Company will be
distributed pro rata to holders of ordinary shares on an if-converted basis.
Redemption
The Series B Shares are redeemable at the option of the holders of the Series B any time
after the fourth anniversary of issuance date, if not previously converted, for an amount
equal to the greater of: (x) one hundred percent (100%) of the applicable Series B-1/B-2/B-3
Shares issue price, plus all dividends accrued but unpaid and (y) the fair market value of
the Series B-1/B-2/B-3 Shares to be determined by an independent appraisal.
Conversion
The Series B Shares are convertible into ordinary shares of the Company on a one-for-one
basis except the Series B-2 Shares has a conversion ratio of 0.8 to 1, at the option of the
holder anytime after issuance. Each automatically converts into ordinary shares of the
Company upon majority of the class of shareholders’ written consent or an IPO with market
value of the Group immediately after the IPO of no less than $300,000, including the
ordinary shares converted from the Group’s preferred shares.
As the effective conversion price exceeded the fair value of ordinary shares on commitment
day of May 2, 2006, there was no beneficial conversion feature upon issuance of Series B-1
and B-2 Shares.
In December 2007, all Series B-1/B-2/B-3 Shares were automatically converted into 2,990,000,
7,975,235, and 661,603 ordinary shares, respectively, upon the IPO of the Company.
F-58
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
17. WARRANTS
In May 2006, in connection with the issuance of Series B-1 Shares and Series B-2 Shares, the
Company granted warrants to Series B-1 and B-2 investors to purchase up to $2,000 of Series
B-3 Shares at the exercise price of $2.8996 per share, which represented 689,750 Series B-3
Shares. Key terms of Series B-3 Shares are set out in Note 16. Other than exercising for
cash, the investor also had an option to receive a reduced number of shares in direct
proportion to the fair value of Series B-3 Shares (“Net Settlement Option”). The warrants
were exercisable upon issuance and were void upon the Company’s completion of IPO.
Management had classified the warrants as a liability under SFAS No. 150,
Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity,
because
exercise of the warrants would result in the delivery of redeemable preferred shares.
Therefore, the warrants were initially accounted for at the fair value of $498 ($0.722 per
warrant) on the date of grant and subsequently reported at fair value as of each reporting
date. As of December 31, 2006, the fair value of the warrants was $903 ($1.309 per
warrant).
The fair value of the warrants was determined by the Group after considering an appraisal by
a third party appraiser and was determined using the Black-Scholes option pricing model with
assumptions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
Date of grant
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
|
5.24
|
%
|
|
|
5.20
|
%
|
|
Expected remaining life of the warrants
|
|
2.17 year
|
|
|
1.5 year
|
|
|
Volatility
|
|
|
38.0
|
%
|
|
|
35.6
|
%
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
(1)
|
|
Volatility
|
|
|
|
|
|
|
The volatility of the underlying ordinary shares during the life of the warrants was
estimated based on the historical stock price volatility of listed comparable
companies over a period comparable to the expected term of the warrants.
|
|
|
|
|
(2)
|
|
Risk-free 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 warrants.
|
F-59
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
17. Warrants — continued
|
|
(3)
|
|
Expected remaining life of the warrants
|
|
|
|
|
|
|
The expected remaining life of the warrants was estimated by the Company based on the
expected IPO date of the Company which was the expected exercise date of the
warrants.
|
|
|
|
|
(4)
|
|
Expected dividend yield
|
|
|
|
|
|
|
The expected dividend yield was estimated by the Company based on its expected
dividend policy over the expected term of the warrants.
|
|
|
|
|
(5)
|
|
Exercise price
|
|
|
|
|
|
|
The exercise price of the warrants was determined by the Company’s board of
directors.
|
|
|
|
|
(6)
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Fair value of underlying ordinary shares
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When estimating the fair value of the ordinary shares on the grant dates before 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.
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On August 3, 2007, the Company’s shareholders passed a resolution of amendments to the
Company’s amended and restated memorandum and Articles of Association to remove the
redemption rights of Series B-3 Shares as set out in Note 16. Therefore, as of August 3,
2007 the warrants no longer qualified as a liability in accordance with SFAS No. 150 and the
carrying amount of $1,260, which was the fair value of the warrant as of the date, was
transferred to shareholders equity.
The change in fair value of $405 and $357 was recorded in the condensed consolidated
statements of operations for the years ended December 31, 2006 and 2007, respectively.
In November 2007, certain holders exercised their warrants to purchase an aggregate of
607,238 Series B-3 preference shares at an exercise price of US$2.8996 per share as set out
in Note 16.
The remaining holder of the warrants exercised all of their warrants with Net Settlement
Option to acquire Series B-3 preference shares of 54,365 in December 2007 immediately before
the IPO.
F-60
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
18. MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government-mandated
multi-employer defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits are provided
to employees. Chinese labor regulations require the Group to accrue for these benefits
based on certain percentages of the employees’ salaries. The total provisions for such
employee benefits were $1,067, $3,009 and $4,780 for the years ended December 31, 2006, 2007
and 2008, respectively.
19. 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 Group’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 Group’s PRC subsidiaries were $3, $869 and $392 for the years ended
December 31, 2006, 2007 and 2008, respectively.
20. CONTINGENT CONSIDERATIONS FOR BUSINESS ACQUISITIONS
In connection with the acquisition of WIT, other than the initial consideration of $1,080 in
cash, the Company agreed to pay additional considerations up to $3,870 in cash and ordinary
shares with a value of up to $2,700 contingent upon the attainment of the earnings
objectives for the thirty-month period ending March 31, 2011.
F-61
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
21. 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:
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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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. The letter does not specify the
amount of any claimed damages or costs. As of the date of December 31, 2008, the Company
had not received any notices of claims from any other investors in Heteng, including Long
March.
F-62
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
21. LITIGATION THREAT AGAINST THE COMPANY — continued
The Company has been advised by the Company’s PRC counsel that the August 2004 transaction
in which the Company acquired the IT services business and related assets of the predecessor
of the Company was duly authorized and approved by both the seller, Wensi Chuangyi and its
subsidiaries, and the buyer, VanceInfo Beijing, in accordance with PRC law, and that the
transaction was effected in compliance with all applicable PRC laws and regulations. In
addition, the Company believes that the level of share ownership in Octiga claimed by Mr.
Jiang is substantially overstated.
It is possible that Mr. Jiang or other shareholders of Heteng or Octiga will institute
litigation as threatened in the notice of claim, including litigation against the Company,
the Company’s subsidiaries, Chris Chen and David Chen. The Company believes that Mr.
Jiang’s purported claims are without merit and, if any such claims are asserted against the
Company, the Company intends to vigorously defend against the claims. The Company believes
that the outcome of any such litigation will not have a material adverse effect on the
results of operations or financial condition of the Company, although litigation is
inherently uncertain and the Company cannot give any assurances in this regard. In
addition, regardless of the outcome, defending any such litigation could result in material
costs and diversion of management resources and attention.
22. COMMITMENTS
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i
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Operating lease commitments
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The Group has entered into operating lease agreements principally for its office
spaces. These leases expire through 2013 and are renewable upon negotiation. Rental
expense under operating leases was $967, $2,840 and $4,865 for the years ended
December 31, 2006, 2007 and 2008, respectively.
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Future minimum lease payments under such non-cancelable leases as of December 31,
2008 are as follows:
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2009
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4,156
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2010
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2,766
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2011
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1,173
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2012
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553
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2013
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385
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9,033
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ii
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Purchase commitments
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As of December 31, 2008, $127 was contractually committed by the Group for purchases
of equipment and leasehold improvements. The Group expects to fulfill these purchase
commitments by December 31, 2009.
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F-63
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008
(In U.S. dollars in thousands, except share and share related data)
23. RELATED PARTY TRANSACTIONS
The Group had the following significant transactions with related parties in addition to the
disclosures in Notes 9, 14, 15, 16 and 17:
The Group provided system development services to Shenzhen Taitai Pharmaceutical Co., Ltd
(“Taitai”), an affiliate of Inno Global Investment Limited, a principal shareholder of the
Company. The Group recognized $16, $38 and nil revenue for these transactions for the years
ended December 31, 2006, 2007 and 2008, respectively. The accounts receivable balances from
Taitai were nil as of December 31, 2007 and 2008, respectively.
The Group provided various IT services to Lenovo (Beijing) Co., Ltd., Beijing Lenovo
Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd. and Lenovo (Dalian) Technologies
Service Co., Ltd.(collectively “Lenovo”), affiliates of LC Fund III, a principal shareholder
of the Company. The Group recognized $45, $940 and $1,750 revenue for these transactions
for the years ended December 31, 2006, 2007 and 2008, respectively. The accounts receivable
balances from Lenovo were $1,257 and $363 as of December 31, 2007 and 2008, respectively.
The Group provided system testing services to A-IT (Shanghai) Software Services Co., Ltd.
(“AIT”), an subsidiary of Link Result Limited, an equity method investment of the Company.
The Group recognized nil, nil and $40 revenue for these transactions for the years ended
December 31, 2006, 2007 and 2008, respectively. The accounts receivable balances from AIT
were nil and $40 as of December 31, 2007 and 2008, respectively.
24. SUBSEQUENT EVENTS
Acquisition of Professional Team in Support of Huawei
On January 1, 2009, the Group acquired a team of engineers from Guangzhou Kernel Technology
Limited.(“Kernel”), a small China-based supplier providing customized application
development services to Huawei Technologies in the areas of Business Support Systems,
Operation Support Systems, Business Intelligence and Color Ring Back Tone Platform with a
consideration of $235. Over 150 IT professionals from Kernel’s offices in Guangzhou,
Shenzhen and Nanjing joined the Company in connection with the transaction.
Share Repurchase Plan
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. The repurchases will be made from time to time at management’s
discretion in the open market or in negotiated transactions subject to market conditions,
the trading price of the ADSs and other factors.
F-64
EXHIBIT INDEX
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Exhibit
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Number
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Description of Document
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4.22
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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.
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8.1
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Subsidiaries of the Registrant.
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12.1
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CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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12.2
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CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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13.1
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CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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13.2
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CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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15.1
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Consent of Conyers Dill & Pearman.
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15.2
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Consent of Jun He Law Offices.
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15.3
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Consent of Deloitte Touche Tohmatsu CPA Ltd..
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Vanceinfo Technologies American Depositary Shares (NYSE:VIT)
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