UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
(Mark One)
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Registration statement pursuant to Section 12(b) or 12 (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, 2010.
or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For
the transition period from ________ to ________
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
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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.
44,556,910 ordinary shares, par value US$0.001 per share, as of December 31, 2010.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes
þ
No
o
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
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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
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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
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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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“DCM Funds” refers to DCM IV, L.P. and DCM Affiliates Fund IV, L.P.;
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“Greater China” refers to the People’s Republic of China, including, 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 Machines 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, Microsoft (China) Co., Ltd., and Microsoft
Development 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 Funds” refers to Sequoia Capital China I, L.P., Sequoia Capital China Partners
Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital Growth Fund III,
L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III,
L.P.;
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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;
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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., or Megainfo, before its liquidation in
January 2009;
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all shares and per share data have been adjusted to reflect a 100-for-1 split that became
effective on March 10, 2005 and a further 10-for-1 split that became effective on November 3,
2005; and
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all discrepancies in any table between the amounts identified as total amounts and the sum
of the amounts listed therein are due to rounding.
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1
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 exchange rate refers to the noon buying
rate as set forth in the H.10 statistical release of the Federal Reserve Board. Unless otherwise
noted, all translations from Renminbi to U.S. dollars have been made at a rate of RMB6.6000 to
US$1.00, the noon buying rate in effect as of December 30, 2010. 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 April 29, 2011, the noon buying
rate was RMB6.4900 to US$1.00.
This annual report on Form 20-F includes our audited consolidated statements of operations for the
years ended December 31, 2008, 2009 and 2010, and consolidated balance sheet data as of December
31, 2009 and 2010.
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.”
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”, “could”, “potential”,
“should”, “would” 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.
2
This annual report on Form 20-F also contains estimates, projections and statistical data related
to the IT services market in China. This market data, including data from International Data
Corporation, or IDC, an independent market research firm, speaks as of the date it was published
and includes projections that are based on a number of assumptions and are not representations of
fact. 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
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ITEM 1
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
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Not Applicable.
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ITEM 2
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OFFER STATISTICS AND EXPECTED TIMETABLE
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Not Applicable.
A.
Selected Financial Data
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.
The selected consolidated statement of operations data for the years ended December 31, 2008, 2009
and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010, reflecting the
adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
Topic 810-10-65,
Transition Related to FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51
(“ASC Topic 810-10-65”) on January
1, 2009, retrospectively, 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, 2007, reflecting the adoption of ASC Topic 810-10-65, have been
derived from our audited consolidated financial statements for 2007, which are not included in this
annual report. The selected consolidated balance sheet data as of December 31, 2008, reflecting the
adoption of ASC Topic 810-10-65, have been derived from our audited consolidated financial
statements for 2008, which are not included in this annual report. The selected consolidated
statement of operations data for the year ended December 31, 2006, except for the impact of
adoption of ASC Topic 810-10-65 which were reflected in this annual report, have been derived from
our audited financial statements for 2006, which are not included in this annual report. The
selected consolidated balance sheet data as of December 31, 2006 and 2007, except for the impact of
adoption of ASC Topic 810-10-65 which were reflected in this annual report, have been derived from
our audited financial statements for 2006 and 2007, which are not included in this annual report.
Our consolidated financial statements are prepared and presented in accordance with accounting
principles generally accepted in the United States of
America (“U.S. GAAP”). The historical results are not necessarily indicative of results to be
expected in any future period.
3
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VanceInfo
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For the Year Ended December 31,
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2006
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2007
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2008
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(as adjusted)
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(as adjusted)
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(as adjusted)
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2009
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2010
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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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29,051
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62,714
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102,663
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148,066
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211,550
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Cost of revenues
(1)
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(17,961
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(38,544
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(62,911
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(92,171
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(132,984
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Gross profit
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11,090
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24,170
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39,752
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55,895
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78,566
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Selling, general and administrative
expenses
(1)
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(6,821
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(16,180
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(25,905
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(34,710
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(51,901
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Total operating expenses
(1)
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(6,821
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(16,180
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(25,905
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(34,710
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(51,901
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Change in fair value of contingent
consideration payable for business
acquisitions
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—
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—
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—
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(62
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221
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Other operating income
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54
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860
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858
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1,754
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4,985
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Income from operations
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4,323
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8,850
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14,705
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22,877
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31,871
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Net income
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4,411
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9,621
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16,089
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21,508
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29,863
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Net (income)/loss attributable to
noncontrolling interest
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(35
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(52
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84
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—
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—
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Deemed dividend on Series A
convertible redeemable preferred
shares — accretion of redemption
premium
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(611
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(632
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—
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—
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—
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Income attributable to VanceInfo
Technologies Inc. shareholders
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3,765
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8,937
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16,173
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21,508
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29,863
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Income per ordinary share:
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Basic
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$
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0.08
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$
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0.22
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$
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0.43
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$
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0.56
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$
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0.74
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Diluted
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$
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0.07
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$
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0.19
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$
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0.40
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$
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0.52
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$
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0.69
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Income per ADS:
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Basic
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$
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0.08
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$
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0.22
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$
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0.43
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$
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0.56
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$
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0.74
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Diluted
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$
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0.07
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$
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0.19
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$
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0.40
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$
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0.52
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$
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0.69
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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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9,605,507
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11,426,183
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37,276,306
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38,389,495
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40,298,060
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Diluted
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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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41,576,217
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43,406,080
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4
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VanceInfo
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For the Year Ended December 31,
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2006
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2007
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2008
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(as adjusted)
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(as adjusted)
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(as adjusted)
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2009
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2010
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Other Consolidated Financial
Data
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Gross margin
(2)
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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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37.8
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%
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37.1
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%
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Operating margin
(3)
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14.9
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14.1
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14.3
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15.5
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15.1
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Net margin
(4)
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15.2
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%
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15.3
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%
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15.7
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%
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14.5
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%
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14.1
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%
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(1)
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Includes share-based compensation expenses as follows:
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VanceInfo
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For the Year Ended December 31,
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2006
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2007
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2008
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2009
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2010
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(in US$ thousands)
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Share-based compensation expenses included in:
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Cost of revenues
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(45
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(111
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)
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(265
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(313
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)
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(492
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)
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Selling, general and administrative expenses
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(668
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)
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(885
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)
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(1,126
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)
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(1,252
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)
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(2,755
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)
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Total operating expenses
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(668
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)
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(885
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(1,126
|
)
|
|
|
(1,252
|
)
|
|
|
(2,755
|
)
|
|
|
|
|
|
(2)
|
|
Gross margin represents gross profit as a percentage of net revenues.
|
|
|
|
(3)
|
|
Operating margin represents income from operations as a percentage of net revenues.
|
|
|
|
(4)
|
|
Net margin represents net income as a percentage of net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
(as adjusted)
|
|
|
(as adjusted)
|
|
|
(as adjusted)
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(in US$ thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
20,565
|
|
|
|
76,835
|
|
|
|
79,963
|
|
|
|
64,057
|
|
|
|
161,265
|
|
|
Term deposits and short-term
investments
|
|
|
—
|
|
|
|
1,371
|
|
|
|
1,466
|
|
|
|
22,122
|
|
|
|
18,208
|
|
|
Accounts receivable
|
|
|
11,815
|
|
|
|
24,708
|
|
|
|
36,827
|
|
|
|
60,524
|
|
|
|
85,437
|
|
|
Total assets
|
|
|
42,044
|
|
|
|
129,076
|
|
|
|
155,451
|
|
|
|
205,191
|
|
|
|
351,639
|
|
|
Total liabilities
|
|
|
5,583
|
|
|
|
18,068
|
|
|
|
23,948
|
|
|
|
42,629
|
|
|
|
55,472
|
|
|
Convertible redeemable
preferred shares
|
|
|
31,648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Shareholders’ equity
|
|
|
4,813
|
|
|
|
110,008
|
|
|
|
131,503
|
|
|
|
162,562
|
|
|
|
296,167
|
|
|
Total liabilities,
convertible redeemable
preferred shares and
shareholders’ equity
|
|
|
42,044
|
|
|
|
129,076
|
|
|
|
155,451
|
|
|
|
205,191
|
|
|
|
351,639
|
|
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 Greater China, the United
States, Europe and Japan, 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, 2010, substantially all of our net revenues were derived from clients
headquartered in Greater China, the United States, Europe and Japan. These economies continue to be
impacted by the recent global economic downturn, which have had some adverse effects on our
business and results of operations in 2010, including increased pricing pressures from some of our
clients and some delays in obtaining new projects from existing clients. Furthermore, the recent
earthquake and tsunami that occurred in Japan in March 2011 have caused substantial damage and has
threatened to send the Japanese economy into a recession. As of the date of this annual report, the
extent to which the earthquake and tsunami will affect Japanese’s economy and the global economy
still remains unclear. However, we have seen a slowdown in the increase of our net revenues derived from the Japanese clients in the first quarter of 2011 due to the impact from the earthquake and tsunami. If there are adverse changes to the macro-economic conditions of our or our
key clients’ key markets, 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.
6
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. 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. In 2009, each of Huawei, Microsoft and a European mobile handset
manufacturer accounted for 10% or more of our net revenues, and in the aggregate accounted for
47.0% of our net revenues. In 2010, each of Huawei and Microsoft accounted for 10% or more of our
net revenues, and in the aggregate accounted for 37.8% of our net revenues. Our top five clients
accounted for approximately 53.8%, 56.3% and 55.5% of our net revenues in 2008, 2009 and 2010,
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.
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.
For the years ended December 31, 2008, 2009 and 2010, a majority of our net revenues were derived
from clients in the telecommunications and high technology 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 telecommunications and
high technology 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.
7
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 China-based IT services companies, such as, Chinasoft International Ltd., or
Chinasoft International, HiSoft Technology International Limited, or Hisoft, Neusoft Group
Ltd., or Neusoft, SinoCom Software Group Limited, or SinoCom, iSoftStone Holdings Limited, or
iSoftStone, and Camelot Information Systems Inc., or Camelot;
|
|
•
|
|
Indian IT services companies, such as Cognizant Technology Solutions Corp., or Cognizant,
HCL Technologies Ltd., or HCL, Infosys Technologies Ltd., or Infosys, Tata Consultancy
Services Ltd., or TCS, and Wipro Technologies, or Wipro;
|
|
•
|
|
in-house IT departments of large corporations; and
|
|
•
|
|
offshore IT service providers in emerging outsourcing destinations with low wage costs such
as Southeast Asia, Latin America and Eastern Europe.
|
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
8
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 October 13, 2010 to October 13, 2011, 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, 2010 to October 13, 2011, 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 revenues as a percentage of revenues, 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.
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.
9
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.
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 US$211.6 million in 2010 from US$15.5 million in 2005. Since 2005, we have completed a
number of acquisitions and established or acquired a number of offices in Greater China, the United
States, Europe, Japan and Malaysia. We have also set up a number of CDCs. As of December 31, 2010,
we had 9,827 professionals, as compared to 1,015 professionals as of December 31, 2005. 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.
10
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 Shanghai VanceInfo Technologies Limited, or Shanghai
VanceInfo, Beijing Chosen Technology Co., Ltd., or Chosen, TP Teleservices Limited, TP Consultants
Limited, TP (Taiwan) Limited, TP (Hong Kong) Limited, or TP Hong Kong, and TP Software Technology
(Shanghai) Co., Ltd., or TP Shanghai (together with TP Teleservices Limited, TP Consultants
Limited, TP (Taiwan) Limited and TP Hong Kong, the “TP Companies”), Link Result Limited, or Link
Result, Beijing Viatt Information Technology Co. Ltd., or Beijing Viatt, Lifewood Technology
Limited, or Lifewood Technology, Lifewood Data Technology Limited, or Lifewood Data, Lifewood Data
Technology (Shenzhen) Limited, or Lifewood Shenzhen, and Lifewood Data Technology (Dongguan)
Limited, or Lifewood Dongguan (together with Lifewood Technology, Lifewood Data and Lifewood
Shenzhen, the “Lifewood Companies”) in the past. 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.
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 continue to 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.
11
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
executive vice chairman and co-president, Sidney Xuande Huang, our co-president and chief financial
officer, Frances Hong Zhang, our chief operating officer, Junbo Liu, our chief business development
officer, Jeff Jian Wu, our chief globalization officer,
Stanley Ying Zhou, our chief administrative officer, and Howard Hao Yu, one of our executive vice
presidents, 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.
12
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.
13
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.
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 October 13, 2010 to October 13, 2011, 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, 2010 to October 13, 2011, 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.
14
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 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 exposed to legal proceedings, which, if determined adversely to us, could cause us to pay
significant damages or otherwise adversely affect our business and operation.
From time to time, we may be subject to legal proceedings, investigations and claims incidental to
the conduct of our business. In November 2010, Jonathan Jianguo Jiang, or Jiang, filed an action
naming us, our subsidiary VanceInfo Technologies Inc., a Delaware corporation, or VanceInfo US, and
our executives Chris Shuning Chen and David Lifeng Chen as defendants in the Superior Court of
California, County of San Mateo. See Item 8, “Financial Information — Consolidated Statements and
Other Financial Information — Legal Proceedings.” This action and any future legal proceedings
against us may divert our management’s attention regardless of the final results of the legal
proceedings. Furthermore, these proceedings, if determined adversely to us, could cause us to pay
significant damages or otherwise adversely affect our business and operation.
15
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.
We may face certain risk with respect to our proposed purchase of land use right.
In November 2009, we entered into agreements with a Beijing-based developer regarding our proposed
acquisition of the use right to two parcels of land with 37,492 square meters of permitted floor
space in Zhongguancun Software Park, Haidian District, Beijing. We have paid approximately US$18.0
million relating to the land use right as of December 31, 2010. Currently, the necessary
governmental permits are being applied for. Given this initial application stage, there is
significant uncertainty regarding whether or when these governmental permits will be obtained. If
we fail to timely acquire the land use right and obtain the relevant governmental permits, we may
not be able to timely build our office premises on these parcels of land as planned and our
expansion plan may be affected. In addition, we plan to move our headquarters and research and
development center to the new office premises built on these parcels of land in the future. Due to
the concentration of our operations, any future problem in our facilities such as loss of power or
earthquake may limit our ability to conduct our business.
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 ended December 31, 2010.
Our management has concluded that our internal control over financial reporting was effective as of
December 31, 2010. 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, 2010. 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.
16
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 October 13, 2010 to October 13, 2011, 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, 2010 to October 13, 2011, 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.
17
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. An outbreak of swine flu in
Mexico and the United States in the summer of 2009 has spread to China and human cases of swine flu
were and continue to be discovered 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, and the sickness or death of our key officers and employees. 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. As a consequence, the Renminbi
has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the
U.S. dollar. On June 19, 2010, the People’s Bank of China announced that it will allow a more
flexible exchange rate for Renminbi without mentioning specific policy changes, although it ruled
out any large-scale appreciation. 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 Hong Kong Dollar, Japanese Yen and Euro. Any significant depreciation of
the Hong Kong Dollar, Japanese Yen or Euro against the Renminbi or U.S. dollar would adversely
affect our revenues in Renminbi or U.S. dollar terms, respectively.
Furthermore, the value of our shares may be affected by the foreign exchange rate between U.S.
dollars and RMB because the value of our business is effectively denominated in RMB, while our
shares are traded in U.S. dollars. Depreciation of the value of the U.S. dollar will also reduce
the value of the cash we hold in U.S. dollars, which we may use for purposes of future acquisitions
or other business expansion.
18
We incurred net foreign exchange losses of US$32,000, US$93,000, US$119,000 and US$1.0 million in
2005, 2006, 2009 and 2010, 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, except for a forward exchange contract to purchase US$5 million for
JPY448.75 million in October 2010 and a forward exchange contract to purchase US$5 million for
JPY432.5 million in July 2011. Accordingly, we still 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.”
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, Beijing
Prosoft Software Technology Co., Ltd., or Prosoft, which was liquidated in December 2008, and
Beijing Innovation Technology Co., Ltd., or ITC, which was sold in February 2008, 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 entitled
to enjoy a 7.5% EIT rate from 2008 to 2010. Prosoft and ITC were entitled to enjoy a 7.5% EIT rate
from 2007 to 2009.
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 Administrative
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 set forth by certain departments of the State Council.
19
VanceInfo Beijing was qualified as a “high and new technology enterprise” with a valid term of
three years in December 2008 and is entitled to the preferential EIT rate of 7.5% from 2008 to
2010. On April 21, 2010, the State Administration of Taxation issued the Notice on Further
Clarifying the Implementation Criteria of Preferential Policies on Enterprise Income Tax during the
Transitional Period, or Circular 157, which provides additional guidance on the interaction of
certain preferential tax rates under the transitional rules of the new EIT Law. Prior to Circular
157, we understood that if a high and new technology enterprise was in a tax holiday period, when
it was entitled to a 50% reduction in the EIT rate and it was also entitled to a 15% preferential
EIT rate for a high and new technology enterprise, it would be entitled to pay EIT at the rate of
7.5%. Circular 157 appears on its face to have the effect that such an entity is entitled to pay
taxes at either the lower of 15% or 50% of the applicable EIT rate (in terms of a foreign-invested
high and new technology enterprise located in the Beijing New Industry Development Pilot Zone such
as VanceInfo Beijing, 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and 25% starting from
2012). However, to date, Beijing local-level tax bureau has not implemented Circular 157 and is
holding the view that the relevant provisions may not apply to high and new technology enterprises
in Beijing New Industry Development Pilot Zone. Therefore, VanceInfo Beijing’s current tax rate
remained unchanged. However, if the relevant tax authorities issue more guidance on the
implementation of Circular 157 or implementing Circular 157 more strictly in the future, VanceInfo
Beijing’s effective tax rate may increase. Shanghai VanceInfo was qualified as a “high and new
technology enterprise” in December 2008, which entitled it to a 15% preferential EIT rate in 2008,
and was further recognized as a “key software enterprise under the State plan” in December 2009,
which entitled it to enjoy a 10% preferential EIT rate in 2009. Shanghai Vanceinfo was entitled to
enjoy a 15% preferential EIT rate in 2010 due to its status as a “high and new technology
enterprise.” TP Shanghai, which we acquired in July 2009, was qualified as a “high and new
technology enterprise” in December 2008 with a valid term of three years and is entitled to the
preferential tax rate of 15% in 2009 and 2010. Nanjing VanceInfo Creative Software Technology
Limited, or Nanjing VanceInfo, was recognized as a “software enterprise” in 2009 and was entitled
to be exempted from EIT in 2009 and 2010 and a 50% reduction of its applicable EIT rate with the
reduced applicable EIT rate of 12.5% from 2011 to 2013. A-IT (Shanghai) Software Services Co.,
Ltd., or A-IT Shanghai, became one of our wholly owned subsidiaries in 2010. A-IT Shanghai was
incorporated in 2002 and was recognized as a “software enterprise” in 2007, and therefore, it was
entitled to be exempted from EIT in 2007 and 2008, and was entitled to a 50% tax reduction of its
applicable EIT rate with the reduced applicable EIT rate of 10%, 11%, and 12% in 2009, 2010, and
2011, respectively. However, continued qualification as a “high and new technology enterprise” is subject to a review every
three years by the relevant government authorities in China, and in practice certain local tax
authorities also require annual evaluation of the qualification; continued qualification as a “key
software enterprise under the State plan” or “software enterprise” is subject to an
annual assessment by the relevant government authorities in China. Consequently, there is no
assurance that our subsidiaries will continue to meet the qualifications or that the relevant
government authorities will not revoke our subsidiaries’ “high and new technology enterprise”, “key
software enterprise under the State plan”, or “software enterprise” statuses in the future. 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.
In addition, pursuant to relevant tax rules, each of VanceInfo Beijing, Shanghai VanceInfo,
VanceInfo Technologies Limited, or VanceInfo Tianjin, Shanghai VanceInfo Creative Software
Technology Limited, or VanceInfo Shanghai Creative, Nanjing VanceInfo, A-IT Shanghai,
Shenzhen VanceInfo Creative Software Technology Limited, or VanceInfo
Shenzhen, and TP Shanghai, 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.
20
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.
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 PRC economy
has shown signs of inflation in recent periods. In order to control inflation, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state
bank lending. Such an austere policy can lead to a slowing of economic growth and could materially
and adversely affect our business and prospects. 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.
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.
21
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. The
State Administration of Taxation issued the Notice Regarding the Determination of
Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis
of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain
specific criteria for determining whether the “de facto management body” of a Chinese-controlled
offshore incorporated enterprise is located in China. Although Circular 82 only applies to offshore
enterprises controlled by PRC enterprises, not those invested in by PRC individuals, like our
company, the determining criteria set forth in Circular 82 may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in
determining the tax resident status of offshore enterprises, regardless of whether they are
controlled by PRC enterprises or controlled by or invested in by PRC individuals. 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, were
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
VanceInfo Shenzhen, is incorporated in Hong Kong. TP Hong Kong, our wholly owned subsidiary and the
direct holder of a 100% equity interest in TP Shanghai, is incorporated in Hong Kong. Link Result,
our wholly owned subsidiary and the direct holder of a 100% equity interest in A-IT Shanghai, is
also incorporated in Hong Kong. Lifewood Data, our wholly owned subsidiary and the direct holder of
a 100% equity interest in Lifewood Shenzhen and Lifewood Dongguan, 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
22
investor owns directly at least 25% of the shares of the foreign-invested
enterprise). Under the new EIT Law and the Implementing Rules, if each of VanceInfo Hong Kong, TP
Hong Kong, Link Result or Lifewood Data is regarded as a resident enterprise, the dividends payable
to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo Shenzhen, dividends payable to TP Hong
Kong from TP Shanghai, dividends payable to Link Result from A-IT Shanghai, and dividends payable
to Lifewood Data from Lifewood Shenzhen and Lifewood Dongguan will be exempt from PRC income tax.
If each of VanceInfo Hong Kong, TP Hong Kong, Link Result or Lifewood Data is regarded as a
non-resident enterprise, subject to the confirmation of the local tax authorities, a 5% withholding
tax will be imposed for any dividends payable to VanceInfo Hong Kong from VanceInfo Tianjin and
VanceInfo Shenzhen, any dividends payable to TP Hong Kong from TP Shanghai, any dividends payable
to Link Result from A-IT Shanghai, and any dividends payable to Lifewood Data from Lifewood
Shenzhen and Lifewood Dongguan. Furthermore, the State Administration of Taxation promulgated the
Notice on How to Understand and Determine the Beneficial Owners in Tax Agreement on October 27,
2009, or Circular 601, which provides guidance for determining whether a resident of a contracting
state is the “beneficial owner” of an item of income under China’s tax treaties and tax
arrangements. According to Circular 601, a beneficial owner generally must be engaged in
substantive business activities. An agent or conduit company will not be regarded as
a beneficial
owner and, therefore, will not qualify for treaty benefits. The conduit company normally refers to
a company that is set up for the purpose of avoiding or reducing taxes or transferring or
accumulating profits. We cannot assure you that our subsidiaries in Hong Kong will not be deemed as
conduit companies, or any dividends to be distributed by us to our non-PRC shareholders and ADS
holders whose jurisdiction of incorporation has a tax treaty with China providing for a different
withholding arrangement will be entitled to the benefits under the relevant withholding
arrangement.
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.
The strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a
negative impact on our acquisition strategy.
In order to strengthen its scrutiny over the direct or indirect transfer of equity interest in a
PRC resident enterprise by a non-resident enterprise, the State Administration of Taxation issued,
on December 10, 2009, the Notice on Strengthening the Management on Enterprise Income Tax for
Non-resident Enterprises Equity Transfer, or Circular 698, which became effective retroactively on
January 1, 2008. Under Circular 698, the PRC State Administration of
Taxation is entitled to redefine the nature of an equity transfer where offshore vehicles are
interposed for tax-avoidance purposes and without reasonable commercial purpose. Since we
consistently pursue acquisitions as one of our growth strategies, and have conducted and may
conduct acquisitions involving complex corporate structures, the PRC tax authorities may, at their
discretion, adjust the capital gains or request us to submit additional documentation for their
review in connection with any of our acquisitions, thus causing us to incur additional acquisition
costs.
Restrictions on currency exchange may limit our ability to receive and use our revenues or
financing effectively.
A majority 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.
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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.
On August 29, 2008, the SAFE promulgated the Circular on the Relevant Operating Issues Concerning
the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of
Foreign Invested Enterprises, or SAFE Circular 142, a notice regulating the conversion by a
foreign-invested company of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. SAFE Circular 142 requires that Renminbi converted from the foreign
currency-denominated registered capital of a foreign-invested company may only be used for purposes
within the company’s business scope approved by the applicable governmental authority and may not
be used for equity investments within the PRC unless specifically provided for otherwise in its
business scope. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi
funds converted from the foreign currency-denominated registered capital of a foreign-invested
company. The use of such Renminbi may not be changed without approval from the SAFE, and may not in
any case be used to repay Renminbi loans if the proceeds of such loans have not yet been used.
Violations of SAFE Circular 142 may result in severe penalties, including substantial fines as set
forth in the Foreign Exchange Administration Regulations. As a result, SAFE Circular 142 may
significantly limit our ability to transfer the net proceeds from a public offering to our PRC
subsidiaries in the PRC, which may adversely affect our liquidity and our ability to fund and
expand our business in the PRC, and we may not be able to convert the net proceeds from a public
offering into Renminbi to invest in or acquire any other PRC companies.
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.
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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, Fangda Partners, 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 public offerings 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 public offerings, 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
also required to make relevant registration procedures with the local SAFE branch. 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.
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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. Mr. Chris
Shuning Chen, our founder, chairman and chief executive officer, Mr. Stanley Ying Zhou, our chief
administrative officer, and Mr. Kevin Zhong Liu, our executive vice president, have made the
requisite SAFE registration with respect to their investment and beneficial ownership in us.
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.
The failure or inability of our PRC resident shareholders or beneficial owners to make any required
registrations or comply with other requirements may subject such shareholders or beneficial owners
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 public offerings) our PRC subsidiary,
VanceInfo Beijing, limit VanceInfo Beijing’s ability to pay dividends or otherwise distribute
profits to us, or otherwise adversely affect us.
A failure to comply with PRC regulations regarding the registration of shares and share options
held by our employees who are PRC citizens may subject such employees or us to fines and legal or
administrative sanctions.
Pursuant to the Implementation Rules of the Administrative Measures on Individual Foreign Exchange,
or the Individual Foreign Exchange Rules, promulgated on January 5, 2007 by SAFE and the Operating
Procedures on Administration of Foreign Exchange for PRC Individuals’ Participation in Employee
Share Ownership Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share
Option Rules, issued by SAFE in March 2007, PRC citizens who are granted shares or share options by
an overseas-listed company according to its employee share option or share incentive plan are
required, through the PRC subsidiary of such overseas-listed company or other qualified PRC agents,
to register with SAFE and complete certain other procedures related to the share option or other
share incentive plan. In addition, the overseas listed company or its PRC subsidiary or other
qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank,
and open special foreign currency accounts to handle transactions relating to the share option or
other share incentive plan.
We and the participants of our employee stock option plan who are PRC citizens are subject to these
rules, and we have applied to the local SAFE for the registration of our employee stock option
plan. Failure to comply with such rules may subject us and the participants of our employee stock
option plan who are PRC citizens to fines and legal sanctions and prevent us from further granting
options and restricted share units, also known as nonvested shares, under our employee stock option
plan to our employees, which could adversely affect our business operations.
New labor laws in the PRC may adversely affect our results of operations.
As of March 31, 2011, we had approximately 10,300 employees in the PRC. On June 29, 2007, the PRC
Government promulgated a new labour law, namely, the Labour Contract Law of the PRC, or the Labour
Contract Law, which became effective on January 1, 2008.
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The Labor Contract Law establishes more restrictions and increases costs for employers to dismiss
employees under certain circumstances, including specific provisions related to fixed-term
employment contracts, non-fixed-term employment contracts, task-based employment, part-time
employment, probation, consultation with the labor union and employee representative’s council,
employment without a contract, dismissal of employees, compensation upon termination and for
overtime work, and collective bargaining. According to the Labor Contract Law, unless otherwise
provided by law, an employer is obliged to sign a labor contract with a non-fixed term with an
employee if the employer continues to hire the employee after the expiration of two consecutive
fixed-term labor contracts or if the employee has worked for the employer for ten consecutive
years. Severance pay is required if a labor contract expires without renewal because the employer
refuses to renew the labor contract or provides less favorable terms for renewal. In addition,
under the Regulations on Paid Annual Leave for Employees, which became effective on January 1,
2008, employees who have served more than one year for an employer are entitled to a paid vacation
ranging from 5 to 15 days, depending on the number of the employee’s working years at the employer.
Employees who waive such vacation time at the request of employers shall be compensated for three
times their regular salaries for each waived vacation day. As a result of these new measures
designed to enhance labor protection, our labor costs are expected to increase, which may adversely
affect our business and our results of operations. In addition, the PRC government in the future
may enact further labor-related legislation that increases our labor costs and restricts our
operations.
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 9, 2011, the trading price of our ADSs has ranged from US$4.20 to US$41.06 per ADS and the
closing sale price on May 9, 2011 was US$31.21 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 economic and market conditions or other developments affecting us, our industry,
our markets 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.
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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, including ADSs or ordinary shares issuable upon
the exercise of our outstanding stock options, 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 ordinary 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 ordinary 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.
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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 most 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 most of our operations in China through our
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 us or 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, 2010. However, the application
of the PFIC rules is subject to uncertainty in several respects. In addition, we must make a
separate determination after the close of each taxable year as to whether we were a PFIC for that
year. Accordingly, we cannot assure you that we will not be a PFIC for any future taxable year. 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. 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. In addition, changes in the
composition of our income or assets may cause us to become a PFIC. 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 an 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.”
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
History and Development of the Company
We commenced operations in 1995 through the IT services business of Beijing Wensi Chuangyi Software
Technology Co., Ltd., or 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, Cap. 22 (Law 3 of 1961, as consolidated and
revised).
In December 2007, we completed our initial public offering of our ADSs and listed our ADSs on the
NYSE. We completed follow-on public offerings of our ADSs in July 2009 and November 2010,
respectively.
Since 2008, we have acquired a number of businesses. The following are our recent acquisitions:
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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, a
China-based company providing IT outsourcing services to multinational financial institutions,
from A-IT Software Services PTE Ltd. In July 2010, we completed the purchase of the remaining
67% equity interest in Link Result from other shareholders. Approximately 170 professionals of Link Result joined us in connection with this transaction.
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In October 2008, we completed the acquisition of 100% of the equity interest in Wireless
Info Tech, Ltd., or WIT, a U.S. based mobile testing and application development services
provider, from Wireless Info Tech Limited.
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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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In July 2009, we acquired the operating subsidiaries, i.e. TP Companies, of TP Corporation
Limited, a Hong Kong-headquartered provider of customer relationship management, or CRM,
solutions and system integration.
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In October 2009, we acquired a team of engineers together with the smart phone software
testing business and the related assets from a China-based mobile service provider which
provides research and development services to a leading global handset manufacturer. Over 150
professionals joined us in connection with the transaction.
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In February 2010, we made a strategic investment in Beijing Viatt, an IT services and
solution provider for Chinese domestic financial institutions. Under the terms of the
agreements, we made a loan of approximately RMB3.0 million (US$0.4 million), which is
convertible into a 20% equity interest in Beijing Viatt with an exclusive right to acquire the
remaining 80% of the equity in the next 12 to 18 months at our sole discretion. In January
2011, we acquired 100% equity interest in Beijing Viatt. Over 80 professionals of Beijing
Viatt joined us in connection with the transaction.
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In March 2010, we acquired a team of engineers together with the cell phone software
development outsourcing business and the related assets from Beijing Mobitech Software Co.,
Ltd., or Mobi, a small China-based company providing mobile software development service. Over
50 professionals of Mobi joined us in connection with the transaction.
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In September 2010, we entered into certain investment agreements to acquire equity interest
in Salsatec Corporation Pty. Ltd., or Salsatec, an Australia-based IT services and solution
provider for Australian telecommunication and technology companies. Pursuant to the
investment agreements, we made a payment of US$0.2 million in cash for an initial equity
interest of 20% of Salsatec in convertible redeemable preference shares, with an exclusive
option right to acquire the remaining 80% of the equity interest in the next 12 months after
the execution date of the investment agreements at our sole discretion.
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In March 2011, we entered into an acquisition agreement with Think Consulting
Limited to acquire certain businesses of its wholly owned subsidiary, Bright Consulting
(Beijing) Limited, or Beijing Bright, a China-based IT services company providing Oracle
consulting and implementation services to Chinese domestic clients. This acquisition was
completed in April 2011.
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In April 2011, we acquired 100% equity interest in Lifewood Companies which provide
business process outsourcing services.
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We sold 100% of our equity interest in ITC in February 2008 after integrating its business and
employees into our other entities. Prosoft and Megainfo were liquidated in December 2008 and
January 2009, respectively, after we integrated its business and employees into our other entities.
WIT was dissolved in 2010 after we integrated its
business and employees into one of our subsidiaries. We are in the process of completing the tax
clearance procedures of WIT.
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 Greater China, the United States, Europe and Japan,
targeting selected industries with high growth potential for IT services such as
telecommunications, high technology, banking, financial services and insurance, travel services,
manufacturing, retail and distribution.
31
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 appropriately 10,400 professionals as of March 31, 2011, 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 Greater China and in the
United States, Europe, Japan and Malaysia.
Our major clients include Expedia, Huawei, Microsoft, TIBCO, and a European mobile handset
manufacturer. The number of our clients increased significantly from 241 for 2008 to 327 for 2010.
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 2008, 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$102.7 million in 2008 to US$211.6 million in 2010,
representing a compound annual growth rate, or CAGR, of 43.5%. Our net income grew from US$16.1
million to US$29.9 million over the same period, representing a CAGR of 36.2%.
Service Lines
We categorize our services into three broad sets: (i) R&D Outsourcing Services, which include two
service lines, R&D services and globalization and localization, (ii) IT Services, which include
three service lines, enterprise solutions, ADM and quality assurance and testing, and (iii) other
solutions and services, which include business process outsourcing service and other services.
Set forth below is our net revenues breakdown by service lines for the periods indicated:
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Year Ended December 31,
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2008
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2009
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2010
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(in US$ thousands, except for percentages)
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R&D Outsourcing Services
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R&D services
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60,808
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59.2
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%
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90,581
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61.2
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%
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124,181
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58.7
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%
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Globalization and localization
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4,259
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4.2
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5,118
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3.5
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6,060
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2.9
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IT Services
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Enterprise solutions
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13,542
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13.2
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14,429
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9.7
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19,725
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9.3
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ADM
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17,061
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16.6
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26,373
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17.8
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43,825
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20.7
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Quality assurance and testing
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6,717
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6.5
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7,807
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5.3
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13,003
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6.2
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Other Solutions and Services
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276
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0.3
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3,758
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2.5
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4,756
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2.2
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Total net revenues
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102,663
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100.0
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%
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148,066
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100
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%
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211,550
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100
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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, travel 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.
32
We have accumulated a variety of skill sets from over 15 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.
The
following case studies describe the R&D services we provide to
three of our clients:
TIBCO
(a Nasdaq-listed software company with over 4,000 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.
33
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.
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. We usually
have 50 to 150 R&D and IT service projects going in parallel for this client. 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 end-to-end IT service solutions on cloud computing, reducing acquisition cost
and IT service cost significantly with latest technologies.
A global leading telecommunication company
Client’s Project Requirements
. In 2011, this client appointed us to develop cloud computing
comprehensive business system (basic version) and required us to deliver a complete new version
within a tight timeframe. This basic version would be functioned as platform as a service, or PAAS,
and would be applied broadly in this client’s business solutions for telecommunication carriers,
enterprises, the Internet and individuals.
34
Our Solutions
. We assembled a project team consisting of highly qualified and experienced
professionals. Among the current apprxomiately 40 team members, 90% of whom have more than three
years’ experience in R&D services. Since PAAS is functioned as the support and integrated platform
for software as a service, or SAAS, our team aimed to develop a product with a user-friendly
interface, easy maneuverability, high compatibility and stability. 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
. This client attaches high importance to the quality of the
software outsourcing. Recognizing the high quality of our services provided historically and
strong capabilities of our professionals, we are the only supplier appointed by this client for the
above cloud computing project. We estimate a team of approximately 150 professionals will be
designated to this project to develop more versions for this client in the future.
Enterprise Solutions
We provide clients with a full spectrum of services in enterprise solutions, including enterprise
resource planning, or ERP, 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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customization;
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regional rollout;
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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 study describes the enterprise solutions services we provide to one of our
clients:
One of China’s major automobile manufacturing groups
Client’s Project Requirements
. This client is one of the major automobile manufacturing groups
based in China. To upgrade its IT system, this client required us to:
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be familiar with its complicated organizational structure and internal procedures, and
characteristics of its operations in a tight timeframe;
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provide cost-effective solutions to meet its demand for high-quality services; and
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seamlessly integrate the upgraded system with its manufacturing execution system, or MES,
and other systems.
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Meanwhile, there was no domestic reference case for upgrading this client’s system and there was no
strong technical support from the client side.
Our Solutions
. We quickly completed the overall needs analysis, business blueprint design, system
design, system implementation and acceptance, designed a complex flexible process, and developed a
detailed project plan and a strict risk control system to ensure the success of this project.
We implemented SAP automotive solutions, successfully upgraded SAP ECC5.0 version to ECC6.0
version, and enabled ECC6.0 version to have a seamless connection with this client’s MES system.
The implementation of SAP ERP system enabled this client to effectively improve its internal and
external communication, its manufacturing planning efficiency and supplier quality management and
establish a complete purchasing, logistics, manufacturing, sales service system and quality control
system, thus reducing its information isolation, strengthening its inter-department collaboration
and multi-supplier collaboration. The precise manufacturing planning and a real-time control of
this client’s various manufacturing procedures significantly shortened its manufacturing cycle,
reduced its production costs and improved its productivity. In the context of soaring raw material
prices, the improvement of the manufacturing process has significantly improved this client’s
overall competitiveness.
Current Relationship with Client
. We signed a three-year informatization operation and maintenance
contract with this client. We will continue to provide customized informatization services, further
optimize and improve its application systems, integrate its engineering Bill of Materials, or BOM,
management with its demand management system, and to provide comprehensive overall solutions to
this client.
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 studies describe the ADM services we provide to two of our
clients:
A flag carrier in Asia Pacific
Client’s Project Requirements
. This client is a flag carrier headquartered in Asia Pacific. This
client was seeking a strategic partner as it went forward with its major instant messaging, or IM,
transition plans and had an increasing number of projects. The high salary of developers where the
client’s headquarters locate makes it hard to meet this client’s fast changing business needs.
Meanwhile, this client has a substantial backlog of development work to be carried out due to its
IM transition plan implementation thus requiring us to complete assignments in a tight timeframe.
Our Solutions.
We established a CDC in Shenzhen to support this client’s development requirements.
This CDC is responsible for this client’s staff augmentation and project-related SOW requirements.
We also strategically placed business analysts based in the city where the client’s headquarters
locate to meet its requirements for various information management projects and development
objectives. We have established effective cross-border relationship with this client through IM
tools, onsite training, inviting the client’s experts for offstore training, and updating client
with weekly and monthly reports. We are establishing a team which will eventually possess the
domain knowledge base required to take over the role as an aviation service management, or ASM,
service provider for this client in the next two to three years. We have maintained a well-defined
process to manage the projects and working process, perform cross-team training and support, and we
also set up a self-testing team to increase test efficiency for this client. We are also assisting
this client in setting up an outsourcing management process mechanism and providing this client
with project management resources.
36
Current Relationship with Client
. We entered into an MSA with this client in September 2010.
Currently, we usually assign more than 50 professionals working for this client, both onsite and
offshore. We held monthly meetings with this client in the city where this client is headquartered
and Shenzhen, which enabled us to maintain an open, honest relationship with this client with low
attrition rate for our professionals working for this client.
One of the largest gaming companies in Asia
Client’s Project Requirements
. The client is one of the largest gaming companies in Asia. To
shorten the time-to-market of their services and fulfill their unique current and future business
needs, the client planned to construct an online betting system with high efficiency and
flexibility. This highly customized system needs to be re-designed and migrated from its previously
existing platform.
Our Solutions
. We assembled a dedicated team with over 50 experienced engineers in a short
timeframe. We utilized our expertise in online e-commerce services to understand the client’s
business processes and requirements.
Following an in-depth analysis, our team proposed a technical solution that would enhance the
system’s flexibility and ability to adapt to future business needs.
During the delivery process, our team designed a set of development processes and a rigorous
quality control system to minimize defects and improve project execution efficiency. As a result,
the project was completed ahead of schedule following strict quality controls. The successful
project completion supported the client’s quick launch of new online betting business lines and
enabled its geographic expansion.
Current Relationship with Client
. We are the major service provider in mainland China to help the
client develop IT systems and applications. Due to the success of the online betting system, the
client authorized us to set up two CDCs. By the end of 2010, we have more than 90 staff at our
dedicated CDCs working for this client in a wide range of application development and maintenance
services.
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.
37
The following case studies describe the quality assurance and testing services we provide to two of
our clients:
A pre-eminent Fortune 100 financial services company
Client’s Project Requirements
. From 2007, this client’s several subsidiaries in Asia Pacific
region decided to adopt a new system to achieve the system convergence, and manage its banking
businesses ranging from retail banking, credit cards to capital markets services. From 2010,
similar system convergence and regeneration started to be adopted in the U.S. 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 has:
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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, flexible 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. The team has been well managed and maintained with
continual capability growth. 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 proceeded smoothly and we are well recognized by client with more and
more projects assigned to us.
Current Relationship with Client
. We have also been retained by the client’s Asia-Pacific regional
headquarters and other branches for various testing projects under separately billed assignments.
Our services extended from testing to software development and business process outsourcing with
more than 300 professionals. The engagement model developed from pure staff augmentation to
team-based and project-based outsourcing. The offshore testing center for this client has supported
more than 100 projects.
A global mobile and Internet technology company
Client’s Project Requirements.
Partly due to the impact of financial crisis, this client has
transferred more and more projects, particularly testing related service projects, to China to save
cost. This client required that the service provider:
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has extensive experience in testing, especially in the mobile area;
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is experienced in human resource hiring and management;
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is good at offshore project management;
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has the capability to build up competence and conduct quality management; and
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has cost-effective, flexible and timely delivery capabilities.
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Our Solutions.
We started this project from onsite support working mode. As customer requirements
increased, we also set up an offshore team with separate management and independent execution
capability. We are now providing testing service in both English and Japanese languages. As
cooperation with this client deepens, we received some new assignments like automation testing,
white box testing, localization and development. We set up a virtual team to manage internal
competence, quality and resource, thus highly improved our efficiency.
38
Current relationship with client.
We have assigned 80 onsite professionals and more than 200
offshore professionals to this client. Since 2009, among this client’s testing service suppliers in
China, we have been ranked number one based on the number of dedicated professionals. In addition
to localization and automation services provided to this client in China, we also provide services
to this client’s subsidiaries in Sweden and Tokyo via our onsite professionals.
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 study describes the globalization and localization services we provide to one of
our clients:
A Fortune 100 international mobile and Internet technology company
Client’s Project Requirements.
In 2008 and 2009, the leading mobile and Internet technology
company looked for a company which could perform linguistic quality assurance, covering more than
85 languages for the devices applications and internet services applications. This project required
not only globalization and localization expertise, but also quick turnaround and ability to ram up
a multinational team to fulfill the ongoing tasks on a daily basis.
39
Our Solutions.
We had accumulated in-depth knowledge and experience with respect to the client’s
products and services through previous cooperation. We set up a team consisting of localization and
testing experts to provide quality assurance services covering up to 95 languages. In particular,
leveraging our localization services expertise and localization 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 localized versions
testing in a timely and cost-efficient manner.
Current Relationship with Client
. As one of the global top 10 suppliers of this leading mobile
and Internet service company, we have established and maintained a long-term collaboration with the
client and have been providing services for most of its major product lines. We have teams with
over 900 dedicated professionals providing a full-spectrum of services to this client, including
quality assurance and testing, field testing, automation testing, application development, etc.,
wherein more than 150 full —time professionals from 70 different countries or regions plus over
950 native speaker freelancers are working on its localization testing and localization projects.
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.
To address clients’ concerns with respect to security and intellectual property rights, we
occasionally grant clients an option to acquire our 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 studies describe our relationship with two 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 500 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.
40
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, 2011, we maintained a high-quality research and development team of professionals
for TIBCO, all of whom hold undergraduate and graduate degrees.
One of the largest global online travel service providers
Client’s Project Requirements.
This client is one of the world’s leading online travel companies,
providing travel products and services to leisure and corporate travelers in the U.S. and around
the world. This client’s decades-old monolithic system is costly to maintain and hard to satisfy
its fast changing business needs, and thus it does not have
enough budget for some other initiatives, such as test automation and performance tuning. This
client planned to reconstruct its e-commerce core platform so as to adjust more of its budget to
other engineering areas.
Our Solutions.
We established a CDC including a dedicated team of more than 100 senior
professionals in 2009. This CDC currently has more than 350 professionals and has an engineering
team helping to redesign this client’s system. Our customized solutions include:
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providing effective onshore and offshore engagement model;
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providing agile development methodology;
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designing and implementing this client’s e-commerce core platform with service-oriented
architecture, or SOA, and system migration;
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•
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providing project-based end-to-end deliverables in data warehouse, websites, back-end
system, internal tools, customer care, etc.;
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•
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establishing dedicated development team to provide universal automation platform for test
and providing professional test automation for all lines of business for this client; and
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•
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providing professional performance analysis and tuning;
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We maintained effective communication with this client by applying flexible working hours and
adopting video teleconferencing, conference calls, live meeting and onsite rotation. Our valuable
solutions enabled this client to enhance its core platforms of SOA and services, improve its
time-to-market, increase its competitive agility, and meet its resource demands while saving cost.
The stability of the client’s system performance also ensured its core business operations.
Current Relationship with Client.
The CDC for this client has grown significantly since its
establishment in 2009 in Shenzhen, and the number of our professionals in this CDC increased
significantly from more than 100 in 2009 to more than 350 as of March 31, 2011 due to our
satisfactory and successful deliveries provided to this client. This Shenzhen CDC is the second
largest engineering center globally for this client in terms of the number of dedicated
professionals. This client has recently approved the establishment of our second CDC for this
client in Beijing. We are currently a major service provider to this client.
41
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.
Quality and Process Management
One of the crucial factors in our success has been our efforts to pursue the highest quality
standards in all aspects of our business. We are able to define various project processes, monitor
the project schedule and workforce allocation, and improve our requirement management, testing
management, defect management, risk management and resource management. We believe our seamless
quality and process management process has greatly improved our global delivery capability, process
maturity and timely decision-making.
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. One
of our subsidiaries, Shanghai VanceInfo, is ISO 27001:2005 certified and 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. One of our subsidiaries, VanceInfo Shenzhen, is ISO 9001:2008 and ISO/IEC
27001:2005 certified and have achieved CMMI Level-Three certification. One of our subsidiaries,
Beijing Viatt, is ISO 9001:2008 certified.
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 December 31, 2010, our BD team consisted of 62 full-time
sales personnel, including 15 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, San Diego, London, 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.
42
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 2010, including
Gartner Symposium/ITXpo 2010, Gartner Outsourcing & Vendor Management Summit 2010, IAOP 2010
Outsourcing World Summit, Marcus Evans CIO Summit 2010, TravelCom 2010, Aviation Outlook China
2010, the 7
th
Annual China Regional Commercial Banking Summit, the 7
th
Annual
China Insurance Summit, and the 2
nd
Annual China Cloud Computing Conference. 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 Greater China, the United States, Europe
and Japan. We have a strong market share of Greater China-based companies and U.S. and European
corporations operating in China. The number of our clients increased significantly from 241 for
2008 to 327 for 2010.
The following table sets forth our net revenues by geographic breakdown based on the location of
our clients’ headquarters for the periods indicated.
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For the Year Ended December 31,
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2008
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2009
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2010
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(in US$ thousands, except for percentages)
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Greater China
(1)
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22,045
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21.5
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%
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59,373
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40.1
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%
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95,481
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45.1
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%
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United States
(1)
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56,175
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54.7
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56,634
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38.3
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70,955
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33.6
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Europe
(1)
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14,991
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14.6
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23,148
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15.6
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32,178
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15.2
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Japan
(1)
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9,157
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8.9
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8,466
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5.7
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9,889
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4.7
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Others
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295
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0.3
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445
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0.3
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3,047
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1.4
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Total net revenues
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102,663
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|
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|
100.0
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%
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148,066
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100.0
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%
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211,550
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100.0
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%
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(1)
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Countries or regions where the headquarters of our clients are located.
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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. In 2009, each of Huawei, Microsoft and a
European mobile handset manufacturer accounted for 10% or more of our net revenues, and in the
aggregate accounted for 47.0% of our net revenues. In 2010, each of Huawei and Microsoft accounted
for 10% or more of our net revenues, and in the aggregate accounted for 37.8% of our net revenues.
Our top five clients accounted for approximately 53.8%, 56.3% and 55.5% of our net revenues in
2008, 2009 and 2010, 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.
43
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:
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China-based IT services companies, such as Chinasoft International, Hisoft, Neusoft,
SinoCom, iSoftStone, and Camelot;
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•
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Indian IT services companies, such as Cognizant, HCL, Infosys, TCS and Wipro; and
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•
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offshore IT service providers in emerging outsourcing destinations with low wage costs such
as the Southeast Asia, Latin America and Eastern Europe.
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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 China, the
United States, Europe, Australia, Singapore and Hong Kong, and have additional trademark
registration applications pending in the United States and in China for one of these marks. One of
our subsidiaries, TP Shanghai, holds a trademark registration for “
” in China. One of our
subsidiaries, Lifewood Technology Limited, holds a trademark
registration for “
lifewood
” in Hong Kong. We
have registered our domain names, www.vanceinfo.com, www.vanceinfo.net, www.vanceinfo.com.cn,
www.vanceinfo.net.cn, www.vanceinfo.cn, www.vitocs.com, and www.jp.vanceinfo.com. Certain of our
subsidiaries have also registered their domain names, www.aitsoftware.com.cn, www.tp-corp.com,
www.viatt.com.cn, www.viatt.cn, www.lifewood.com, and www.lifewood.cn.
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.
44
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.
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.
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.
45
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 Circular, enterprises exporting
software are entitled to preferential treatment including governmental financial support,
preferential interest rate of export credit and tax preferential treatment. Software enterprises
engaging in software export (including research and development services) must conduct online
registration of software export contracts with the administration center jointly established by the
Ministry of Commerce, the Ministry of Science and Technology, the Ministry of Industry and
Information Technology, the State Statistics Bureau, SAFE, and the Export-Import Bank of China and
apply for Software Export Contract Registration
Certificates in order to be entitled to tax refunds.
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.
On December 28, 2009, the Ministry of Commerce and the Ministry of Industry and Information
Technology promulgated the
Certain Provisions on Protection of Information of Service Outsourcing
Business Undertaken by Domestic Enterprises
, which became effective as of February 1, 2010.
According to these provisions, enterprises engaged in the information technology outsourcing and
technology business process outsourcing businesses shall establish an information protection system
and take various measures to keep clients’ confidential information secret, including causing their
employees to sign confidentiality agreements and non-competition agreements and third parties who
have access to clients’ confidential information to sign confidentiality agreements.
On January 28, 2011, the State Council issued the
Certain Policies in Further Encouraging the
Development of Software and Integrated Circuit Industry
(the “Further Encouraging Policy”) to
further promote the development of the software and integrated circuit industries in China.
Pursuant to the Further Encouraging Policy, relevant preferential treatment stipulated in the
Encouraging Policy, such as the “two-year EIT exemption and three-year 50% EIT reduction” for the
recognized software enterprise, continues to be implemented; while additional financial support and
tax incentives are adopted, such as that, the recognized software enterprise which engages in
software development and testing business, and related technology consultancy and maintenance
services is entitled to an exemption from business tax.
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.
46
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 hold trademark registrations for our trademarks, “VANCEINFO”
and
in China. One of our subsidiaries, TP Shanghai, holds a trademark registration for “
” in
China.
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.
On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the
Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of
Foreign Invested Enterprises, or SAFE Circular 142, a notice regulating the conversion by a
foreign-invested company of foreign currency into Renminbi by restricting how the converted
Renminbi may be used. SAFE Circular 142 requires that Renminbi converted from the foreign
currency-denominated registered capital of a foreign-invested company may only be used for purposes
within the company’s business scope approved by the applicable governmental authority and may not
be used for equity investments within the PRC unless specifically provided for otherwise in its
business scope. In addition, the SAFE strengthened its oversight of the flow and use of Renminbi
funds converted from the foreign currency-denominated registered capital of a foreign-invested
company. The use of such Renminbi may not be changed without approval from the SAFE, and may not in
any case be used to repay Renminbi loans if the proceeds of such loans have not yet been used.
47
Dividend Distribution.
The principal regulations governing distribution of dividends of foreign
holding companies include the Wholly Foreign Owned Enterprise Law (1986), as amended, and the
Administrative Rules under the Wholly Foreign Owned 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, and to set aside a certain amount of its after-tax profits each year, if any,
to fund its staff welfare fund. 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.
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 also required to make relevant registration procedures with their local SAFE
branch. 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.
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.
Employee Stock Option Plans.
On March 28, 2007, SAFE promulgated the Operating Procedures on
Administration of Foreign Exchange for PRC Individuals’ Participation in Employee Share Ownership
Plans and Employee Share Option Plans of Overseas Listed Companies, or the Share Option Rules.
Under the Share Option Rules, PRC citizens who are granted shares or share options by an
overseas-listed company according to its employee share option or share incentive plan are
required, through the PRC subsidiary of such overseas-listed company or other qualified PRC agents,
to register with SAFE and complete certain other procedures related to the share option or other
share incentive plan. In addition, the overseas-listed company or its PRC subsidiary or any other
qualified PRC agent is required to appoint an asset manager or administrator and a custodian bank,
and open special foreign currency accounts to handle transactions relating to the share option or
other share incentive plan. Failure to comply with such rules may subject such overseas-listed
company and the participants of its employee stock option plan who are PRC citizens to fines and
legal sanctions and prevent the overseas-listed company from further granting options under its
employee stock option plan to its employees.
48
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 M&A Rule, which
became effective on September 8, 2006. This 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, Fangda Partners, 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.
|
49
C.
Organizational Structure
The following diagram illustrates our corporate structure as of May 10, 2011:
50
|
|
|
|
|
(1)
|
|
VanceInfo Japan Inc., or VanceInfo Japan, formerly named Worksoft Japan Inc., has 1,400,000
outstanding shares, with 1,399,900 shares owned by VanceInfo, 100 shares owned by Mr. Xiaolai
Wang, a Chinese citizen.
|
|
|
|
(2)
|
|
VanceInfo Creative Software Technology Ltd., or VanceInfo Beijing, a Chinese limited
liability company, 100% owned by VanceInfo.
|
|
|
|
(3)
|
|
VanceInfo Technologies Inc., or VanceInfo US, formerly named Worksoft Creative Software
Technology Inc., a corporation incorporated under the laws of the State of Delaware in the
United States, 100% owned by VanceInfo.
|
|
|
|
(4)
|
|
VanceInfo Creative Software Technology Ltd., or VanceInfo BVI, formerly named Worksoft
Creative Software Technology Ltd., a holding company incorporated under the laws of the
British Virgin Islands, 100% owned by VanceInfo.
|
|
|
|
(5)
|
|
Nanjing VanceInfo Creative Software Technology Limited, or Nanjing VanceInfo, a Chinese
limited liability company, 100% owned by VanceInfo Beijing.
|
|
|
|
(6)
|
|
Shanghai VanceInfo Creative Software Technology Limited, or VanceInfo Shanghai Creative, a
Chinese limited liability company, 100% owned by VanceInfo Beijing.
|
|
|
|
(7)
|
|
Beijing Chosen Technology Co., Ltd., or Chosen, a Chinese limited liability company, 100%
owned by VanceInfo Beijing.
|
|
|
|
(8)
|
|
Shanghai VanceInfo Technologies Limited, or Shanghai VanceInfo, formerly named Shanghai
Solutions Software Co., Ltd., a Chinese limited liability company, 100% owned by VanceInfo
Beijing.
|
|
|
|
(9)
|
|
Beijing Viatt Information Technology Co. Ltd., or Beijing Viatt, a Chinese limited liability
company, 100% owned by VanceInfo Beijing.
|
|
|
|
(10)
|
|
VanceInfo Malaysia Inc. Sdn. Bhd., or VanceInfo Malaysia, a corporation incorporated under
the laws of Malaysia, 100% owned by VanceInfo BVI.
|
|
|
|
(11)
|
|
VanceInfo Technologies Limited, or VanceInfo Hong Kong, formerly named Worksoft Information
Technology Service Limited, a company incorporated under the laws of Hong Kong, 100% owned by
VanceInfo BVI.
|
|
|
|
(12)
|
|
TP Teleservices Limited, a company incorporated under the laws of Hong Kong, 100% owned by
VanceInfo BVI.
|
|
|
|
(13)
|
|
TP (Hong Kong) Limited, or TP Hong Kong, a company incorporated under the laws of Hong Kong,
100% owned by VanceInfo BVI.
|
|
|
|
(14)
|
|
TP Consultants Limited, a company incorporated under the laws of Hong Kong, 100% owned by
VanceInfo BVI.
|
|
|
|
(15)
|
|
TP (Taiwan) Limited, a company incorporated under the laws of Hong Kong, 100% owned by
VanceInfo BVI.
|
|
|
|
(16)
|
|
VanceInfo Technologies Limited, or VanceInfo Tianjin, a Chinese limited liability company,
100% owned by VanceInfo Hong Kong.
|
51
|
|
|
|
|
(17)
|
|
Shenzhen VanceInfo Creative Software Technology Limited, or VanceInfo Shenzhen, a Chinese
limited liability company, 100% owned by VanceInfo Hong Kong.
|
|
|
|
(18)
|
|
TP Software Technology (Shanghai) Co., Ltd., or TP Shanghai, a Chinese limited liability
company, 100% owned by TP Hong Kong.
|
|
|
|
(19)
|
|
Link Result Limited, or Link Result, a company incorporated under the laws of Hong Kong,
100% owned by VanceInfo BVI.
|
|
|
|
(20)
|
|
A-IT (Shanghai) Software Services Co., Ltd., or A-IT Shanghai, a Chinese limited liability
company, 100% owned by Link Result.
|
|
|
|
(21)
|
|
Lifewood Technology Limited, or Lifewood Technology, a company incorporated under the laws of
Hong Kong, 100% owned by VanceInfo BVI.
|
|
|
|
(22)
|
|
Lifewood Data Technology Limited, or Lifewood Data, a company incorporated under the laws of
Hong Kong, 100% owned by VanceInfo BVI.
|
|
|
|
(23)
|
|
Lifewood Data Technology (Shenzhen) Limited, or Lifewood Shenzhen, a Chinese limited
liability company, 100% owned by Lifewood Data.
|
|
|
|
(24)
|
|
Lifewood Data Technology (Dongguan) Limited, or Lifewood Dongguan, a Chinese limited
liability company, 100% owned by Lifewood Data.
|
D.
Property, Plants and Equipment
Our principal executive offices are located on premises comprising approximately 9,400 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 Greater China, the United States, Europe, Japan and
Malaysia under leases with terms ranging from one to six years.
The following table describes each of the leases for our headquarters and other major delivery
centers as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Space
|
|
|
|
|
Location
|
|
(in square meters)
|
|
|
Usage of Property
|
|
Beijing
|
|
|
26,368
|
*
|
|
Headquarters, General Administration
|
|
|
|
|
|
|
|
Globalization and Localization
|
|
|
|
|
|
|
|
ADM, R&D Services
|
|
Shanghai
|
|
|
16,797
|
*
|
|
ADM, Quality Assurance and Testing, R&D Services
|
|
Nanjing
|
|
|
14,181
|
*
|
|
R&D Services, Training
|
|
Hangzhou
|
|
|
5,000
|
|
|
R&D Services
|
|
Shenzhen
|
|
|
14,800
|
*
|
|
General Administration, ADM, R&D Services
|
|
Chengdu
|
|
|
1,300
|
|
|
R&D Services
|
|
Hong Kong
|
|
|
1,081
|
*
|
|
ADM, R&D Services
|
|
Xi’an
|
|
|
1,134
|
|
|
R&D Services
|
|
U.S.
|
|
|
753
|
*
|
|
R&D Service and Sales Office
|
|
|
|
|
|
*
|
|
The sum of space under multiple leases.
|
52
As of December 31, 2010, we had capacity for nearly 11,000 professionals and general and
administrative personnel at these facilities and we used approximately 70% of our existing office
space for our operations.
In November 2009, we entered into agreements regarding our proposed acquisition of the use right to
two parcels of land with 37,492 square meters of permitted floor space in Zhongguancun Software
Park, Haidian District, Beijing. We have paid approximately US$18.0 million relating to the land
use right as of December 31, 2010. We are currently applying for relevant governmental permits for
construction on these two parcels of land. The new office complex built on this premises will be
used as our new headquarters and research and development center to meet the demand arising from
our current and anticipated business expansion and headcount increase.
|
|
|
|
|
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 Greater China,
the United States, Europe and Japan, targeting selected industries with high growth potential for
IT services such as telecommunications, high technology, banking, financial services and insurance,
travel services, manufacturing, retail and distribution. We have a team of over 9,827 professionals
as of December 31, 2010 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 the United States, and in Japan.
Our net revenues grew from US$102.7 million in 2008 to US$211.6 million in 2010, representing a
CAGR of 43.5%. Our net income grew from US$16.1 million in 2008 to US$29.9 million in 2010,
representing a CAGR of 36.2%.
53
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.
|
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, globalization and
localization, as well as other solutions and services. We provide these services primarily to
corporations headquartered in Greater China, the United States, Europe and Japan.
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$102.7 million
in 2008 to US$148.1 million in 2009 and US$211.6 million in 2010.
We discuss below the breakdown of our net revenues by service lines, clients, and geographic
markets.
Net Revenues by Service Lines
We derive net revenues from the provision of our IT services, including R&D services, globalization
and localization, enterprise solutions, ADM, quality assurance and testing, as well as other
solutions and services.
Set forth below is our net revenue breakdown by service lines for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
|
|
|
|
R&D Outsourcing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D services
|
|
|
60,808
|
|
|
|
59.2
|
%
|
|
|
90,581
|
|
|
|
61.2
|
%
|
|
|
124,181
|
|
|
|
58.7
|
%
|
|
Globalization and localization
|
|
|
4,259
|
|
|
|
4.2
|
|
|
|
5,118
|
|
|
|
3.5
|
|
|
|
6,060
|
|
|
|
2.9
|
|
|
IT Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise solutions
|
|
|
13,542
|
|
|
|
13.2
|
|
|
|
14,429
|
|
|
|
9.7
|
|
|
|
19,725
|
|
|
|
9.3
|
|
|
ADM
|
|
|
17,061
|
|
|
|
16.6
|
|
|
|
26,373
|
|
|
|
17.8
|
|
|
|
43,825
|
|
|
|
20.7
|
|
|
Quality assurance and testing
|
|
|
6,717
|
|
|
|
6.5
|
|
|
|
7,807
|
|
|
|
5.3
|
|
|
|
13,003
|
|
|
|
6.2
|
|
|
Other Solutions and Services
|
|
|
276
|
|
|
|
0.3
|
|
|
|
3,758
|
|
|
|
2.5
|
|
|
|
4,756
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
102,663
|
|
|
|
100.0
|
%
|
|
|
148,066
|
|
|
|
100
|
%
|
|
|
211,550
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
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 2008 to 2010 as we increased our
efforts in these service lines. Our net revenues from globalization and localization, enterprise
solutions, and other solutions and services also increased in absolute numbers, but decreased as a
percentage of our total net revenues in 2010 compared to 2009. Our net revenues from quality
assurance and testing increased in both its absolute number and as a percentage of our total net
revenues in 2010 compared to 2009.
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 Expedia, Huawei,
Microsoft, TIBCO, and a European mobile handset manufacturer, and we commenced our relationships
with them in 2009, 2004, 1997, 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$44.4 million, or 43.2% of our total net revenues, in 2008, to US$117.5 million, or 55.5% of
our total net revenues, in 2010.
As illustrated in the table below, a significant proportion of our net revenues has been derived
from a limited number of clients. 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. In 2009,
each of Huawei, Microsoft and a European mobile handset manufacturer accounted for 10% or more of
our net revenues, and in the aggregate accounted for 47.0% of our net revenues. In 2010, each of
Huawei and Microsoft accounted for 10% or more of our net revenues, and in the aggregate accounted
for 37.8% of our net revenues.
We initially developed relationships with certain divisions of Microsoft 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 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$1 million in annual revenue increased
significantly from 16 for 2008 to 30 for 2010. The percentage of our net revenues derived from our
top five clients increased slightly to 56.3% in 2009 compared with 53.8% in 2008 and decreased
slightly to 55.5% in 2010. The percentage of our net revenues derived from our top ten clients
decreased from 68.6% in 2008 to 67.5% in 2009 and 66.5% in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
|
|
|
|
Clients accounting
for 10% or more of
our net revenues
|
|
|
39,880
|
|
|
|
38.8
|
%
|
|
|
69,633
|
|
|
|
47.0
|
%
|
|
|
79,921
|
|
|
|
37.8
|
%
|
|
Top five clients
|
|
|
55,240
|
|
|
|
53.8
|
|
|
|
83,300
|
|
|
|
56.3
|
|
|
|
117,478
|
|
|
|
55.5
|
|
|
Top 10 clients
|
|
|
70,449
|
|
|
|
68.6
|
|
|
|
99,936
|
|
|
|
67.5
|
|
|
|
140,606
|
|
|
|
66.5
|
|
55
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: Greater China, the United States, Europe and
Japan. We typically provide IT services to our clients to enhance and facilitate their operations
in Greater China. As the table below illustrates, a significant portion of our net revenues is
derived from clients headquartered in Greater China and the United States.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
(in US$ thousands, except for percentages)
|
|
|
|
|
|
|
Greater China
(1)
|
|
|
22,045
|
|
|
|
21.5
|
%
|
|
|
59,373
|
|
|
|
40.1
|
%
|
|
|
95,481
|
|
|
|
45.1
|
%
|
|
United States
(1)
|
|
|
56,175
|
|
|
|
54.7
|
|
|
|
56,634
|
|
|
|
38.3
|
|
|
|
70,955
|
|
|
|
33.6
|
|
|
Europe
(1)
|
|
|
14,991
|
|
|
|
14.6
|
|
|
|
23,148
|
|
|
|
15.6
|
|
|
|
32,178
|
|
|
|
15.2
|
|
|
Japan
(1)
|
|
|
9,157
|
|
|
|
8.9
|
|
|
|
8,466
|
|
|
|
5.7
|
|
|
|
9,889
|
|
|
|
4.7
|
|
|
Others
|
|
|
295
|
|
|
|
0.3
|
|
|
|
445
|
|
|
|
0.3
|
|
|
|
3,047
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
102,663
|
|
|
|
100.0
|
%
|
|
|
148,066
|
|
|
|
100.0
|
%
|
|
|
211,550
|
|
|
|
100.0
|
%
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(1)
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Countries or regions where the headquarters of our clients are located.
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While we expect that a substantial portion of our net revenues will continue to be derived from
strategic clients headquartered in Greater China and 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.
Cost of Revenues
Cost of revenues represented 61.3%, 62.2% and 62.9% of our net revenues for the years ended
December 31, 2008, 2009 and 2010, 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 2010, our compensation and benefit expenses, excluding
share-based compensation expenses, were US$107.1 million, compared to US$71.7 million in 2009 and
US$46.0 million in 2008. 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 entry level
professionals from outside the major cities in China, consolidate our CDCs across our business
units for better resources allocation and increase in college hires where compensation tends to be
lower. We seek to maintain compensation levels in accordance with
prevailing trends in our industry in China.
56
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 2010, we incurred a subcontracting
cost of US$15.9 million, compared to US$11.6 million in 2009 and US$10.4 million in 2008.
We incur travel expenses primarily due to our professionals’ traveling to perform onsite work for
projects. In 2010, our travel expenses were US$4.9 million, compared to US$4.3 million in 2009 and
US$3.2 million in 2008. We expect our travel expenses to increase as our overseas onshore services
and enterprise solutions services provided to domestic clients grow. We plan to explore
opportunities to establish additional overseas delivery offices, expand onshore delivery teams 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
Selling, General and Administrative Expenses
Selling, general and administrative expenses represented 25.2%, 23.4% and 24.5%, of our net
revenues for the years ended December 31, 2008, 2009 and 2010, respectively. Selling, general and
administrative expenses consist primarily of compensation and benefit expenses, including
share-based compensation expenses, relating to our personnel, rental expenses, depreciation and
amortization expenses and overhead expenses, travel and advertising expenses, selling and
marketing-related office expenses. Selling, general and administrative expenses also include legal
and other professional fees and miscellaneous administrative costs. We expect our selling, general
and administrative expenses to increase as we hire additional personnel, increase our sales efforts
and target new markets, establish new sales offices both in China and overseas, invest in research
and development of solutions for our internal usage, upgrade our ERP system, enhance management
training, initiate additional marketing programs to further build our brand, and incur additional
expenses to support our operations as a public company, including compliance-related costs.
57
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 increase of 3% 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 1,353,680, 235,874 and 1,075,214 ordinary shares to
our directors, officers and other employees in 2008, 2009 and 2010. As of December 31, 2010, there
were 1,401,028 ordinary shares issuable upon exercise of outstanding options under our 2005 Stock
Plan, as amended, and 2,279,507 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.
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For the Year Ended December 31,
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2008
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2009
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2010
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(in US$ thousands)
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Share-based compensation expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
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Cost of revenues
|
|
|
265
|
|
|
|
313
|
|
|
|
492
|
|
|
Selling, general and administrative expenses
|
|
|
1,126
|
|
|
|
1,252
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|
|
|
2,755
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Total
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1,391
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|
|
|
1,565
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|
|
|
3,247
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As of December 31, 2010, the unamortized compensation expenses in connection with our outstanding
options and restricted share units were US$8.1 million.
Other Operating Income
Other operating income primarily relates 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.
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.
United States
VanceInfo US and WIT were subject to a progressive federal income tax rate from 15% to 35%
depending on the income level and a state income tax rate at 8.84% for the years of 2008, 2009 and
2010.
58
British Virgin Islands
Under the current laws of the British Virgin Islands, VanceInfo BVI is not subject to British
Virgin Islands tax on income or capital gains. In addition, payment of dividends is not subject to
withholding tax in the British Virgin Islands.
Hong Kong
TP Hong Kong, TP (Taiwan) Limited and TP Teleservices Limited were subject to profit tax rate of
16.5% for 2009 and 2010.
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 entitled to enjoy a
7.5% EIT rate from 2008 to 2010. Prosoft and ITC were entitled to enjoy a 7.5% EIT rate from 2007
to 2009.
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 Administrative 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 set forth by certain
departments of the State Council.
59
VanceInfo Beijing was qualified as a “high and new technology enterprise” with a valid term of
three years in December 2008 and is entitled to the preferential EIT rate of 7.5% from 2008 to
2010. On April 21, 2010, the
State Administration of Taxation issued Circular 157, which provides additional guidance on the
interaction of certain preferential tax rates under the transitional rules of the new EIT Law.
Prior to Circular 157, we understood that if a high and new technology enterprise was in a tax
holiday period, when it was entitled to a 50% reduction in the EIT rate and it was also entitled to
a 15% preferential EIT rate for a high and new technology enterprise, it would be entitled to pay
EIT at the rate of 7.5%. Circular 157 appears on its face to have the effect that such an entity is
entitled to pay taxes at either the lower of 15% or 50% of the applicable EIT rate (in terms of a
foreign-invested high and new technology enterprise located in the Beijing New Industry Development
Pilot Zone such as VanceInfo Beijing, 18% for 2008, 20% for 2009, 22% for 2010, 24% for 2011 and
25% starting from 2012). However, to date, Beijing local-level tax bureau has not implemented
Circular 157 and is holding the view that the relevant provisions may not apply to high and new
technology enterprises in Beijing New Industry Development Pilot Zone. Therefore, VanceInfo
Beijing’s current tax rate remained unchanged. However, if the relevant tax authorities issue more
guidance on the implementation of Circular 157 or implementing Circular 157 more strictly in the
future, VanceInfo Beijing’s effective tax rate may increase. Shanghai VanceInfo was qualified as a
“high and new technology enterprise” in December 2008, which entitled it to a 15% preferential EIT
rate in 2008, and was further recognized as a “key software enterprise under the State plan” in
December 2009, which entitled it to enjoy a 10% preferential EIT rate in 2009. Shanghai Vanceinfo
was entitled to enjoy a 15% preferential EIT rate in 2010 due to its status as a “high and new
technology enterprise” and we are in the process of obtaining the 10% preferential EIT rate for
Shanghai VanceInfo. TP Shanghai, which we acquired in July 2009, was qualified as a “high and new
technology enterprise” in December 2008 with a valid term of three years and is entitled to the
preferential tax rate of 15% in 2009 and 2010. Nanjing VanceInfo was recognized as a “software
enterprise” in 2009 and was entitled to be exempted from EIT in 2009 and 2010 and a 50% reduction
of its applicable EIT rate with the reduced applicable EIT rate of 12.5% from 2011 to 2013. A-IT
Shanghai became one of our wholly owned subsidiaries in 2010. A-IT Shanghai was incorporated in
2002 and was recognized as a “software enterprise” in 2007, and therefore, it was entitled to be
exempted from EIT in 2007 and 2008, and was entitled to a 50% tax reduction of its applicable EIT
rate with the reduced applicable EIT rate of 10%, 11%, and 12% in 2009, 2010, and 2011, respectively. We are also in the process of obtaining the 15%
preferential EIT rate for VanceInfo Shenzhen. However, continued qualification as a “high and new technology
enterprise” is subject to a review every three years by the relevant government authorities in
China, and in practice certain local tax authorities also require annual evaluation of the
qualification; continued qualification as a “key software enterprise under the State plan” or
“software enterprise” is subject to an annual assessment by the relevant government authorities in
China. Consequently, there is no assurance that our subsidiaries will continue to meet the
qualifications or that the relevant government authorities will not revoke our
subsidiaries’ “high and new technology enterprise”, “key software enterprise
under the State plan”, or “software enterprise” statuses in the future. 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. Our other subsidiaries located in the PRC were subject to a 25% EIT rate
for the year ended December 31, 2008, 2009 and 2010.
60
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. The Circular 82, which was issued by the State Administration of
Taxation on April 22, 2009, provides certain specific criteria for determining whether the “de
facto management body” of a Chinese-controlled offshore incorporated enterprise is located in
China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not
those invested in by PRC individuals, like our company, the determining criteria set forth in
Circular 82 may reflect the State Administration of Taxation’s general position on how the “de
facto management body” test should be applied in determining the tax resident status of offshore
enterprises, regardless of whether they are controlled by PRC enterprises or controlled by or
invested in by PRC individuals. 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, were
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. TP Hong Kong, our wholly
owned subsidiary and the direct holder of a 100% equity interest in TP Shanghai, is incorporated in
Hong Kong. Link Result, our wholly owned subsidiary and the direct holder of a 100% equity interest
in A-IT Shanghai, is also incorporated in Hong Kong. Lifewood Data, our wholly owned subsidiary and
the direct holder of a 100% equity interest in Lifewood Shenzhen and Lifewood Dongguan, 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 each of VanceInfo Hong Kong, TP Hong Kong, Link Result or Lifewood Data
is regarded as a resident enterprise, the dividends payable to VanceInfo Hong Kong from VanceInfo
Tianjin and VanceInfo Shenzhen, dividends payable to TP Hong Kong from TP Shanghai, dividends
payable to Link Result from A-IT Shanghai, and dividends payable to Lifewood Data from Lifewood
Shenzhen and Lifewood Dongguan will be exempt from PRC income tax. If each of VanceInfo Hong Kong,
TP Hong Kong, Link Result or Lifewood Data is regarded as a non-resident enterprise, subject to the
confirmation of the local tax authorities, a 5% withholding tax will be imposed for any dividends
payable to VanceInfo Hong Kong from VanceInfo Tianjin and VanceInfo Shenzhen, any dividends payable
to TP Hong Kong from TP Shanghai, any dividends payable to Link Result from A-IT Shanghai, and any
dividends payable to Lifewood Data from Lifewood Shenzhen and Lifewood Dongguan.
61
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 located in the
PRC that are available for distribution to us of approximately US$77.8 million at December 31, 2010
are considered to be indefinitely reinvested, and accordingly, no provision has been made for the
Chinese dividend withholding taxes as of December 31, 2010.
Furthermore, the State Administration of Taxation promulgated the Circular 601 on October 27, 2009,
which provides guidance for determining whether a resident of a contracting state is the
“beneficial owner” of an item of income under China’s tax treaties and tax arrangements. According
to Circular 601, a beneficial owner generally must be engaged in substantive business activities.
An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not
qualify for treaty benefits. The conduit company normally refers to a company that is set up for
the purpose of avoiding or reducing taxes or transferring or accumulating profits. We cannot assure
you that our subsidiaries in Hong Kong will not be deemed as conduit companies, or any dividends to
be distributed by us to our non-PRC shareholders and ADS holders whose jurisdiction of
incorporation has a tax treaty with China providing for a different withholding arrangement will be
entitled to the benefits under the relevant withholding arrangement.
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.
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, VanceInfo Shanghai Creative, Nanjing VanceInfo, A-IT
Shanghai, VanceInfo Shenzhen and TP Shanghai, 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.
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.
62
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.
Research and development outsourcing services and IT services
We primarily derive revenues from provision of research and development outsourcing services and 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.
The remaining revenues are earned from fixed-price services 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.
Reimbursable out-of-pocket expenses and material costs are recognized as revenues when billed. 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.
Other solutions
We derive revenues from providing system integration solutions, which normally include the
procurement of hardware on behalf of clients and customized software licenses, implementation of
the software and hardware, and post contract customer support, or PCS, including telephone support
and on-site support.
We have established the vender-specific objective evidence, or VSOE, of fair value of the PCS based
on standalone sales on regular basis and therefore treat the arrangements as two units of
accounting, which are (1) hardware and software implementation and (2) PCS. Revenues of the
hardware and software implementation are primarily recognized using percentage-of-completion method
measured based on the relationship of costs already incurred to the total estimated costs to be
incurred. We consider labor costs and
other direct contract costs in calculating the percentage of completion. Revenues of the PCS are
recognized ratably over the PCS period.
63
In an arrangement with a software deliverable, we have considered whether the software is more than
incidental to the arrangement as a whole. As the software deliverable is essential to the
functionality of other deliverables as well as the system as a whole, we believe software
deliverables in our multiple-element arrangements are more than incidental, and therefore
authoritative accounting literatures in relation to software revenue recognition apply. We treat
the non-software deliverables (i.e., third-party hardware) as software related elements because the
software deliverable is essential to the functionality of the non-software deliverables and the
acceptance of the non-software deliverables by customers are subject to the acceptance of software
deliverables.
In addition, we performed a few contracts which involved initial IT services, software resale, and
maintenance service which is considered PCS for the three years period ended December 31, 2010.
Since we did not establish the VSOE of the fair value of each element of these contracts, the
contract amounts were recognized as revenues ratably over the period of PCS, which was the last
undelivered element in the arrangements.
Income taxes
Deferred income taxes are recognized for temporary differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements, net operating loss carry
forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Current
income taxes are provided for in accordance with the laws of the relevant tax authorities. The
components of the deferred tax assets and liabilities are individually classified as current and
non-current based on their characteristics.
The impact of an uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. We classify interest and penalties, if any, as a component of our
income tax provision.
Share-based compensation
In 2008, 2009 and 2010, 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
3,322,628 ordinary shares and had 357,907 restricted share units as of December 31, 2010. See Item
6, “Directors, Senior Management and Employees—Compensation— Share Incentive Plans.”
We 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). 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. The estimate of forfeitures will be adjusted over the requisite
service period to the extent that actual forfeitures differ, or are expected to differ, from
such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up
adjustment in the period of change.
64
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 and allowance for doubtful accounts
Our accounts receivable as of December 31, 2008, 2009 and 2010 were US$36.8 million, US$60.5
million and US$85.4 million, respectively. Our advance from customers as of December 31, 2008, 2009
and 2010 were US$0.7 million, US$0.6 million and US$1.2 million, respectively. Our deferred
revenues as of December 31, 2008, 2009 and 2010 were nil, US$2.7 million and US$1.3 million,
respectively. Our days of sales outstanding in 2008, 2009 and 2010 were 104, 112 and 118 days,
respectively. We calculate our days of sales outstanding by dividing the average accounts
receivable, net of average advance from clients and average deferred revenues, by gross revenues
before business tax 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 2008, 2009 and 2010, the provision made for
doubtful accounts was US$0.6 million, US$1.0 million and US$2.0 million, respectively. If the
frequency and amount of customer defaults change due to our clients’ financial condition or general
economic conditions, our allowance for uncollectible accounts may require adjustment. As a result,
we continuously monitor outstanding receivables and adjust allowances for accounts where collection
may be in doubt.
65
The following table presents a profile of our accounts receivable in terms of days for which
accounts receivable were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(in US$ thousands)
|
|
|
Period in days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-90
|
|
|
35,351
|
|
|
|
47,505
|
|
|
|
59,105
|
|
|
91-180
|
|
|
1,066
|
|
|
|
11,893
|
|
|
|
14,912
|
|
|
More than 180
|
|
|
410
|
|
|
|
1,126
|
|
|
|
11,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,827
|
|
|
|
60,524
|
|
|
|
85,437
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combinations
We account for acquired businesses using the purchase method of accounting. On January 1, 2009, we
adopted a new accounting pronouncement with prospective application which made certain changes to
the previous authoritative literature on business combinations. From January 1, 2009, the assets
acquired, the liabilities assumed, and any noncontrolling interest of the acquiree at the
acquisition date, if any, are measured at their fair values as of that date. Goodwill is recognized
and measured as the excess of the total consideration transferred plus the fair value of any
noncontrolling interest of the acquiree, if any, at the acquisition date over the fair values of
the identifiable net assets acquired. Previously, any non-controlling interest was reflected at
historical cost. Common forms of the consideration made in acquisitions include cash and common
equity instruments. Consideration transferred in a business acquisition is measured at the fair
value as at the date of acquisition. For shares issued in a business combination, we have estimated
the fair value as of the date of acquisition.
Where the consideration in an acquisition includes contingent consideration, the payment of which
depends on the achievement of certain specified conditions post-acquisition, from January 1, 2009,
the contingent consideration is recognized and measured at its fair value at the acquisition date
and if recorded as a liability, it is subsequently carried at fair value with changes in fair value
reflected in earnings. For periods prior to January 1, 2009, contingent consideration was not
recorded until the contingency was resolved.
Impairment of goodwill and indefinite-lived intangible assets
We annually, or more frequently if we believe indicators of impairment exist, review the carrying
value of intangible assets not subject to amortization, including goodwill, to determine whether
impairment may exist.
Specifically, goodwill impairment is determined using a two-step process. The first step compares
the fair value of each reporting unit to its carrying amount, including goodwill. If the fair value
of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and
the second step will not be required. If the carrying amount of a reporting unit exceeds its fair
value, the second step compares the implied fair value of 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.
66
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.
We determine the entities which have similar economic characteristics as a reporting unit and
perform our annual goodwill and indefinite-lived intangible assets impairment test on the last day
of each fiscal year. We did not incur any impairment loss on goodwill or other intangible assets
not subject to amortization for the years ended December 31, 2008, 2009 or 2010.
Recently issued accounting standards
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair value
measurements. This guidance amends previous guidance on fair value measurements to add new
requirements for disclosures about transfers into and out of Levels 1 and 2 and separate
disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurement on a
gross basis rather than on a net basis as currently required. This guidance also clarifies
existing fair value disclosures about the level of disaggregation and about inputs and valuation
techniques used to measure fair value. This guidance is effective for annual and interim periods
beginning after December 15, 2009, except for the requirement to provide the Level 3 activities of
purchases, sales, issuances, and settlements on a gross basis, which will be effective for annual
and interim periods beginning after December 15, 2010. Early application is permitted and, in the
period of initial adoption, entities are not required to provide the amended disclosures for any
previous periods presented for comparative purposes. We do not expect the adoption of this
pronouncement to have a significant impact on our financial condition or results of operations.
In April 2010, the FASB issued an authoritative pronouncement on milestone method of revenue
recognition. The scope of this pronouncement is limited to arrangements that include milestones
relating to research or development deliverables. This pronouncement specifies guidance that must
be met for a vendor to recognize consideration that is contingent upon achievement of a substantive
milestone in its entirety in the period in which the milestone is achieved. The guidance applies to
milestones in arrangements within the scope of this consensus regardless of whether the arrangement
is determined to have single or multiple deliverables or units of accounting. The pronouncement
will be effective for fiscal years, and interim periods within those years, beginning on or after
June 15, 2010. Early application is permitted. Companies can apply this guidance prospectively to
milestones achieved after adoption. However, retrospective application to all prior periods is also
permitted. We do not expect the adoption of this pronouncement to have a significant effect on our
financial position or results of operations.
67
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2 of the
goodwill impairment test for reporting units with zero or negative carrying amounts. The amendments
in this update modify Step 1 so that for those reporting units, an entity is required to perform
Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment
exists. In determining whether it is more likely than not that a goodwill impairment exists, an
entity should consider whether there are any adverse qualitative factors indicating that an
impairment may exist. The qualitative factors are consistent with existing guidance, which requires
that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. For public entities, the guidance is effective for impairment tests
performed during
entities’ fiscal years (and interim periods within those years) that begin after December 15, 2010.
Early adoption will not be permitted. For nonpublic entities, the guidance is effective for
impairment tests performed during entities’ fiscal years (and interim periods within those years)
that begin after December 15, 2011. Early application for nonpublic entities is permitted;
nonpublic entities that elect early application will use the same effective date as that for public
entities. We do not expect the adoption of this guidance would have a significant effect on our
consolidated financial position or results of operations.
In December 2010, the FASB issued an authoritative pronouncement on disclosure of supplementary pro
forma information for business combinations. The objective of this guidance is to address diversity
in practice regarding the interpretation of the pro forma revenue and earnings disclosure
requirements for business combinations. The amendments in this update specify that if a public
entity presents comparative financial statements, the entity should disclose revenue and earnings
of the combined entity as though the business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual reporting period only. The
amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable t the
business combination included in the reported pro forma revenue and earnings. The amendments affect
any public entity as defined by Topic 805 that enters into business combinations that are material
on an individual or aggregate basis. The amendments will be effective for business combinations
consummated in periods beginning after December 15, 2010, and should be applied prospectively as of
the date of adoption. Early adoption is permitted. We do not expect the adoption of this guidance
would have a significant effect on our consolidated financial position or results of operations.
68
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,
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
(as adjusted)
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(in US$ thousands)
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
102,663
|
|
|
|
148,066
|
|
|
|
211,550
|
|
|
Cost of revenues
|
|
|
(62,911
|
)
|
|
|
(92,171
|
)
|
|
|
(132,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39,752
|
|
|
|
55,895
|
|
|
|
78,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
|
(25,905
|
)
|
|
|
(34,710
|
)
|
|
|
(51,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(25,905
|
)
|
|
|
(34,710
|
)
|
|
|
(51,901
|
)
|
|
Change in fair value of contingent
consideration payable for business
acquisitions
|
|
|
—
|
|
|
|
(62
|
)
|
|
|
221
|
|
|
Other operating income
|
|
|
858
|
|
|
|
1,754
|
|
|
|
4,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,705
|
|
|
|
22,877
|
|
|
|
31,871
|
|
|
Interest income
|
|
|
2,028
|
|
|
|
856
|
|
|
|
782
|
|
|
Interest expense
|
|
|
(69
|
)
|
|
|
(86
|
)
|
|
|
(85
|
)
|
|
Exchange differences
|
|
|
703
|
|
|
|
(119
|
)
|
|
|
(950
|
)
|
|
Gain on re-measurement of fair
value of noncontrolling equity
investment in connection with
business acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
earnings in equity method
investment
|
|
|
17,367
|
|
|
|
23,528
|
|
|
|
32,230
|
|
|
Income tax expense
|
|
|
(1,298
|
)
|
|
|
(2,089
|
)
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before earnings in equity
method investment
|
|
|
16,069
|
|
|
|
21,439
|
|
|
|
29,712
|
|
|
Earnings in equity method investment
|
|
|
20
|
|
|
|
69
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,089
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Net loss attributable to
noncontrolling interest
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
Income attributable to VanceInfo
Technologies Inc. shareholders
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
69
The following table sets forth certain financial information as a percentage of our net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
(as adjusted)
|
|
|
2009
|
|
|
2010
|
|
|
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of revenues
|
|
|
(61.3
|
)
|
|
|
(62.2
|
)
|
|
|
(62.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
38.7
|
|
|
|
37.8
|
|
|
|
37.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
|
(25.2
|
)
|
|
|
(23.4
|
)
|
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(25.2
|
)
|
|
|
(23.4
|
)
|
|
|
(24.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent
consideration payable for business
acquisitions
|
|
|
—
|
|
|
|
(*
|
)
|
|
|
0.1
|
|
|
Other operating income
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14.3
|
|
|
|
15.5
|
|
|
|
15.1
|
|
|
Interest income
|
|
|
2.0
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(*
|
)
|
|
Exchange differences
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
Gain on re-measurement of fair
value of noncontrolling equity
investment in connection with
business acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxs and
earnings in equity method
investment
|
|
|
16.9
|
|
|
|
15.9
|
|
|
|
15.3
|
|
|
Income tax expense
|
|
|
(1.2
|
)
|
|
|
(1.4
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before earnings in equity
method investment
|
|
|
15.7
|
|
|
|
14.5
|
|
|
|
14.1
|
|
|
Earnings in equity method investment
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
15.7
|
|
|
|
14.5
|
|
|
|
14.1
|
|
|
Net loss attributable to
noncontrolling interest
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
Income attributable to VanceInfo
Technologies Inc. shareholders
|
|
|
15.8
|
%
|
|
|
14.5
|
%
|
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net Revenues
Our net revenues were US$211.6 million in 2010, representing an increase of 42.9% from our net
revenues of US$148.1 million in 2009. The growth in our net revenues was primarily due to an
increase in sales volumes, which was due primarily to a US$54.0 million increase in our sales to
our existing clients as of December 31, 2009, as a result of our enhanced relationships with these
clients, and US$9.5 million of sales to new clients. The number of our clients increased to 327 for 2010 from 272 for 2009. 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 30 for 2010 from 22 for 2009.
70
Cost of Revenues
In 2010, our cost of revenues was US$133.0 million, representing an increase of 44.3% from US$92.2
million in 2009. Cost of revenues represented 62.2% and 62.9% of our net revenues in 2009 and 2010,
respectively. The increase was primarily due to an increase in compensation and benefit expenses of
our professionals and, to a lesser extent, due to an increase in subcontracting costs as explained
further below.
In 2010, our compensation and benefit expenses in respect of our professionals, excluding
share-based compensation expenses, increased by 49.3% to US$107.1 million from US$71.7 million in
2009, primarily due to an increase in our number of professionals. Our cost of revenues in 2010 and
2009 also included US$0.5 million and US$0.3 million, respectively, of share-based compensation
expenses arising from share options and restricted share units granted to our professionals.
Our subcontracting costs increased to US$15.9 million in 2010 from US$11.6 million in 2009,
primarily due to increases in business volumes and project scale.
Our travel expenses in cost of revenues increased slightly to US$4.9 million in 2010 from US$4.3
million in 2009. Our depreciation and amortization expenses included in cost of revenues increased
slightly to US$1.7 million in 2010 from US$1.5 million in 2009.
Gross Profit
Our gross profit in 2010 was US$78.6 million, representing an increase of 40.6% from US$55.9
million in 2009. Gross profit as a percentage of our net revenues decreased slightly to 37.1% in
2010 from 37.8% in 2009.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were US$51.9 million in 2010, representing an
increase of 49.5% from US$34.7 million in 2009.
Compensation and benefit expenses in respect of selling, general and administrative employees,
excluding share-based compensation expenses, increased by 48.8% to US$21.2 million in 2010 from
US$14.3 million in 2009, primarily as we hired more selling, general and administrative employees
and their average salary increased. Our selling, general and administrative expenses in 2010 also
included US$2.8 million of share-based compensation expenses arising from share options granted to
our selling, general and administrative employees compared to US$1.3 million of share-based
compensation expenses in 2009. Rental and utilities expenses increased to US$9.6 million in 2010
from US$6.5 million in 2009, primarily due to our entering into new leases in major cities across
China. Our amortization and depreciation expenses increased to US$6.4 million in 2010 from US$4.5
million in 2009 as a result of increase in our capital expenditures in 2010 and our acquisitions in
2009 and 2010. Our travel and advertising expenses also increased in 2010 compared to 2009
primarily due to enhanced marketing efforts.
71
Other Operating Income
Other operating income was generated primarily from government subsidies. In 2010, our government
subsidies were US$4.6 million, an increase from US$1.5 million in 2009. In 2009 and 2010, we were
granted government subsidies for obtaining certain technical certifications, improving our internal
process management system and hiring and training new employees with college degrees.
Income from Operations
Our income from operations was US$31.9 million in 2010, representing an increase of 39.3% from
US$22.9 million in 2009. The increase was due to our higher net revenues in 2010 compared to 2009,
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 15.1% in 2010
from 15.5% in 2009.
Interest Income
Our interest income decreased slightly to US$0.8 million in 2010 from US$0.9 million in 2009.
Foreign Exchange Gain (Loss)
For 2010, we incurred foreign exchange loss of US$1.0 million, as compared to foreign exchange loss
of US$0.1 million for 2009. Our foreign exchange loss in 2010 was largely due to the fluctuation of
the Japanese yen.
Income Tax Expense
Our income tax expense increased to US$2.5 million for 2010 from US$2.1 million for 2009, primarily
due to an increase in taxable income and partially offset by a decrease in effective tax rate from
8.9% in 2009 to 7.8% in 2010.
Earnings in equity investment
We invested in Link Result in 2008 and account for our investment in Link Result under the equity
method before our acquisition of the remaining 67% in July 2010. In September 2010, we invested in
20% equity interest in Salsatec and account for our investment in Salsatec under the equity method.
For 2010, we shared earnings in Link Result and Salsatec in the amount of US$0.2 million.
Net Income
As a result of the foregoing, our net income was US$29.9 million in 2010, representing an increase
of 38.8% from US$21.5 million in 2009. Net income as a percentage of our net revenues decreased
slightly to 14.1% in 2010 from 14.5% in 2009.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Our results of operations for the year ended December 31, 2009 compared to the year ended December
31, 2008 were impacted by the inclusion in the operating results for 2009 of our acquisition of TP
Companies, which we acquired in July 2009.
72
Net Revenues
Our net revenues were US$148.1 million in 2009, representing an increase of 44.2% from our net
revenues of US$102.7 million in 2008. The growth in our net revenues was primarily due to an
increase in sales volumes, which was due primarily to a US$31.1 million increase in our sales to
our existing clients as of December 31, 2008, as a result of our enhanced relationships with these
clients, and US$14.3 million of sales to new clients. The number of our clients increased to 272
for 2009 from 241 for 2008. 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 22 for 2009 from 18
for 2008.
We hired approximately 230 professionals through our acquisition of TP Companies in 2009. This
acquisition strengthened our capabilities and expertise in call center CRM solutions and call
center services.
Cost of Revenues
In 2009, our cost of revenues was US$92.2 million, representing an increase of 46.5% from US$62.9
million in 2008. Cost of revenues represented 61.3% and 62.2% of our net revenues in 2008 and 2009,
respectively. The increase was primarily due to an increase in compensation and benefit expenses of
our professionals as explained further below.
In 2009, our compensation and benefit expenses in respect of our professionals, excluding
share-based compensation expenses, increased by 55.8% to US$71.7 million from US$46.0 million in
2008, primarily due to an increase in our number of professionals. Our cost of revenues in 2009 and
2008 also included US$0.3 million and US$0.3 million, respectively, of share-based compensation
expenses arising from share options and restricted share units granted to our professionals.
Our subcontracting costs increased to US$11.6 million in 2009 from US$10.4 million 2008, primarily
due to increases in business volumes and project scale. Our travel expenses in cost of revenues
increased to US$4.3 million in 2009 from US$3.2 million in 2008, primarily due to the growth in our
overseas onsite services and enterprise solutions services provided to domestic clients.
Our depreciation and amortization expenses included in cost of revenues increased to US$1.5 million
in 2009 from US$0.9 million in 2008, 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 2009 was US$55.9 million, representing an increase of 40.6% from US$39.8
million in 2008. Gross profit as a percentage of our net revenues decreased slightly to 37.8% in
2009 from 38.7% in 2008.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses were US$34.7 million in 2009, representing an
increase of 34.0% from US$25.9 million in 2008.
73
Compensation and benefit expenses in respect of selling, general and administrative employees,
excluding share-based compensation expenses, increased by 38.4% to US$14.3 million in 2009 from
US$10.3 million in
2008, primarily as we hired more selling, general and administrative employees and their average
salary increased. Our selling, general and administrative expenses in 2009 also included US$1.3
million of share-based compensation expenses arising from share options granted to our selling,
general and administrative employees compared to US$1.1 million of share-based compensation
expenses in 2008. Rental and utilities expenses increased to US$6.5 million in 2009 from US$4.5
million in 2008, primarily due to our entering into new leases in major cities across China. Our
amortization and depreciation expenses increased to US$4.5 million in 2009 from US$3.0 million in
2008 as a result of increase in our capital expenditures in 2009 and our acquisitions in 2008 and
2009. Our travel and advertising expenses also increased in 2009 compared to 2008 primarily due to
enhanced marketing efforts.
Other Operating Income
Other operating income was generated primarily from government subsidies. In 2009, our government
subsidies were US$1.5 million, an increase from US$0.8 million in 2008. In 2008 and 2009, we were
granted government subsidies for obtaining certain technical certifications, improving our internal
process management system and hiring and training new employees with college degrees.
Income from Operations
Our income from operations was US$22.9 million in 2009, representing an increase of 55.6% from
US$14.7 million in 2008. The increase was due to our higher net revenues in 2009 compared to 2008,
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 increased to 15.5% in 2009 from
14.3% in 2008.
Interest Income
Our interest income decreased to US$0.9 million in 2009 from US$2.0 million in 2008. The decrease
was primarily due to decrease of the bank interest rate in 2009 compared to 2008.
Foreign Exchange Gain (Loss)
For 2009, we incurred foreign exchange loss of US$0.1 million, as compared to foreign exchange gain
of US$0.7 million for 2008. Our foreign exchange loss in 2009 was largely due to the fluctuation of
the Japanese yen.
Income Tax Expense
Our income tax expense increased to US$2.1 million for 2009 from US$1.3 million for 2008, primarily
due to an increase in effective tax rate from 7.5% in 2008 to 8.9% in 2009 and an increase in
taxable income.
Earnings in equity investment
We invested in Link Result in 2008 and account for our investment in Link Result under the equity
method. For 2009, we shared earnings in Link Result in the amount of US$69,000.
Net Income
As a result of the foregoing, our net income was US$21.5 million in 2009, representing an increase
of 33.7%
from US$16.1 million in 2008. Net income as a percentage of our net revenues decreased to 14.5% in
2009 from 15.7% in 2008.
74
B.
Liquidity and Capital Resources
Cash Flows and Working Capital
Our operations and growth have been financed by cash generated from operations and from our public
offering proceeds. As of December 31, 2010, we had US$161.3 million in cash and cash equivalents,
compared to US$64.1 million as of December 31, 2009 and US$80.0 million as of December 31, 2008.
The increase in our cash and cash equivalents from December 31, 2009 to December 31, 2010 was
primarily due to cash flows from our expanded operation in 2010 and our follow-on public offering
in November 2010. The decrease in our cash and cash equivalents from December 31, 2008 to December
31, 2009 was primarily due to the short-term investments in marketable debt securities.
Our working capital as of December 31, 2008, 2009 and 2010 was US$99.6 million, US$121.5 million
and US$224.5 million, respectively. We had US$1.5 million, nil and US$3.0 million in outstanding
bank borrowings as of such dates.
The following table shows our cash flows with respect to operating activities, investing activities
and financing activities in 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(in US$ thousands)
|
|
|
Net cash provided by operating activities
|
|
|
15,404
|
|
|
|
11,925
|
|
|
|
11,554
|
|
|
Net cash used in investing activities
|
|
|
(10,128
|
)
|
|
|
(30,483
|
)
|
|
|
(11,339
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,826
|
)
|
|
|
2,673
|
|
|
|
96,225
|
|
|
Effect of exchange rate changes
|
|
|
678
|
|
|
|
(21
|
)
|
|
|
768
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,450
|
|
|
|
(15,885
|
)
|
|
|
96,440
|
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
76,835
|
|
|
|
79,963
|
|
|
|
64,057
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
79,963
|
|
|
|
64,057
|
|
|
|
161,265
|
|
Operating Activities
Net cash provided by operating activities for 2010 amounted to US$11.6 million. Net cash provided
by operating activities for 2010 was primarily attributable to net income of US$29.9 million;
partly 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$148.1 million for 2009 to US$211.6 million for 2010, 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$173.1 million for 2010 from US$118.9 million for 2009. As of
December 31, 2010, our days of sales outstanding were 118 days, as compared to 112 days at the end
of the year 2009.
Net cash provided by operating activities for 2009 amounted to US$11.9 million. Net cash provided
by operating
activities for 2009 was primarily attributable to net income of US$21.5 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$102.7 million for 2008 to US$148.1 million for 2009, 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$118.9 million for 2009 from US$83.5 million for 2008. As of December 31,
2009, our days of sales outstanding were 112 days, as compared to 104 days at the end of the year
2008.
75
Net cash provided by operating activities for 2008 amounted to US$15.4 million. Net cash provided
by operating activities for 2008 was primarily attributable to net income of US$16.1 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 104 days, as compared to 103 days at the end
of the year 2007.
Investing Activities
Net cash used in investing activities was US$11.3 million for 2010, primarily attributable to
US$16.8 million for purchase of investment-held-to-maturity securities, US$11.7 million for
purchase of property and equipment, partly offset by US$13.6 million in proceeds from maturity of
investment and US$5.0 million in cash received upon maturity of term deposit. Net cash used in
purchase of property and equipment was primarily due to purchase of fixed assets and improvement of
leased premises to satisfy the need from an increasing number of our professionals in 2010.
Net cash used in investing activities was US$30.5 million for 2009, primarily attributable to
US$12.1 million for purchase of short-term investment, US$10.0 million for purchase of term deposit,
US$6.4 million for purchase of property and equipment and US$3.5 million of consideration paid for
business acquisitions, partly offset by US$1.5 million in cash received upon maturity of term deposit. 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 2009. Net cash paid for business acquisitions was primarily for our
acquisitions of Kernel and a professional team of engineers and certain business and assets from a
China-based mobile service provider and additional consideration paid in relation to our
acquisitions of WIT, Tianchuang and Chosen.
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. 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.
76
Financing Activities
Net cash provided by financing activities was US$96.2 million for 2010, compared to net cash
provided by
financing activities of US$2.7 million for 2009. Net cash provided by financing activities for 2010
was primarily due to US$89.8 million of proceeds from our follow-on public offering in November
2011, US$5.0 million of proceeds from exercise of options and US$2.9 million of proceeds from
short-term borrowings.
Net cash provided by financing activities was US$2.7 million for 2009, compared to net cash used in
financing activities of US$2.8 million for 2008. Net cash provided by financing activities for 2009
was primarily due to US$3.6 million of proceeds from exercise of options and US$3.6 million of
proceeds from our follow-on public offering in July 2009, partially offset by repayment of
short-term borrowings of US$3.9 million.
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 in 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.
Capital Expenditures
Our capital expenditures in 2008, 2009 and 2010 were US$6.1 million, US$6.4 million and US$11.7
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 may 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.
77
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
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.
C.
Research and Development, Patents and Licenses, Etc.
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, 2008 to December 31,
2010 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, 2010, in connection with our recent acquisitions, we agreed to make contingent
payments of up to US$3.3 million in a mix of cash and our ordinary shares, of which up to US$2.0
million may be paid with cash, and up to US$1.3 million may be paid with our ordinary shares, in
each case subject to the achievement of certain financial performance targets of 2011.
78
Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
(in US$ thousands)
|
|
|
Operating leases
|
|
$
|
24,471
|
|
|
$
|
8,476
|
|
|
$
|
12,646
|
|
|
$
|
3,349
|
|
|
|
—
|
|
|
Purchase obligations
|
|
|
278
|
|
|
|
278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total contractual obligations
|
|
$
|
24,749
|
|
|
$
|
8,754
|
|
|
$
|
12,646
|
|
|
$
|
3,349
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than non-current deferred tax liabilities,
non-current deferred income and non-current deferred revenue, the obligations set forth above, and the
contingent payments described under “—Contingent Acquisition Payments,” we did not have any
other long-term liabilities as of December 31, 2010.
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”, “could”, “potential”, “should”, “would” 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:
|
•
|
|
our anticipated growth strategy;
|
|
•
|
|
our plans to recruit more employees;
|
|
•
|
|
our plans to invest in research and development to enhance our service lines;
|
|
•
|
|
our future business development, results of operations and financial condition;
|
|
•
|
|
expected changes in our net revenues and certain cost or expense items;
|
|
•
|
|
our ability to attract and retain clients; and
|
|
•
|
|
trends and competition in the offshore IT services industry.
|
79
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. This market data, including data from IDC, an independent
market research firm, speaks as of the date it was published and includes projections that are
based on a number of assumptions and are not representations of fact. 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.
|
|
|
|
|
|
|
|
|
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
|
Chris Shuning Chen
|
|
|
47
|
|
|
Chairman and Chief Executive Officer
|
|
David Lifeng Chen
|
|
|
42
|
|
|
Executive Vice Chairman and Co-President
|
|
Hao Chen
|
|
|
44
|
|
|
Director
|
|
Ruby Rong Lu
|
|
|
40
|
|
|
Director
|
|
Kui Zhou
|
|
|
43
|
|
|
Director
|
|
Daniel Mingdong Wu
|
|
|
44
|
|
|
Director
|
|
Samuelson S.M. Young
|
|
|
59
|
|
|
Director
|
|
Sidney Xuande Huang
|
|
|
45
|
|
|
Co-President and Chief Financial Officer
|
|
Frances Zhang
|
|
|
40
|
|
|
Chief Operating Officer
|
|
Junbo Liu
|
|
|
48
|
|
|
Executive Vice President and Chief Business Development Officer
|
|
Howard Hao Yu
|
|
|
39
|
|
|
Executive Vice President
|
|
Jeff Jian Wu
|
|
|
43
|
|
|
Executive Vice President and Chief Globalization Officer
|
|
Stanley Ying Zhou
|
|
|
48
|
|
|
Executive Vice President and Chief Administrative Officer
|
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.
80
Mr. David Lifeng Chen
has served as the executive vice chairman of our company since February 2011
and has been a director of our company since 2008. Mr. Chen also is our co-president overseeing our
strategic planning and business development and has been working with us since 2001. 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, Beijing Kaitone 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. Mr. Chen received his
bachelor’s degree in computer and application from Huazhong University of Science & Technology.
Ms. Ruby Rong 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 E-Commerce China Dangdang Inc., a
China-based business-to-consumer e-commerce company listed on the New York Stock Exchange, Bitauto
Holdings Limited, an Internet content and marketing services provider for China’s fast-growing
automotive industry listed on the New York Stock Exchange, 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 to 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.
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. Mr. Zhou
also serves on the board of directors of some Sequoia portfolio companies, including a director of
Sky-mobi Limited, a China-based mobile application store operator listed on the Nasdaq Global
Market; Xiamen Changelight Co., Ltd., a China-based LED and solar cell research and manufacturing
company listed on Growth Enterprises Market of the Shenzhen Stock Exchange; Beijing Speedpay
Technology Co., Ltd., a high-tech company committed to wireless payment and mobile e-commerce
business; and Beijing Zhijinleye Education & Technology Co., Ltd., a company specializing in
providing China’s medical industry with distance education training and technical services. 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. 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.
81
Mr. Daniel
Mingdong Wu
has been our director since October 2007.
Mr. Wu has served as the chief financial officer of www.55tuan.com,
a China-based group buying website, since January 2011. Prior to that,
Mr. Wu served as a venture partner
at SAIF Partners, a private equity fund focusing on growth investment opportunities in China and
other Asian countries, from 2009. Prior to that, 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. 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
served as the vice chairman of Studio A Inc., an apple premium reseller with around 50 chain stores
in Asia, since 2010. 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 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.
Executive Officers
Mr. Sidney Xuande Huang
has been our chief financial officer since 2006 and our co-president
overseeing our organizational growth and strategic transactions since January 2011. He also was
our chief operating officer from 2008 to 2010. 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 July 2005 to March 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 has served as a director of Bitauto Holdings Limited
and Beijing Enlight Media Co., Ltd. since 2010. 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.
Ms. Frances Hong Zhang
is our chief operating officer and has been working with us since 2006.
Prior to joining us, Ms. Zhang was the chief executive officer of Prosoft from 2004 to 2006. Ms.
Zhang found China Logistic Investment Limited, a China-based logistics information system
development company, in 2002. Ms. Zhang was the managing director of Timeless Software (Beijing)
Limited, a China-based software development company, and an executive director of Timeless Software
limited, a Hong Kong-based software development company listed on
the Hong Kong Stock Exchange, from 2000 to 2002. Ms. Zhang received her master’s degree in computer
science from the Chinese Academy of Sciences in 1997 and her bachelor’s degree in electronics
engineering from Tsinghua University in 1994.
82
Mr. Junbo Liu
is our executive vice president and chief business development officer in charge of
our business development. He has been working with us since 2005. Prior to working with us, Mr. Liu
served as a senior vice president of Beijing SureKAM Technologies Co., Ltd., 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.
Dr. Howard Hao Yu
is our executive vice president and has been working with us since 2007. Prior to
joining us, Dr. Yu was the founder and managing director of ITC from 2001 to 2007. Dr. Yu was also
an associate professor at Beijing University of Posts and Telecommunications from 2001 to 2008
following his postdoctoral research work at Tsinghua University from 1999 to 2001. He received his
Ph.D. degree in communication and information system from Beijing University of Posts and
Telecommunications in 1999 and his bachelor’s degree in telecommunication engineering from Beijing
Institute of Technology in 1994.
Mr. Jeff Jian Wu
is our executive vice president and chief globalization officer in charge of our
globalization initiatives. Prior to joining us in 2004, 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. Stanley Ying Zhou
is our executive vice president and 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
For the fiscal year ended December 31, 2010, we paid an aggregate of approximately US$1.6 million
in cash to our senior executive officers, and we did not pay any cash compensation to our
non-executive directors. Our PRC subsidiaries are required by law to make contributions equal to
certain percentages of each employee’s salary for his or her pension insurance, medical insurance,
housing fund, unemployment and other statutory benefits. Other than the above-mentioned statutory
contributions mandated by applicable PRC law, we have not set aside or accrued any amount to
provide pension, retirement or other similar benefits to our executive officers and directors. For
options and restricted share units granted to our officers and directors, see Item 6, “ — Share
Incentive Plan.”
83
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.
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, 2011, there are 1,306,742 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 increase of 3% 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, 2011, there are 2,488,655 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.
|
84
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, from January 1, 2010 to March 31, 2011, the outstanding restricted
share units that we granted to our directors and officers under our 2007 Share Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
|
|
|
End of Vesting
|
|
Name
|
|
Units Granted
|
|
|
Grant Date
|
|
Period
|
|
Chris Shuning Chen
|
|
|
7,961
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
David Lifeng Chen
|
|
|
5,789
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
|
|
|
10,000
|
|
|
December 16, 2010**
|
|
December 16, 2014
|
|
Hao Chen
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
Ruby Rong Lu
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
Kui Zhou
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
Sidney Xuande Huang
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
|
|
|
*
|
|
|
December 16, 2010**
|
|
December 16, 2014
|
|
Frances Hong Zhang
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
Junbo Liu
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
Howard Hao Yu
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
|
|
|
*
|
|
|
December 16, 2010**
|
|
December 16, 2014
|
|
Jeff Jian Wu
|
|
|
*
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
|
|
|
*
|
|
|
December 16, 2010**
|
|
December 16, 2014
|
|
Stanley Ying Zhou
|
|
|
3,474
|
|
|
February 23, 2010
|
|
February 23, 2014
|
|
|
|
|
10,000
|
|
|
December 16, 2010**
|
|
December 16, 2014
|
|
Directors and Executive officers as a group
|
|
|
132,420
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Upon exercising of all options that are exercisable with 60 days after March 31, 2011 and
vesting of all restricted shares unites that are to be vested within 60 days after March 31,
2011, would beneficially owns
less than 1% of our outstanding ordinary shares.
|
|
|
|
**
|
|
On December 16, 2010, we granted certain restricted share units to several executives
at a discount purchase price of US$22.00 per share, which is lower than the market closing
price of US$34.13 on December 15, 2010, the day before the grant date, by US$12.13.
|
85
The following table summarizes, from January 1, 2010 to March 31, 2011, the outstanding options
that we granted to our directors and officers under our 2007 Share Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Price
|
|
|
|
Expiration
|
|
Name
|
|
Outstanding Options
|
|
|
(US$/Share)
|
|
Grant Date
|
|
Date
|
|
Chris Shuning Chen
|
|
|
80,000
|
|
|
28.70
|
|
March 14, 2011
|
|
March 14, 2016
|
|
David Lifeng Chen
|
|
|
10,000
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Hao Chen
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Ruby Rong Lu
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Kui Zhou
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Sidney Xuande Huang
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Frances Hong Zhang
|
|
|
*
|
|
|
35.50
|
|
November 23, 2010
|
|
November 23, 2015
|
|
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Junbo Liu
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Jeff Jian Wu
|
|
|
*
|
|
|
34.13
|
|
December 16, 2010
|
|
December 16, 2016
|
|
Directors and
Executive officers as
a group
|
|
|
365,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Upon exercising of all options that are exercisable with 60 days after March 31, 2011 and
vesting of all restricted shares unites that are to be vested within 60 days after March 31,
2011, would beneficially owns less than 1% of our outstanding ordinary shares.
|
C.
Board Practices
In 2010, 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 seven 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 (subject to any separate
requirements for audit committee approval under applicable law or the listing rules of the New York
Stock Exchange, and unless disqualified by the chairman of the relevant board meeting). 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.
86
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.
Audit Committee
Our audit committee consists of Mr. Daniel Mingdong Wu, Mr. Samuelson S. M. Young and Ms. Ruby Rong
Lu. 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 and Young and Ms. Lu 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.
|
87
Compensation Committee
Our compensation committee consists of Mr. Kui Zhou, Ms. Ruby Rong 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;
|
|
•
|
|
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.
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 and Mr. David Lifeng Chen
have been designated as Class A directors. Mr. Hao Chen, Mr. Kui Zhou and Ms. Ruby Rong 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.
88
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, 2008, 2009 and
2010, we employed 5,457, 8,347 and 11,044 employees, including 4,841, 7,542 and 9,827
professionals, respectively. As of March 31, 2011, we employed 11,646 employees, including 10,400
professionals.
E.
Share Ownership
The following table sets forth information with respect to the beneficial ownership of our ordinary
shares as of the date of March 31, 2011, 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)
|
|
|
3,852,908
|
|
|
|
8.6
|
|
|
David Lifeng Chen
(4)
|
|
|
297,934
|
|
|
|
0.7
|
|
|
Hao Chen
(5)
|
|
|
*
|
|
|
|
*
|
|
|
Ruby Rong Lu
(6)
|
|
|
*
|
|
|
|
*
|
|
|
Kui Zhou
(7)
|
|
|
1,156,184
|
|
|
|
2.6
|
|
|
Daniel Mingdong Wu
(8)
|
|
|
*
|
|
|
|
*
|
|
|
Samuelson S.M. Young
(9)
|
|
|
*
|
|
|
|
*
|
|
|
Sidney Xuande Huang
(10)
|
|
|
*
|
|
|
|
*
|
|
|
Frances Hong Zhang
(11)
|
|
|
*
|
|
|
|
*
|
|
|
Junbo Liu
(12)
|
|
|
*
|
|
|
|
*
|
|
|
Howard Hao Yu
(13)
|
|
|
*
|
|
|
|
*
|
|
|
Jeff Jian Wu
(14)
|
|
|
*
|
|
|
|
*
|
|
|
Stanley Ying Zhou
(15)
|
|
|
361,776
|
|
|
|
0.8
|
|
|
All Directors and Executive Officers as a Group
(16)
|
|
|
6,147,343
|
|
|
|
13.7
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
Lone Spruce, L.P. and affiliates
(17)
|
|
|
4,192,821
|
|
|
|
9.4
|
|
|
Button Software Ltd.
(18)
|
|
|
3,830,420
|
|
|
|
8.6
|
|
|
FMR LLC and affiliates
(19)
|
|
|
2,581,153
|
|
|
|
5.8
|
|
|
Maverick Capital, Ltd. and affiliates
(20)
|
|
|
2,496,238
|
|
|
|
5.6
|
|
89
|
|
|
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment owner with respect to the securities.
|
|
|
|
(2)
|
|
For each person and group included in this table, percentage ownership was calculated by
dividing the number of shares beneficially owned by such person or group by the sum of
44,556,910, being the number of ordinary shares outstanding as of March 31, 2011, the number
of ordinary shares underlying share options held by such person or group that are exercisable
within 60 days after March 31, 2011, and the number of ordinary shares underlying restricted
share units held by such person or group that are to be vested within 60 days after March 31,
2011.
|
|
|
|
(3)
|
|
Represents 2,517,920 ordinary shares held by Button Software Ltd., a British Virgin Islands
company, and 84,988 ordinary shares issuable upon exercise of options within 60 days after
March 31, 2011 and ordinary shares issuable pursuant to restricted share units that are to be
vested within 60 days after March 31, 2011 beneficially owned by Mr. Chris Shuning Chen. In
addition, Button Software Ltd. entered into certain agreements with Credit Suisse Capital LLC
(the “Button VPF”). Pursuant to the Button VPF, Button Software Ltd. pledged and monetized
712,500 ADSs beneficially owned by it. TAIRON INVESTMENT LIMITED entered into certain
agreements with Credit Suisse Capital LLC (the “Tairon VPF”). Pursuant to the Tairon VPF,
TAIRON INVESTMENT LIMITED pledged and monetized 537,500 ADSs beneficially owned by it. Button
Software Ltd. and TAIRON INVESTMENT LIMITED are ultimately owned by Mr. Chris Shuning Chen’s
family trust. Mr. Chen is the sole director of Button Software Ltd. and TAIRON INVESTMENT
LIMITED. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park,
Haidian District, Beijing 100193, People’s Republic of China.
|
|
|
|
(4)
|
|
Represents 259,400 ADSs, 38,534 ordinary shares issuable upon exercise of options within 60
days after March 31, 2011 and ordinary shares issuable pursuant to restricted share units that
are to be vested within 60 days after March 31, 2011 beneficially owned by Mr. David Lifeng
Chen. The business address for Mr. Chen is 3/F, Building 8, Zhongguancun Software Park,
Haidian District, Beijing 100193, People’s Republic of China.
|
|
|
|
(5)
|
|
Represents ADSs held by LC Fund II, ordinary shares issuable upon exercise of options within
60 days after March 31, 2011, and ordinary shares issuable pursuant to restricted share units
that are to be vested within 60 days after March 31, 2011 held by Mr. Hao Chen. Mr. Chen
disclaims beneficial ownership with respect to the shares held by LC Fund II except to the
extent of his pecuniary interest therein. The business address for Mr. Chen is 10/F, Tower A,
Raycom Info Tech Park, No. 2 Kexueyuan Nanlu Zhongguancun, Haidian District, Beijing 100080,
People’s Republic of China.
|
|
|
|
(6)
|
|
Represents ADSs, ordinary shares issuable upon exercise of options within 60 days after March
31, 2011, and ordinary shares issuable pursuant to restricted share units that are to be
vested within 60 days after March 31,
2011 held by Ms. Ruby Rong Lu. The business address for Ms. Lu is 2420 Sand Hill Road, Suite 200
Menlo Park, CA 94025, United States of America.
|
90
|
|
|
|
|
(7)
|
|
Represents 87,651 ADSs held by Kui Zhou, 600,515 ordinary shares held by Sequoia Capital
China I, L.P., Sequoia Capital China Partners Fund I, L.P., and Sequoia Capital China
Principals Fund I, L.P., 467,080 ordinary shares held by Sequoia Capital Growth Fund III,
L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth Partners III,
L.P., and 938 ordinary shares issuable upon exercise of options within 60 days after March 31,
2011 and ordinary shares issuable pursuant to restricted share units that are to be vested
within 60 days after March 31, 2011 held by Mr. Kui Zhou. Mr. Kui Zhou disclaims beneficial
ownership with respect to the shares held by Sequoia Capital China I, L.P., Sequoia Capital
China Partners Fund I, L.P., Sequoia Capital China Principals Fund I, L.P., Sequoia Capital
Growth Fund III, L.P., Sequoia Capital Growth III Principals Fund and Sequoia Capital Growth
Partners III, L.P. except to the extent of his pecuniary interest therein. The business
address for Mr. Zhou is Room 3606, Tower 3, China Central Place, No 77 Jianguo Road, Chaoyang
District, Beijing 100025, People’s Republic of China.
|
|
|
|
(8)
|
|
Represents ordinary shares issuable upon exercise of options within 60 days after March 31,
2011 held by held by Mr. Daniel Mingdong Wu. The business address for Mr. Wu is 3/F, Building
8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of China.
|
|
|
|
(9)
|
|
Represents ordinary shares issuable upon exercise of options within 60 days after March 31,
2011 held by held by Mr. Samuelson S.M. Young. The business address for Mr. Young is 3/F,
Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of
China.
|
|
|
|
(10)
|
|
Represents ordinary shares issuable upon exercise of options within 60 days after March 31,
2011 and ordinary shares issuable pursuant to restricted share units that are to be vested
within 60 days after March 31, 2011 held by held by Mr. Sidney Xuande Huang. The business
address for Mr. Huang is 3/F, Building 8, Zhongguancun Software Park, Haidian District,
Beijing 100193, People’s Republic of China.
|
|
|
|
(11)
|
|
Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days
after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are
to be vested within 60 days after March 31, 2011 beneficially owned by Ms. Frances Hong Zhang.
The business address for Ms. Zhang is 3/F, Building 8, Zhongguancun Software Park, Haidian
District, Beijing 100193, People’s Republic of China.
|
|
|
|
(12)
|
|
Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days
after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are
to be vested within 60 days after March 31, 2011 held by Mr. Junbo Liu. The business address
for Mr. Liu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193,
People’s Republic of China.
|
|
|
|
(13)
|
|
Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days
after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are
to be vested within 60 days after March 31, 2011 beneficially owned by Dr. Howard Hao Yu. The
business address for Dr. Yu is 3/F, Building 8, Zhongguancun Software Park, Haidian District,
Beijing 100193, People’s Republic of China.
|
|
|
|
(14)
|
|
Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days
after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are
to be vested within 60 days after March 31, 2011 held by Mr. Jeff Jian Wu. The business
address for Mr. Wu is 3/F, Building 8, Zhongguancun Software Park, Haidian District, Beijing
100193, People’s Republic of China.
|
91
|
|
|
|
|
(15)
|
|
Represents 325,865 ordinary shares held by Charlene Limited, a British Virgin Islands company
wholly owned and controlled by Mr. Stanley Ying Zhou, 35,911 ordinary shares issuable upon
exercise of options within 60 days after March 31, 2011 and ordinary shares issuable pursuant
to restricted share units that are to be vested within 60 days after March 31, 2011
beneficially owned by Mr. Stanley Ying Zhou. The business address for Mr. Zhou is 3/F,
Building 8, Zhongguancun Software Park, Haidian District, Beijing 100193, People’s Republic of
China.
|
|
|
|
(16)
|
|
Represents ordinary shares, ordinary shares issuable upon exercise of options within 60 days
after March 31, 2011, and ordinary shares issuable pursuant to restricted share units that are
to be vested within 60 days after March 31, 2011 held by all of our directors and executive
officers as a group.
|
|
|
|
(17)
|
|
Based on Schedule 13G/A jointly filed by Lone Spruce, L.P., Lone Balsam, L.P., Lone Sequoia,
L.P., Lone Dragon Pine, L.P., Lone Pine Associates LLC, Lone Pine Members LLC, Lone Pine
Capital LLC, and Stephen F. Mandel, Jr. on February 14, 2011.
|
|
|
|
(18)
|
|
Represents 2,517,920 ordinary shares held by Button Software Ltd., a British Virgin Islands
company, and 62,500 ordinary shares ordinary shares issuable upon exercise of options within
60 days after March 31, 2011 held by TAIRON INVESTMENT LIMITED. In addition, pursuant to the
Button VPF, Button Software Ltd. pledged and monetized 712,500 ADSs beneficially owned by it.
Pursuant to the Tairon VPF, TAIRON INVESTMENT LIMITED pledged and monetized 537,500 ADSs
beneficially owned by it. Button Software Ltd. and TAIRON INVESTMENT LIMITED are ultimately
owned by Mr. Chris Shuning Chen’s family trust. The registered address for Button Software
Ltd. is OMC Chambers, P.O. Box 3152, Road Town, Tortola, British Virgin Islands.
|
|
|
|
(19)
|
|
Based on Schedule 13G/A jointly filed by FMR LLC and Edward C. Johnson 3d on February 14,
2011.
|
|
|
|
(20)
|
|
Based on Schedule 13G jointly filed by Maverick Capital, Ltd., Maverick Capital Management,
LLC and Lee S. Ainslie III on February 14, 2011.
|
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 December 31, 2007, based on their respective 13G filing, Sequoia Funds, DCM Funds, and LC
Fund II held 20.3%, 16.7% and 11.9%, respectively, of our ordinary shares and as of December 31,
2010, based on their respective Schedule 13G/A filing, each of them held 2.4%, nil and 0.1%,
respectively, of our ordinary shares. Button Software Ltd. held 9.6% of our ordinary shares as of
December 31, 2007 and it beneficially held 8.6% of our ordinary shares as of March 31, 2011.
As of March 31, 2011, 44,556,910 of our ordinary shares were issued and outstanding. To our
knowledge, approximately 91.1% of our total outstanding ordinary shares were held by seven record
shareholders in the United States, including approximately 88.7% held by JPMorgan Chase Bank,
N.A., the depositary of our ADS program. The number of beneficial owners of our ADSs 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 and restricted share units granted to our directors, officers and employees,
please refer to “—B. Compensation.”
92
|
|
|
|
|
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
From time to time we provide various IT services to Lenovo (Beijing) Co., Ltd., Lenovo (Shanghai)
Co., Ltd., Lenovo (Shanghai) Electronic Technology Co., Ltd., Lenovo Mobile Communications Co.,
Ltd., Beijing Lenovo Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd., Sunny Information
Technology Service, Inc., and Lenovo (Dalian) Technologies Service Co., Ltd., affiliates of LC
Fund II, one of our shareholders. 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.
Other Share Issuances
In November 2010, we issued 26,442 ordinary shares to Hui Wing Han Christina Wendy & Wong Kit
Cheung Paul as a part of the consideration for the acquisition of TP Companies.
Employment Agreements
See Item 6, “Directors, Senior Management and Employees — Compensation— Employment Agreements.”
Stock Option Grants
See Item 6, “Directors, Senior Management and Employees — Compensation— 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. Except as otherwise disclosed herein, 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.
93
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. In November 2010,
Jiang filed an action naming
us, our subsidiary VanceInfo US, and our executives Chris Shuning Chen and David Lifeng Chen as
defendants in the Superior Court of California, County of San Mateo captioned Jonathan Jiang v.
VanceInfo Technologies, et al., CIV 500979. An amended complaint filed January 21, 2011 alleges:
|
•
|
|
Jiang was a minority shareholder of Octiga, Inc., a dissolved California Corporation.
Octiga, Inc. allegedly owned “more than 30% interest in a joint venture” in Beijing Heteng
Software Technology Company, Ltd., or Heteng, a company incorporated in China.
|
|
•
|
|
Heteng owned 95% of Wensi Chuangyi.
|
|
•
|
|
Jiang owned 220,000 common shares of Octiga, Inc. for which compensation was not
appropriately provided.
|
|
•
|
|
The transfer of assets of Wensi Chuangyi from Heteng to us occurred without proper
compensation to Octiga, Inc.
|
These matters are scheduled to be heard in the next few months. Jiang has submitted theories for
claims of damages in an unknown range of values. Jiang’s claims are brought on his own behalf, and
Jiang also seeks to assert the claims derivatively on behalf of Octiga, Inc. We believe that
Jiang’s factual allegations are flawed and his legal theories unsound, and there are meritorious
defenses to the claims. On March 10, 2011, we filed a motion to quash service on us and a demurrer
to the amended complaint on behalf of VanceInfo US.
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 pay dividends. Our company may also
authorize the payment of dividends but the amount cannot exceed the amount recommended by our board
of directors. 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.
94
|
|
|
|
|
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 9, 2011, the trading price of our ADSs on the NYSE has
ranged from US$4.20 to US$41.06 per ADS. For the year ended December 31, 2010, the trading price
ranged from US$14.79 to US$41.06 per ADS.
The following table sets forth, for the periods indicated, the high and low trading prices on the
NYSE for our ADSs.
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Price ($)
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007 (from December 12, 2007 to December 31, 2007)
|
|
|
10.95
|
|
|
|
8.51
|
|
|
2008
|
|
|
13.98
|
|
|
|
4.28
|
|
|
First quarter
|
|
|
9.25
|
|
|
|
4.90
|
|
|
Second quarter
|
|
|
13.98
|
|
|
|
6.45
|
|
|
Third quarter
|
|
|
10.19
|
|
|
|
5.80
|
|
|
Fourth quarter
|
|
|
8.28
|
|
|
|
4.28
|
|
|
2009
|
|
|
21.07
|
|
|
|
4.20
|
|
|
First quarter
|
|
|
6.00
|
|
|
|
4.20
|
|
|
Second quarter
|
|
|
15.50
|
|
|
|
4.95
|
|
|
Third quarter
|
|
|
19.60
|
|
|
|
10.54
|
|
|
Fourth quarter
|
|
|
21.07
|
|
|
|
14.50
|
|
|
2010
|
|
|
41.06
|
|
|
|
14.79
|
|
|
First quarter
|
|
|
23.85
|
|
|
|
14.79
|
|
|
Second quarter
|
|
|
26.48
|
|
|
|
18.21
|
|
|
Third quarter
|
|
|
33.30
|
|
|
|
22.11
|
|
|
Fourth quarter
|
|
|
41.06
|
|
|
|
30.55
|
|
|
November
|
|
|
38.43
|
|
|
|
32.37
|
|
|
December
|
|
|
41.06
|
|
|
|
33.51
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
37.99
|
|
|
|
27.55
|
|
|
January
|
|
|
37.99
|
|
|
|
31.86
|
|
|
February
|
|
|
36.56
|
|
|
|
28.32
|
|
|
March
|
|
|
33.99
|
|
|
|
27.55
|
|
|
April
|
|
|
34.90
|
|
|
|
28.40
|
|
|
May (through May 9, 2011)
|
|
|
33.08
|
|
|
|
30.10
|
|
95
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.
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. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely
traded currencies, in tandem with the U.S. dollar. On June 19, 2010, the People’s Bank of China
announced that it will allow a more flexible exchange rate for Renminbi without mentioning specific
policy changes, although it ruled out any large-scale appreciation. It is difficult to predict how
long the current situation may last and when and how it may
change again.
96
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, articles of association 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. On August 29, 2008, the SAFE
promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the
Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested
Enterprises, or SAFE Circular 142, a notice regulating the conversion by a foreign-invested company
of foreign currency into Renminbi by restricting how the converted Renminbi may be used. SAFE
Circular 142 requires that Renminbi converted from the foreign currency-denominated registered
capital of a foreign-invested company may only be used for purposes within the company’s business
scope approved by the applicable governmental authority and may not be used for equity investments
within the PRC unless specifically provided for otherwise in its business scope. In addition, the
SAFE strengthened its oversight of the flow and use of Renminbi funds converted from the foreign
currency-denominated registered capital of a foreign-invested company. The use of such Renminbi may
not be changed without approval from the SAFE, and may not in any case be used to repay Renminbi
loans if the proceeds of such loans have not yet been used.
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, PRC 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
possibly with retroactive effect. This summary does not deal with all possible tax consequences
relating to an investment in our ADSs or ordinary shares, such as tax
consequences under state, local and other tax laws in jurisdictions other than the Cayman Islands,
PRC or the United States. 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.
97
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.
PRC Enterprise Income Tax
See “Item 5. Operating and Financial Review and Prospects” for a description on PRC Enterprise
Income Tax.
United States Federal Income Taxation
The following discussion describes the 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 neither deals with the tax consequences to any particular investor nor
describes all of the tax consequences applicable to persons in special tax situations such as:
|
•
|
|
financial institutions;
|
|
•
|
|
regulated investment companies;
|
|
•
|
|
real estate investment trusts;
|
|
•
|
|
traders that elect to mark to market;
|
|
•
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tax-exempt entities;
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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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partnerships or pass through entities, or persons holding ADSs or ordinary shares through
such entities.
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INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX LAW
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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If you own ADSs, you should be treated as the owner of the underlying ordinary shares represented
by those ADSs for U.S. federal income tax purposes. No gain or loss will be recognized upon the
exchange of ordinary shares for ADSs or an exchange of ADSs for 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
(including the amount of any PRC taxes withheld therefrom) 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 capital, thereby reducing your tax
basis in your ADSs or ordinary shares (but not below zero), 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.
99
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, for taxable
years beginning before January 1, 2013, 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. However, based on existing guidance, it is not entirely
clear whether dividends that you receive with respect to the ordinary shares will be taxed as
qualified dividend income, because the ordinary shares are not themselves listed on a U.S.
exchange. 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.
If PRC withholding taxes apply to dividends paid to you with respect to our ADSs or ordinary
shares, the amount of the dividend would include withheld PRC taxes and, subject to certain
conditions and limitations, such PRC withholding taxes generally will be treated as foreign taxes
eligible for credit against your U.S. federal income tax liability. 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.”
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 for the ADS (in U.S. dollars) 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.
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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, you 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 for foreign tax credit purposes. 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, 2010. However, the application of the PFIC rules is subject to uncertainty
in several respects, 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.
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 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.
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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 or other disposition 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.
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.
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Alternatively, if a non-U.S. corporation is a PFIC, a U.S. 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 we are classified as a PFIC, you must file United States Internal Revenue Service Form 8621
for each tax year in which you make a disposition of your ADSs or ordinary shares, receive direct
or indirect distributions on your ADSs or ordinary shares or make a mark-to-market or deemed sale
election mentioned above with respect to your ADSs or ordinary shares. Legislation enacted on March
18, 2010 creates an additional annual filing requirement for tax years beginning on or after the
date of enactment for U.S. persons who are shareholders of a PFIC. The legislation does not
describe what information will be required to be included in the additional annual filing, but
rather grants the Secretary of the U.S. Treasury authority to decide what information must be
included in such annual filing. If we are a PFIC for a given taxable year, then you should consult
your tax advisor concerning the tax consequences to you of such PFIC status, the availability and
consequences of making a mark-to-market election mentioned above and your annual filing
requirements.
Medicare Tax
For taxable years beginning after December 31, 2012, a United States person that is an individual
or estate, or a trust that does not fall into a special class of trusts that is exempt from such
tax, is subject to a 3.8% tax on the lesser of (1) the United States person’s “net investment
income” for the relevant taxable year and (2) the excess of the United States person’s modified
adjusted gross income for the taxable year over a certain threshold (which in the case of
individuals will be between US$125 thousand and US$250 thousand, depending on the individual’s
circumstances). A United States person’s net investment income will include its gross dividend
income and its net gains from the disposition of stock, unless such dividends or net gains are
derived in the ordinary course of the conduct of a trade or business (other than a trade or
business that consists of certain passive or trading activities). If you are a United States person
that is an individual, estate or trust, you are urged to consult your tax advisors regarding the
applicability of the Medicare tax to your income and gains in respect of your investment in our
ADSs or ordinary shares.
Information with Respect to Foreign Financial Assets
Individuals who own “specified foreign financial assets” with an aggregate value in excess of
US$50,000 in taxable years beginning after March 18, 2010 will be required to file an information
report with respect to such assets with their tax returns. “Specified foreign financial assets”
include any financial accounts maintained by foreign financial institutions, as well as any of the
following, but only if they are not held in accounts maintained by financial institutions: (i)
stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for
investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities.
U.S. holders that are individuals are urged to consult their tax advisors regarding the application
of this legislation to their ownership of our ADSs or ordinary shares.
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Information Reporting and Backup Withholding
Dividend payments with respect to our ADSs or ordinary shares and proceeds from the sale, exchange
or redemption of our ADSs or ordinary shares may be subject to information reporting to the
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 who furnishes a correct taxpayer identification number and makes
any other required certification or who is otherwise exempt from backup withholding. U.S. Holders
who are required to establish their exempt status must provide such certification on 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 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 our registration statement on Form F-3 (Registration No. 333-160287 and
Registration No. 333-170632, as amended), 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.
We are currently subject to 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., Washington, D.C. 20549. You may also
obtain copies of this information by mail from the Public Reference Section of the SEC at
prescribed rates. Further information on the operation of the SEC’s Public Reference Room in
Washington, D.C. can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
website that contains reports, proxy and information statements and other information about
registrants, such as us, who file electronically with the SEC. The address of that site is
http://www.sec.gov.
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.
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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.”
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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 2010. 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. As a consequence, the Renminbi has fluctuated
sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. On
June 19, 2010, the People’s Bank of China announced that it will allow a more flexible exchange
rate for Renminbi without mentioning specific policy changes, although it ruled out any large-scale
appreciation. It is difficult to predict how long the current situation may last and when and how
it may change again. 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, 2010, we had a Renminbi denominated cash
balance of RMB359.9 million and a U.S. dollar denominated cash balance of US$101.5 million.
Assuming we had converted the U.S. dollar denominated cash balance of US$101.5 million as of
December 31, 2010 into Renminbi at the exchange rate of US$1.00 for RMB6.6000 as of December 30,
2010, this cash balance would have been RMB669.9 million. Assuming a further 1% appreciation of the
Renminbi against the U.S. dollar, this cash balance would have decreased to RMB663.3 million as of
December 31, 2010. Conversely, if we decide to convert our
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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 Hong Kong Dollar, Japanese Yen and Euro. Any
significant depreciation of Hong Kong Dollar, Japanese Yen or Euro against the Renminbi or U.S.
dollar would adversely affect our revenues in Renminbi or U.S. dollar terms, respectively.
Furthermore, the value of our shares may be affected by the foreign exchange rate between U.S.
dollars and RMB because the value of our business is effectively denominated in RMB, while our
shares are traded in U.S. dollars. Depreciation of the value of the U.S. dollar will also reduce
the value of the cash we hold in U.S. dollars, which we may use for purposes of future acquisitions
or other business expansion. We have not used any forward contracts or currency borrowings to hedge
our exposure to foreign currency exchange risk, except for a forward exchange contract to purchase
US$5 million for JPY448.75 million in October 2010 and a forward exchange contract to purchase US$5
million for JPY432.5 million in July 2011. While the use of such foreign currency forward contract
provides us with protection from certain fluctuations in foreign currency exchange, we potentially
forgo the benefits that might result from favorable fluctuations in foreign currency exchange. In
addition, any default by the counterparties to these transactions could adversely affect our
financial condition and results of operations.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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A.
Debt Securities
Not Applicable.
B.
Warrants and Rights
Not Applicable.
C.
Other Securities
Not Applicable.
D.
American Depository Shares
Fees and Charges Payable by ADS Holders
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According to the deposit agreement between us and the depositary, JPMorgan Chase Bank N.A., our ADR
holders may have to pay the following fees and charges to JPMorgan Chase Bank N.A. in connection
with ownership of the ADR:
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Category
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Depositary actions
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Associated fee
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(a) Depositing or substituting the underlying shares
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Each person to whom ADSs are issued against deposits of shares, including deposits and issuances in respect of:
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US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs issued
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•
Share distributions, stock dividend, stock split, merger
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Exchange of securities or any other transaction or event affecting the ADSs or the deposited securities
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(b) Receiving or distributing dividends
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Distribution of cash dividends
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US$0.02 or less per ADS
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(c) Selling or exercising rights
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Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities
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Up to US$5.00 for each 100 ADSs (or portion thereof)
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Category
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Depositary actions
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Associated fee
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(d) Withdrawing an underlying security
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Acceptance of ADRs surrendered for withdrawal of deposited securities
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US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered
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(e) Transferring, splitting or grouping receipts
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Transfers of depositary receipts
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US$1.50 per ADS
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(f) General depositary services, particularly those charged on an annual basis
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Services performed by the depositary in administering the ADRs
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US$0.02 per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charge from one or more cash dividends or other cash distributions
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(g) Expenses of the Depositary
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Expenses incurred on behalf of ADR Holders in connection with:
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Expenses payable at the sole discretion of the depositary by billing ADR Holders or by deducting such charges from one or more cash dividends or other cash distributions
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•
Compliance with foreign exchange control regulations or any law or regulation relating to foreign investment
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The depositary’s or its custodian’s compliance with applicable law, rule or regulation
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Stock transfer or other taxes and other governmental charges
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Cable, telex and facsimile transmission and delivery charges
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|
|
|
|
•
fees for the transfer or registration of deposited securities in connection with the deposit or withdrawal of deposited securities
|
|
|
|
|
|
•
Expenses of the depositary in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency)
|
|
|
|
|
|
•
Any other charge payable by depositary or its agents in connection with the servicing of the shares or the deposited securities
|
|
|
We will pay all other charges and expenses of the depositary and any agent of the depositary
(except the custodian) pursuant to agreements from time to time between us and the depositary. The
fees described above may be amended from time to time.
107
Fees and Payments from the Depositary to Us
In January 2010, we received from the depositary a reimbursement of approximately US$0.5 million
for certain expenses we incurred in 2009 that were related to establishment and maintenance of the
ADR program, including investor relationship service fees and audit service fees.
In addition, for year 2010, we were entitled to receive approximately US$1.3 million from the
depositary as reimbursement for certain fees and expenses including legal fees, audit service fees,
NYSE listing fees, investor relations expenses, Financial Industry Regulatory Authority filing fees
and SEC registration fees. We received US$0.1 million thereof in 2010, and received US$0.8 million
and US$2.3 thousand in January 2011 and March 2011, respectively.
The depositary has agreed to reimburse us for our expenses incurred in connection with our ADR
programs in the future. There are limits on the amount of expenses for which the depositary will
reimburse us. We recognize the reimbursable amounts in other income on our consolidated statements
of operations on a straight-line basis over the contract term with the depositary.
PART II
|
|
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|
|
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:
|
•
|
|
approximately US$31.0 million to establish new offices, to fund other capital expenditures
and to make the payment for the land use right we are going to acquire in Beijing; and
|
|
•
|
|
approximately US$11.1 million to fund strategic acquisitions.
|
As of December 31, 2010, approximately US$14.8 million of the 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.
108
The effective date of the registration statement on Form F-3 (File number: 333-160287) for which
use of proceeds information is being disclosed was July 8, 2009. We offered our ordinary shares, in
the form of ADSs, in our follow-on public offering in July 2009. We registered and sold 300,000
ADSs, representing 300,000 ordinary shares, at US$11.00 per ADS and issued additional 45,000 ADSs,
representing 45,000 ordinary shares, upon exercise of over-allotments by the underwriters. We
received net proceeds of approximately US$2.7 million from this follow-on public offering.
We have not used the net proceeds received from our follow-on public offering in July 2009 as of
the date of this annual report. As of December 31, 2010, approximately US$0.9 million of the
offering proceeds from this follow-on public offering had been applied and paid to others,
including consultants and advisors. Proceeds from our follow-on public offering that have yet to be
applied have been invested in money market funds or bank deposits. Citigroup Global Markets Inc.
and J.P. Morgan Securities Inc. were the managing underwriters for our follow-on public offering in
July 2009.
The effective date of the registration statement on Form F-3 (File number: 333-170632) for which
use of proceeds information is being disclosed was November 16, 2010. We offered our ordinary
shares, in the form of ADSs, in our follow-on public offering in November 2010. We registered and
sold 2,200,000 ADSs, representing 2,200,000 ordinary shares, at US$35.50 per ADS and issued
additional 330,000 ADSs, representing 330,000 ordinary shares, upon exercise of over-allotments by
the underwriters. We received net proceeds of approximately US$89.3 million from this follow-on
public offering.
We have not used the net proceeds received from our follow-on public offering in November 2010 as
of the date of this annual report. As of December 31, 2010, approximately US$0.5 million of the
offering proceeds from this follow-on public offering had been applied and paid to others,
including consultants and advisors. Proceeds from our follow-on public offering that have yet to be
applied have been invested in money market funds or bank deposits. Citigroup Global Markets Inc.
was the managing underwriter for our follow-on public offering in November 2010.
|
|
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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.
109
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, 2010. 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. Based on this assessment, our internal control over
financial reporting was effective.
In view of the limited timeframe between date of acquisition and December 2010, management has
excluded from our assessment for internal control over financial reporting that of Link Result and
A-IT Shanghai, or Link Result Companies, which were fully acquired in July 2010, as the time
available was inadequate to complete an effective assessment of the internal control of Link result
Companies as well as insufficient to effectively implement and roll out any meaningful changes.
Management was also of the view that any potential risk from the Link Result Companies is
manageable and should not be a key concern for the year. Link Result Companies in aggregate had
total assets (including goodwill and intangible assets acquired) of US$6.9 million, net assets
(including goodwill and intangible assets acquired) of US$6.4 million, net revenues of US$3.0
million and net income of US$0.5 million, which accounted for 2.0% of our total assets, 2.2% of our
net assets, 1.4% of our net revenues and 1.8% of our net income on a consolidated basis, as of and
for the year ended December 31, 2010.
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, 2010, 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, 2010,
based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s
Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment
the internal control over financial reporting at Link Result Limited and A-IT (Shanghai) Software
Services Co., Ltd., which were fully acquired in July 2010 and whose financial statements
constitute, in aggregate, 2.0% of total assets, 2.2% of net assets, 1.4% of net revenues and 1.8%
of net income of the Group’s consolidated financial statement amounts as of and for the year ended
December 31, 2010. Accordingly, our audit did not include the internal control over financial
reporting at Link Result Limited and A-IT (Shanghai) Software Services Co., Ltd. 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.
110
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 directors, 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, 2010, 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, 2010 of the Group and our report dated May 11, 2011 expressed an unqualified opinion on
those financial statements.
/s/ Deloitte Touche Tohmatsu CPA Ltd.
Beijing, the People’s Republic of China
May 11, 2011
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
111
|
|
|
|
|
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.
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.
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(in US$ thousands)
|
|
|
Audit fees
(1)
|
|
|
1,120
|
|
|
|
1,178
|
|
|
Audit-related fees
|
|
|
—
|
|
|
|
—
|
|
|
Tax fees
(2)
|
|
|
—
|
|
|
|
25
|
|
|
All other fees
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
(1)
|
|
“Audit fees” means the aggregate fees billed in each of the fiscal years listed for
professional services rendered by our principal auditors for the audit of our annual financial
statements, the review of our interim financial statements, and also other assurance services
rendered in connection with our follow-on offerings in 2009 and 2010 and filing of various
registration statements.
|
|
|
|
(2)
|
|
“Tax fees” means fees billed for tax compliance, tax advice, and tax planning services.
|
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.
112
|
|
|
|
|
ITEM 16E.
|
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
ADSs Purchased
|
|
|
Dollar Value of
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
as Part of Publicly
|
|
|
ADSs that May
|
|
|
|
|
ADS
|
|
|
Average Price
|
|
|
Announced
|
|
|
Yet Be Purchased
|
|
|
Period
|
|
Purchased
(1)
|
|
|
Paid Per ADS
|
|
|
Program
(2)
|
|
|
Under the Program
(1)
|
|
|
February 21, 2009 – February
28, 2009
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
10,000,000
|
|
|
March 1, 2009 – March 31, 2009
|
|
|
2,800
|
|
|
$
|
4.6914
|
|
|
|
2,800
|
|
|
$
|
9,986,864
|
|
|
April 1, 2009 – January 31, 2010
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
9,986,864
|
|
|
February 1, 2010 – February 20, 2010
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
0
|
|
|
Total
|
|
|
2,800
|
|
|
$
|
4.6914
|
|
|
|
2,800
|
|
|
$
|
0
|
|
|
|
|
|
|
(1)
|
|
Each of our ADS represents one ordinary share.
|
|
|
|
(2)
|
|
We publicly announced a share repurchase program on February 21, 2009, pursuant to which we are
authorized to repurchase up to US$10 million worth of our outstanding ADSs within the next 12
months following February 21, 2009 (the program’s approval date). This share repurchase program
expired on February 20, 2010.
|
In March 2010, we repurchased 27,772 shares of our ordinary shares from Global Mission Limited for
nominal consideration.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
ADSs Purchased
|
|
|
Dollar Value of
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
as Part of Publicly
|
|
|
ADSs that May
|
|
|
|
|
ADS
|
|
|
Average Price
|
|
|
Announced
|
|
|
Yet Be Purchased
|
|
|
Period
|
|
Purchased
(1)
|
|
|
Paid Per ADS
|
|
|
Program
(2)
|
|
|
Under the Program
(1)
|
|
|
March 21, 2011 – March 31, 2011
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
40,000,000
|
|
|
April 1, 2011 – April 30, 2011
|
|
|
68,277
|
|
|
$
|
29.2723
|
|
|
|
68,277
|
|
|
$
|
38,001,376
|
|
|
May 1, 2011 – May 9, 2011
|
|
|
0
|
|
|
|
N/A
|
|
|
|
0
|
|
|
$
|
38,001,376
|
|
|
Total
|
|
|
68,277
|
|
|
$
|
29.2723
|
|
|
|
68,277
|
|
|
$
|
38,001,376
|
|
|
|
|
|
|
(1)
|
|
Each of our ADS represents one ordinary share.
|
|
|
|
(2)
|
|
We publicly announced a share repurchase program on March 21, 2011, pursuant to which we are
authorized to repurchase up to US$40 million worth of our outstanding ADSs within the next 12
months following March 21, 2011 (the program’s approval date).
|
|
|
|
|
|
ITEM 16F.
|
|
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
|
Not applicable.
113
|
|
|
|
|
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.
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.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
1.1
|
|
|
Amended and Restated Memorandum and Articles of Association of the
Registrant (incorporated by reference to Exhibit 3.2 from our Registration
Statement on Form F-1 (file no. 333-147601) filed with the Securities and
Exchange Commission on November 23, 2007).
|
|
|
2.1
|
|
|
Registrant’s Specimen American Depositary Receipt (incorporated by
reference to Exhibit 4.3 from our Registration Statement on Form F-1 (file
no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
2.2
|
|
|
Registrant’s Specimen Certificate for Ordinary shares (incorporated by
reference to Exhibit 4.2 from our Registration Statement on Form F-1 (file
no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
2.3
|
|
|
Form of Deposit Agreement among the Registrant, the depositary and holder
of the American Depositary Receipts (incorporated by reference to Exhibit
4.3 from our Registration Statement on Form F-1 (file no. 333-147601) filed
with the Securities and Exchange Commission on November 23, 2007).
|
|
|
4.1
|
|
|
Shareholders Agreement among the Registrant and other parties thereto dated
as of April 28, 2006, as amended as of July 30, 2007 (incorporated by
reference to Exhibit 4.7 from our Registration Statement on Form F-1 (file
no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
4.2
|
|
|
Series A Preferred Share Purchase Agreement among the Registrant and other
parties thereto dated as of February 3, 2005 (incorporated by reference to
Exhibit 4.4 from our Registration Statement on Form F-1 (file no.
333-147601) filed with the Securities and Exchange Commission on November
23, 2007).
|
114
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
4.3
|
|
|
Series B Preferred Share Purchase Agreement among the Registrant and other
parties thereto dated as of April 28, 2006, as amended as of July 30, 2007
(incorporated by reference to Exhibit 4.6 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.4
|
|
|
Stock Plan dated as of November 3, 2005, as amended in April and May 2006,
including form of Award Agreement (incorporated by reference to Exhibit
10.1 from our Registration Statement on Form F-1 (file no. 333-147601)
filed with the Securities and Exchange Commission on November 23, 2007).
|
|
|
4.5
|
|
|
Share Incentive Plan dated as of July 30, 2007, as supplemented and amended
on August 1, 2007, including form of Award Agreement (incorporated by
reference to Exhibit 10.2 from our Registration Statement on Form F-1 (file
no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
4.6
|
|
|
Form of Indemnification Agreement with the Registrant’s directors
(incorporated by reference to Exhibit 10.3 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.7
|
*
|
|
Form of Employment Contract between the Registrant and a Senior Executive
Officer of the Registrant.
|
|
|
4.8
|
*
|
|
English Translation of Form of Employment Contract between VanceInfo
Creative Software Technology Ltd., formerly named Worksoft Creative
Software Technology Ltd., and a Senior Executive Officer of it.
|
|
|
4.9
|
|
|
English Translation of Asset Transfer Agreement between Worksoft Creative
Software Technology Ltd. and SureKAM Co., Ltd. as of September 6, 2005
(incorporated by reference to Exhibit 10.6 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.10
|
|
|
English Translation of Equity Transfer Contract among Worksoft Creative
Software Technology Ltd. and other parties thereto dated as of September
15, 2006 (incorporated by reference to Exhibit 10.7 from our Registration
Statement on Form F-1 (file no. 333-147601) filed with the Securities and
Exchange Commission on November 23, 2007).
|
|
|
4.11
|
|
|
English Translation of Asset Transfer Agreement between Worksoft Creative
Software Technology Ltd. and Beijing SunBridges Technologies Development
Co., Ltd. dated as of December 1, 2006 (incorporated by reference to
Exhibit 10.8 from our Registration Statement on Form F-1 (file no.
333-147601) filed with the Securities and Exchange Commission on November
23, 2007).
|
|
|
4.12
|
|
|
English Translation of Equity Transfer Contract among Worksoft Creative
Software Technology Ltd., Hao Yu and Wei Wei dated as of March 15, 2007
(incorporated by reference to Exhibit 10.9 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.13
|
|
|
English Translation of Power of Attorney between Ming Zhao and Chris
Shuning Chen dated March 31, 2007 (incorporated by reference to Exhibit
10.10 from our Registration Statement on Form F-1 (file no. 333-147601)
filed with the Securities and Exchange Commission on November 23, 2007).
|
115
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
4.14
|
|
|
English Translation of Exclusive Technology Development and Consultancy
Agreement among Worksoft Creative Software Technology Ltd., Shanghai
Megainfo Tech Co., Ltd. and Ming Zhao dated as of March 31, 2007
(incorporated by reference to Exhibit 10.11 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.15
|
|
|
English Translation of Loan Agreement among the Registrant, Airland
International Limited and Bizexpress Limited dated March 31, 2007
(incorporated by reference to Exhibit 10.12 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.16
|
|
|
English Translation of Equity Transfer Contract among Worksoft Creative
Software Technology Ltd., Jilun Zhang and Rongbin Shi dated as of April 1,
2007 (incorporated by reference to Exhibit 10.13 from our Registration
Statement on Form F-1 (file no. 333-147601) filed with the Securities and
Exchange Commission on November 23, 2007).
|
|
|
4.17
|
|
|
English Translation of Equity Transfer Contract between the Registrant and
Jinsong Tang dated as of May 31, 2007 (incorporated by reference to Exhibit
10.14 from our Registration Statement on Form F-1 (file no. 333-147601)
filed with the Securities and Exchange Commission on November 23, 2007).
|
|
|
4.18
|
|
|
English Translation of Equity Transfer Contract between Worksoft Creative
Software Technology Ltd. and parties thereto dated as of July 29, 2007
(incorporated by reference to Exhibit 10.15 from our Registration Statement
on Form F-1 (file no. 333-147601) filed with the Securities and Exchange
Commission on November 23, 2007).
|
|
|
4.19
|
|
|
English Translation of Loan Agreement among the Registrant, Hao Yu, Wei Wei
and other parties thereto dated as of March 15, 2007 (incorporated by
reference to Exhibit 10.16 from our Registration Statement on Form F-1
(file no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
4.20
|
|
|
Master Services Agreement and Intellectual Property Assignment between
Worksoft Creative Software Technology Ltd. and Microsoft (China) Co., Ltd.
dated as of November 1, 2005 (incorporated by reference to Exhibit 10.17
from our Registration Statement on Form F-1 (file no. 333-147601) filed
with the Securities and Exchange Commission on November 23, 2007).
|
|
|
4.21
|
|
|
Technical Service Agreement between Worksoft Creative Software Technology
Ltd. and International Business Machine China Company Limited dated as of
September 13, 2004 (incorporated by reference to Exhibit 10.18 from our
Registration Statement on Form F-1 (file no. 333-147601) filed with the
Securities and Exchange Commission on November 23, 2007).
|
|
|
4.22
|
|
|
English Translation of Premises Lease Contract between VanceInfo Creative
Software Technology Ltd. and Beijing Zhongguancun Huaxia Sci-Tech Co., Ltd.
dated as of February 25, 2008 (incorporated by reference to Exhibit 4.22
from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on May 15, 2009).
|
|
|
8.1
|
*
|
|
Subsidiaries of the Registrant.
|
116
|
|
|
|
|
|
|
Exhibit
|
|
|
|
Number
|
|
Description of Document
|
|
|
11.1
|
|
|
Code of Business Conduct and Ethics of the Registrant (incorporated by
reference to Exhibit 99.1 from our Registration Statement on Form F-1 (file
no. 333-147601) filed with the Securities and Exchange Commission on
November 23, 2007).
|
|
|
12.1
|
*
|
|
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
12.2
|
*
|
|
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
13.1
|
*
|
|
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
13.2
|
*
|
|
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
15.1
|
*
|
|
Consent of Conyers Dill & Pearman.
|
|
|
15.2
|
*
|
|
Consent of Fangda Partners.
|
|
|
15.3
|
*
|
|
Consent of Deloitte Touche Tohmatsu CPA Ltd.
|
|
|
|
|
|
*
|
|
Filed with this Annual Report on Form 20-F.
|
117
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 11, 2011
VANCEINFO TECHNOLOGIES INC.
Report of Independent Registered Public Accounting Firm
For the years ended December 31, 2008, 2009 and 2010
VANCEINFO TECHNOLOGIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
|
|
|
|
|
|
|
CONTENTS
|
|
PAGE(S)
|
|
|
|
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
|
|
F-59
|
|
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, 2009 and 2010 and the related consolidated statements of operations and comprehensive
income, changes in equity, and cash flows for each of the three years in the period ended
December 31, 2010. 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, 2009 and 2010, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2010 in conformity with accounting principles generally accepted in the United
States of America.
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, 2010, 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 11, 2011 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 11, 2011
|
|
|
F-1
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
64,057
|
|
|
|
161,265
|
|
|
Term deposit
|
|
|
10,000
|
|
|
|
5,000
|
|
|
Restricted cash
|
|
|
—
|
|
|
|
679
|
|
|
Held-to-maturity securities-current
|
|
|
12,122
|
|
|
|
13,208
|
|
|
Available-for-sale investment
|
|
|
—
|
|
|
|
1,302
|
|
|
Accounts receivable, net of allowance for doubtful
accounts of $1,018 and $1,956 as of December 31, 2009 and 2010, respectively
|
|
|
60,524
|
|
|
|
85,437
|
|
|
Prepaid expenses and other current assets
|
|
|
6,026
|
|
|
|
4,860
|
|
|
Deferred income tax assets-current
|
|
|
1,473
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
154,202
|
|
|
|
274,192
|
|
|
|
|
|
|
|
|
|
|
Rental deposits and prepaid rentals
|
|
|
1,658
|
|
|
|
2,393
|
|
|
Property and equipment, net
|
|
|
15,000
|
|
|
|
20,344
|
|
|
Acquired intangible assets, net
|
|
|
7,739
|
|
|
|
6,836
|
|
|
Goodwill
|
|
|
24,783
|
|
|
|
28,072
|
|
|
Long-term investment
|
|
|
930
|
|
|
|
193
|
|
|
Held-to-maturity securities, non-current
|
|
|
—
|
|
|
|
1,558
|
|
|
Prepaid land use right
|
|
|
879
|
|
|
|
18,009
|
|
|
Deferred income tax assets, non-current
|
|
|
—
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
205,191
|
|
|
|
351,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term bank loan
|
|
|
—
|
|
|
|
3,020
|
|
|
Accounts payable
|
|
|
702
|
|
|
|
823
|
|
|
Accrued expenses and other payables
|
|
|
24,200
|
|
|
|
36,377
|
|
|
Income tax payable
|
|
|
4,863
|
|
|
|
7,720
|
|
|
Deferred income-current
|
|
|
260
|
|
|
|
462
|
|
|
Deferred revenue-current
|
|
|
2,634
|
|
|
|
1,276
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,659
|
|
|
|
49,678
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities-non current
|
|
|
1,328
|
|
|
|
1,220
|
|
|
Deferred income-non-current
|
|
|
1,778
|
|
|
|
1,305
|
|
|
Deferred revenue-non-current
|
|
|
97
|
|
|
|
—
|
|
|
Long-term payable for business acquisition-non current
|
|
|
6,767
|
|
|
|
3,269
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
42,629
|
|
|
|
55,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 24 and 25)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.001 par value, 70,000,000 shares authorized;
39,888,092 and 44,556,910 shares issued and outstanding
as of December 31, 2009 and 2010, respectively)
|
|
|
40
|
|
|
|
45
|
|
|
Additional paid-in capital
|
|
|
111,680
|
|
|
|
208,431
|
|
|
Shares issuable in connection with business acquisitions
|
|
|
520
|
|
|
|
3,594
|
|
|
Accumulated other comprehensive income
|
|
|
4,924
|
|
|
|
8,836
|
|
|
Statutory reserves
|
|
|
2,307
|
|
|
|
3,478
|
|
|
Retained earnings
|
|
|
43,091
|
|
|
|
71,783
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
162,562
|
|
|
|
296,167
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
205,191
|
|
|
|
351,639
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In U.S. dollars in thousands, except share and share related data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Revenues
|
|
|
105,556
|
|
|
|
152,065
|
|
|
|
216,492
|
|
|
Business tax
|
|
|
(2,893
|
)
|
|
|
(3,999
|
)
|
|
|
(4,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
102,663
|
|
|
|
148,066
|
|
|
|
211,550
|
|
|
Cost of revenues (including share-based compensation of $265,
$313 and $492 in 2008, 2009 and 2010, respectively)
|
|
|
(62,911
|
)
|
|
|
(92,171
|
)
|
|
|
(132,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
39,752
|
|
|
|
55,895
|
|
|
|
78,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including share-based compensation of $1,126, $1,252
and $2,755 in 2008, 2009 and 2010, respectively)
|
|
|
(25,905
|
)
|
|
|
(34,710
|
)
|
|
|
(51,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(25,905
|
)
|
|
|
(34,710
|
)
|
|
|
(51,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
payable for business acquisition
|
|
|
—
|
|
|
|
(62
|
)
|
|
|
221
|
|
|
Other operating income
|
|
|
858
|
|
|
|
1,754
|
|
|
|
4,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
14,705
|
|
|
|
22,877
|
|
|
|
31,871
|
|
|
Interest income
|
|
|
2,028
|
|
|
|
856
|
|
|
|
782
|
|
|
Interest expense
|
|
|
(69
|
)
|
|
|
(86
|
)
|
|
|
(85
|
)
|
|
Exchange differences
|
|
|
703
|
|
|
|
(119
|
)
|
|
|
(950
|
)
|
|
Gain on re-measurement of fair value of noncontrolling equity investment
in connection with business acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and earnings in equity method investment
|
|
|
17,367
|
|
|
|
23,528
|
|
|
|
32,230
|
|
|
Income tax expense
|
|
|
(1,298
|
)
|
|
|
(2,089
|
)
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before earnings in equity method investment
|
|
|
16,069
|
|
|
|
21,439
|
|
|
|
29,712
|
|
|
Earnings in equity method investment
|
|
|
20
|
|
|
|
69
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,089
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to VanceInfo Technologies Inc. shareholders
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,089
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
2,578
|
|
|
|
(48
|
)
|
|
|
3,722
|
|
|
Unrealized gains (loss) on foreign currency exchange forward contract
|
|
|
—
|
|
|
|
145
|
|
|
|
(506
|
)
|
|
(Gains) loss on foreign currency exchange forward contract transfer to
statements of operations
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
202
|
|
|
Net unrealized gain on available-for-sale investment, net tax effect of $87
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income, net of tax
|
|
|
2,578
|
|
|
|
61
|
|
|
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
18,667
|
|
|
|
21,569
|
|
|
|
33,775
|
|
|
Comprehensive income attributable to the noncontrolling interest
|
|
|
84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Vanceinfo Technologies Inc.
|
|
|
18,751
|
|
|
|
21,569
|
|
|
|
33,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-ordinary share
|
|
|
0.43
|
|
|
|
0.56
|
|
|
|
0.74
|
|
|
Diluted-ordinary share
|
|
|
0.40
|
|
|
|
0.52
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in calculating net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic-ordinary share
|
|
|
37,276,306
|
|
|
|
38,389,495
|
|
|
|
40,298,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted-ordinary share
|
|
|
40,695,982
|
|
|
|
41,576,217
|
|
|
|
43,406,080
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CHANGE IN EQUITY
(In U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in connection
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
Additional
|
|
|
with business
|
|
|
comprehensive
|
|
|
Statutory
|
|
|
Retained
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
acquisitions
|
|
|
income
|
|
|
reserves
|
|
|
earnings
|
|
|
interest
|
|
|
shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2008
|
|
|
37,198,907
|
|
|
|
37
|
|
|
|
98,706
|
|
|
|
—
|
|
|
|
2,285
|
|
|
|
924
|
|
|
|
8,426
|
|
|
|
630
|
|
|
|
111,008
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
148,594
|
|
|
|
—
|
|
|
|
1,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,174
|
|
|
Shares issuable in connection with Chosen acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,527
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
Repurchase of ordinary shares
|
|
|
(226,622
|
)
|
|
|
—
|
|
|
|
(387
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,633
|
)
|
|
|
—
|
|
|
|
(2,020
|
)
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,391
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
392
|
|
|
|
(392
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,578
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,578
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,173
|
|
|
|
(84
|
)
|
|
|
16,089
|
|
|
Noncontrolling interest acquired in business combination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(546
|
)
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
39,120,879
|
|
|
|
39
|
|
|
|
101,184
|
|
|
|
1,527
|
|
|
|
4,863
|
|
|
|
1,316
|
|
|
|
22,574
|
|
|
|
—
|
|
|
|
131,503
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
422,213
|
|
|
|
1
|
|
|
|
2,088
|
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
Shares issuable in connection with TP acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
520
|
|
|
Repurchase of ordinary shares
|
|
|
(2,800
|
)
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
|
Issuance of ordinary shares upon share offering
|
|
|
345,000
|
|
|
|
—
|
|
|
|
2,648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,648
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,800
|
|
|
|
—
|
|
|
|
4208
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,208
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,565
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,565
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991
|
|
|
|
(991
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized gain on foreign currency exchange forward contract
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
|
Gain on foreign currency exchange forward contract transfer to statements
of operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(48
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,508
|
|
|
|
—
|
|
|
|
21,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
39,888,092
|
|
|
|
40
|
|
|
|
111,680
|
|
|
|
520
|
|
|
|
4,924
|
|
|
|
2,307
|
|
|
|
43,091
|
|
|
|
—
|
|
|
|
162,562
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
26,442
|
|
|
|
—
|
|
|
|
520
|
|
|
|
(520
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Shares issuable in connection with TP acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,978
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,978
|
|
|
Shares issuable in connection with AIT acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,616
|
|
|
Ordinary shares returned from an employee (Note 20)
|
|
|
(27,772
|
)
|
|
|
—
|
|
|
|
(537
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(537
|
)
|
|
Issuance of ordinary shares upon share offering
|
|
|
2,530,000
|
|
|
|
3
|
|
|
|
89,223
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89,226
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,140,148
|
|
|
|
2
|
|
|
|
4,508
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,510
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
3,037
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,037
|
|
|
Provision for statutory reserve
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
1,171
|
|
|
|
(1,171
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Unrealized loss on foreign currency exchange forward contract
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(506
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(506
|
)
|
|
Loss on foreign currency exchange forward contract transfer to statements
of operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
202
|
|
|
Net unrealized gain on available-for-sale investment, net tax effect of $87
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,722
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,722
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,863
|
|
|
|
—
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
44,556,910
|
|
|
|
45
|
|
|
|
208,431
|
|
|
|
3,594
|
|
|
|
8,836
|
|
|
|
3,478
|
|
|
|
71,783
|
|
|
|
—
|
|
|
|
296,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,089
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,391
|
|
|
|
1,565
|
|
|
|
3,247
|
|
|
Depreciation and amortization of property and equipment
|
|
|
2,896
|
|
|
|
4,078
|
|
|
|
6,397
|
|
|
Amortization of intangible assets
|
|
|
823
|
|
|
|
1,668
|
|
|
|
2,023
|
|
|
Loss (gain) on foreign currency exchange
forward contracts transfer to statements of operations
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
578
|
|
|
Loss (gain) on disposal of property and equipment
|
|
|
219
|
|
|
|
282
|
|
|
|
(298
|
)
|
|
Allowance for doubtful accounts
|
|
|
210
|
|
|
|
445
|
|
|
|
685
|
|
|
Change in fair value of contingent consideration payable for acquisition
|
|
|
—
|
|
|
|
62
|
|
|
|
(221
|
)
|
|
Earnings from equity method investment
|
|
|
(20
|
)
|
|
|
(69
|
)
|
|
|
(151
|
)
|
|
Gain on remeasurement of fair value of noncontrolling equity investment
in connection with business acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
(612
|
)
|
|
Accrued interest income of available-for-sale investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(41
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental deposits and prepaid rentals
|
|
|
(1,321
|
)
|
|
|
430
|
|
|
|
(475
|
)
|
|
Accounts receivable
|
|
|
(9,580
|
)
|
|
|
(22,446
|
)
|
|
|
(22,156
|
)
|
|
Accrued interest income of loan to shareholders
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
|
(323
|
)
|
|
|
(1,063
|
)
|
|
|
945
|
|
|
Deferred income tax assets-current
|
|
|
(257
|
)
|
|
|
(1,156
|
)
|
|
|
(901
|
)
|
|
Deferred income tax assets-non current
|
|
|
—
|
|
|
|
—
|
|
|
|
(41
|
)
|
|
Accounts payable
|
|
|
192
|
|
|
|
(2,485
|
)
|
|
|
74
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
30
|
|
|
|
(1,495
|
)
|
|
Accrued expenses and other payables
|
|
|
4,258
|
|
|
|
7,016
|
|
|
|
8,810
|
|
|
Income tax payable
|
|
|
1,470
|
|
|
|
2,479
|
|
|
|
2,643
|
|
|
Deferred income
|
|
|
—
|
|
|
|
757
|
|
|
|
(270
|
)
|
|
Deferred income tax liabilities-current
|
|
|
(145
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Prepaid for land use rights
|
|
|
—
|
|
|
|
(879
|
)
|
|
|
(16,727
|
)
|
|
Deferred income tax liabilities-non current
|
|
|
(398
|
)
|
|
|
(245
|
)
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,404
|
|
|
|
11,925
|
|
|
|
11,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(6,144
|
)
|
|
|
(6,416
|
)
|
|
|
(11,680
|
)
|
|
Purchase of non-current investment-held-to-maturity securities
|
|
|
(841
|
)
|
|
|
—
|
|
|
|
(1,560
|
)
|
|
Purchase of current investment-held-to-maturity securities
|
|
|
—
|
|
|
|
(12,104
|
)
|
|
|
(15,213
|
)
|
|
Proceeds from maturity of investments
|
|
|
—
|
|
|
|
—
|
|
|
|
13,648
|
|
|
Purchase of long-term investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(200
|
)
|
|
Purchase of available-for-sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(661
|
)
|
|
Repayments from shareholders for loans advanced
|
|
|
3,579
|
|
|
|
—
|
|
|
|
—
|
|
|
Consideration paid for business acquisitions (net of cash acquired
of $891, $1,730 and $824 in 2008, 2009 and 2010, respectively)
|
|
|
(6,738
|
)
|
|
|
(3,462
|
)
|
|
|
(127
|
)
|
|
Proceeds from disposal of property and equipment
|
|
|
15
|
|
|
|
34
|
|
|
|
501
|
|
|
Purchase of term deposit
|
|
|
(1,463
|
)
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
Cash received upon maturity of term deposit
|
|
|
1,464
|
|
|
|
1,465
|
|
|
|
5,000
|
|
|
Restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
(659
|
)
|
|
Payment for settlement of foreign currency forward exchange contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(10,128
|
)
|
|
|
(30,483
|
)
|
|
|
(11,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
302
|
|
|
|
3,625
|
|
|
|
5,011
|
|
|
Repayments of loans assumed in business acquisitions
|
|
|
(200
|
)
|
|
|
(2,386
|
)
|
|
|
—
|
|
|
Payment for issuance costs in connection with upon initial public offering
|
|
|
(1,054
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase of ordinary shares
|
|
|
(2,020
|
)
|
|
|
(13
|
)
|
|
|
—
|
|
|
Proceeds from issuance of ordinary shares upon share offering in 2009
|
|
|
—
|
|
|
|
3,624
|
|
|
|
—
|
|
|
Payment for issuance costs in connection with share offering in 2009
|
|
|
—
|
|
|
|
(712
|
)
|
|
|
(220
|
)
|
|
Proceeds from issuance in connection with share offering in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
89,816
|
|
|
Payment for issuance costs of ordinary shares upon share offering in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
(507
|
)
|
|
Consideration paid for business acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
(814
|
)
|
F-5
VANCEINFO TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — continued
(In U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term bank loan
|
|
|
1,463
|
|
|
|
—
|
|
|
|
2,939
|
|
|
Repayments of short-term bank loan
|
|
|
(1,317
|
)
|
|
|
(1,465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,826
|
)
|
|
|
2,673
|
|
|
|
96,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
|
|
|
678
|
|
|
|
(21
|
)
|
|
|
768
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,450
|
|
|
|
(15,885
|
)
|
|
|
96,440
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
76,835
|
|
|
|
79,963
|
|
|
|
64,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
79,963
|
|
|
|
64,057
|
|
|
|
161,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
343
|
|
|
|
1,055
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
96
|
|
|
|
80
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares issued and to be issued
|
|
|
2,701
|
|
|
|
549
|
|
|
|
1,616
|
|
|
Outstanding consideration payable for acquisitions during the year
|
|
|
3,106
|
|
|
|
8,187
|
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in payable for purchase of property and equipment
|
|
|
181
|
|
|
|
1,233
|
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued issuance costs related to share offerings
|
|
|
—
|
|
|
|
264
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
1.
|
|
ORGANIZATION AND PRINCIPAL ACTIVITIES
|
|
|
|
VanceInfo Technologies Inc. (“VanceInfo” or the “Company”), formerly known as Thinkplus
Investments Limited, was incorporated under the laws of the British Virgin Islands (“BVI”)
on April 19, 2004 and was re-domiciled to the Cayman Islands on October 10, 2005. VanceInfo,
together with its subsidiaries and variable interest entity (“VIE”), are hereinafter
referred to as the “Group”.
|
|
|
|
On August 31, 2004, through VanceInfo Creative Software Technology Ltd. (“VanceInfo
Beijing”), VanceInfo acquired the information technology services (“IT services”) business
and related assets of Beijing Wensi Chuangyi Software Technology Co., Ltd. (“Wensi
Chuangyi”) and its subsidiaries, the predecessor of VanceInfo. Wensi Chuangyi was
established under the laws of the People’s Republic of China (“PRC”) in 1995 and engaged in
the provision of localization and quality assurance testing services. The acquisition of
Wensi Chuangyi was accounted for as a purchase business combination with net assets recorded
at their fair value at the date of acquisition. Before the acquisition of Wensi Chuangyi,
the Group did not have significant operations.
|
|
|
|
The Group is principally engaged in the provision of IT services that mainly include quality
assurance testing, application development and maintenances, research and development,
globalization and localization, and enterprise solutions in the PRC.
|
|
|
|
As of December 31, 2010, the Group’s subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Place of
|
|
Percentage
|
|
|
|
|
acquisition/
|
|
establishment/
|
|
of beneficial
|
|
|
Subsidiaries
|
|
incorporation
|
|
incorporation
|
|
ownership
|
|
|
|
|
VanceInfo Beijing
|
|
July 2, 2004
|
|
PRC
|
|
|
100
|
%
|
|
VanceInfo Creative Software Technology Ltd. (“VanceInfo BVI”)
|
|
August 6, 2004
|
|
BVI
|
|
|
100
|
%
|
|
VanceInfo Japan Inc. (“VanceInfo Japan”)
|
|
November 25, 2004
|
|
Japan
|
|
|
99.9
|
%
|
|
VanceInfo Technologies Inc. (“VanceInfo US”)
|
|
November 29, 2005
|
|
United States of
America (“US”)
|
|
|
100
|
%
|
|
VanceInfo Technologies Limited
|
|
March 27, 2007
|
|
Hong Kong
|
|
|
100
|
%
|
|
Shanghai VanceInfo Technologies Limited
(“Shanghai Vanceinfo”, formerly name “Solutions” )
|
|
May 29, 2007
|
|
PRC
|
|
|
100
|
%
|
|
Beijing Chosen Technology Co., Ltd. (“Chosen”)
|
|
July 31, 2007
|
|
PRC
|
|
|
100
|
%
|
|
VanceInfo Technologies Limited
|
|
November 15, 2007
|
|
PRC
|
|
|
100
|
%
|
|
Shanghai VanceInfo Creative Software Technology Limited
(“Vanceinfo Shanghai Creative”)
|
|
September 9, 2008
|
|
PRC
|
|
|
100
|
%
|
|
VanceInfo Malaysia Inc. Sdn. Bhd
|
|
October 9, 2008
|
|
Malaysia
|
|
|
100
|
%
|
|
Shenzhen VanceInfo Creative Software Technology Limited
(“Vanceinfo Shenzhen”)
|
|
October 28, 2008
|
|
PRC
|
|
|
100
|
%
|
|
Nanjing VanceInfo Creative Software Technology Limited
(“Nanjing Vanceinfo”)
|
|
December 19, 2008
|
|
PRC
|
|
|
100
|
%
|
|
TP Teleservices Limited (“TP Teleservices”)
|
|
July 2, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
|
TP (Hong Kong) Limited (“TP HK”)
|
|
July 2, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
|
TP Consultants Limited (“TP Consultant”)
|
|
July 2, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
|
TP (Taiwan) Limited (“TP Taiwan”)
|
|
July 2, 2009
|
|
Hong Kong
|
|
|
100
|
%
|
|
TP Software Technology (Shanghai) Co., Ltd. (“TP Shanghai”)
|
|
July 2, 2009
|
|
PRC
|
|
|
100
|
%
|
|
Link Result Limited (“Link Result”)
|
|
July 2, 2010
|
|
Hong Kong
|
|
|
100
|
%
|
|
A-IT (Shanghai) Software Services Co., Ltd. (“AIT”)
|
|
July 2, 2010
|
|
PRC
|
|
|
100
|
%
|
F-7
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
Basis of presentation
|
|
|
|
|
|
The consolidated financial statements of the Group are prepared in accordance with
accounting principles generally accepted in the United States of America (“US GAAP”).
|
|
|
|
Basis of consolidation
|
|
|
|
|
|
The consolidated financial statements include the financial statements of VanceInfo, its
subsidiaries and its VIE. All inter-company transactions and balances have been eliminated
upon consolidation.
|
|
|
|
Use of estimates
|
|
|
|
|
|
The preparation of financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities,
and revenue and expenses in the financial statements and accompanying notes. Significant
accounting estimates reflected in the Group’s financial statements include allowance for
doubtful accounts, useful lives and impairment of property and equipment, impairment of
goodwill and indefinite-lived intangible assets, economic lives of intangible assets,
purchase price allocation in business combinations, contingent consideration for business
acquired, fair value of hedging, valuation allowance for deferred tax assets, and
stock-based compensation expense. Actual results could differ from those estimates.
|
|
|
|
|
|
Significant risks and uncertainties
|
|
|
|
The Group participates in a dynamic industry and believes that changes in any of the
following areas could have a material adverse effect on the Group’s future financial
position, results of operations, or cash flows: advances and trends in new technologies and
industry standards; competition from other competitors; regulatory or other PRC related
factors; risks associated with the Group’s ability to attract and retain employees necessary
to support its growth; risks associated with the Group’s growth strategies; and general
risks associated with the IT services industry.
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
Cash and cash equivalents consist of cash on hand and highly liquid investments, which are
unrestricted as to withdrawal or use, and which have maturities of three months or less when
purchased.
|
|
|
|
|
|
Restricted cash
|
|
|
|
Restricted cash represents a term deposit pledged for a short-term loan. Cash held in such
accounts is restricted for a period of twelve months.
|
F-8
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Fair value
|
|
|
|
|
|
Fair value is the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Group considers the principal or most
advantageous market in which it would transact and it considers assumptions that market
participants would use when pricing the asset or liability.
|
|
|
|
Authoritative literature provides a fair value hierarchy that requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. A financial instrument’s categorization within the fair value hierarchy is based
upon the lowest level of input that is significant to the fair value measurement as follows:
|
|
|
|
|
|
Level 1
|
|
|
|
Level 1 applies to assets or liabilities for which there are quoted prices in active markets
for identical assets or liabilities.
|
|
|
|
|
|
Level 2
|
|
|
|
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability such as quoted prices
for similar assets or liabilities in active markets; quoted prices for identical assets or
liabilities in markets with insufficient volume or infrequent transactions (less active
markets); or model-derived valuations in which significant inputs are observable or can be
derived principally from, or corroborated by, observable market data.
|
|
|
|
|
|
Level 3
|
|
|
|
Level 3 applies to assets or liabilities for which there are unobservable inputs to the
valuation methodology that are significant to the measurement of the fair value of the
assets or liabilities.
|
|
|
|
The Group’s financial instruments include cash and cash equivalents, held-to-maturity
securities, accounts receivable, short-term bank loan and accounts payable, the carrying
values of which approximate their fair value due to their short-term maturities.
|
|
|
|
The Group’s financial assets and liabilities measured at fair value on a recurring basis as
of December 31, 2009 and 2010 include the foreign currency exchange forward contracts based
on Level 2 inputs, available-for-sale investment and contingent consideration payable in
connection with a business acquisition based on Level 3 inputs.
|
|
|
|
The Group’s financial assets and liabilities measured at fair value on a non-recurring basis
include acquired assets and liabilities based on Level 3 inputs in connection with business
acquisitions.
|
|
|
|
It is not practicable to estimate the fair value of the Group’s long-term investment because
of lack of quoted market prices and the inability to estimate fair value without incurring
excessive costs.
|
F-9
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Held-to-maturity securities
|
|
|
|
|
|
The Group’s held-to-maturity securities are classified as held-to-maturity
securities-current and held-to-maturity securities-non current on the consolidated balance
sheets based on their contractual maturity dates and are stated at their amortized costs.
|
|
|
|
|
|
Available-for-sale investment
|
|
|
|
Available-for-sale investment are carried at their fair values and the unrealized gains or
losses from the changes in fair values are included in accumulated other comprehensive
income. Available-for-sale investment is classified as current assets on the consolidated
balance sheets because they are available for immediate sale.
|
|
|
|
In April 2009, the Financial Accounting Standards Board (FASB) issued guidance amending
existing US GAAP relating to other than temporary impairment (“OTTI”) for debt securities to
improve presentation and disclosure of OTTI on debt securities in the financial statements.
The new guidance requires that an entity separates the amount of the OTTI into the amount
that is credit related (credit loss component) and the amount due to all other factors. The
credit loss component is recognized in earnings, which represents the difference between a
security’s amortized cost basis and the discounted present value of expected future cash
flows. The amount due to other factors is recognized in other comprehensive income if the
entity neither intends to sell and will not more likely than not be required to sell the
security before recovery. The difference between the amortized cost basis and the cash flows
expected to be collected is accreted as interest income. The Group early adopted the new
guidance on January 1, 2009. The adoption of the new guidance did not result in a
cumulative-effective adjustment as of January 1, 2009.
|
|
|
|
|
|
Derivatives and hedge accounting
|
|
|
|
The Group’s risk management strategy includes the use of derivative and non-derivative
financial instruments as hedges of foreign currency exchange risk, whenever management
determines their use to be reasonable and practical. This strategy does not permit the use
of derivative financial instruments for trading purposes, nor does it allow for speculation.
|
|
|
|
The Group uses foreign currency forward exchange contracts to hedge the exposure to foreign
currency risk, primarily Japanese Yen (“JPY”). The purpose of the Group’s foreign currency
derivative activities is to protect the Group from the risk that the functional currencies
net cash flows of the Group’s operating entities resulting from forecasted JPY denominated
revenue transactions will be negatively affected by the fluctuation in exchange rates. The
Group uses foreign currency forward exchange contracts to offset changes in the amount of
future cash flows associated with certain third-party sales expected to occur within the
next twelve months. These contracts, which are designated and documented as cash flow
hedges, qualify for hedge accounting treatment. The effectiveness of the cash flow hedge
contracts is assessed quarterly using regression analysis as well as other timing and
probability criteria. To receive special hedge accounting treatment, all hedging
relationships are formally documented at the inception of the
hedge and the hedges are expected to be highly effective in offsetting changes to future
cash flows generated from hedged transactions.
|
F-10
VANCEINFO TECHNOLOGIES INC.
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Derivatives and hedge accounting —
continued
|
|
|
|
|
|
The Group carries these contracts as either assets or liabilities at fair value. The Group
excludes from its assessment of hedge effectiveness the portion of changes in fair value of
the forward contracts attributable to the changes in difference between the spot exchange
rate and the forward exchange rate (“spot-forward difference”), which is recognized in the
exchange differences account in the statements of operations when incurred. The Group
recognizes the effective portion of the gains and losses on these contracts, which
represents the changes in fair values of these contracts excluding the changes in relation
to spot-forward difference, in other comprehensive income and reclassifies such gains and
losses subsequently in the exchange differences account in the statements of operations when
the forecasted revenue is recognized.
|
|
|
|
|
|
Accounts receivable
|
|
|
|
Accounts receivable represents those receivables derived in the ordinary course of business.
The Group conducts credit evaluations of customers and generally do not require collateral
or other security from their customers. The Group establishes an allowance for doubtful
accounts based upon estimates, historical experience and other factors surrounding the
credit risk of specific customers.
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
Property and equipment, net, are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line method
over the following estimated useful lives:
|
|
|
|
|
|
|
|
Furniture and office equipment
|
|
5 years
|
|
Motor vehicles
|
|
5 years
|
|
Computers and software
|
|
5 years
|
|
Leasehold improvements
|
|
Shorter of the term of the lease or the
estimated useful lives of the assets
|
|
|
|
|
Business combinations
|
|
|
|
|
|
Business combinations are recorded using the purchase method of accounting. On January 1,
2009, the Group adopted a new accounting pronouncement with prospective application which
made certain changes to the previous authoritative literature on business combinations. From
January 1, 2009, the assets acquired, the liabilities assumed, and any noncontrolling
interest of the acquiree at the acquisition date, if any, are measured at their fair values
as of that date. Goodwill is recognized and measured as the excess of the total
consideration transferred plus the fair value of any noncontrolling interest of the
acquiree, if any, at the acquisition date over the fair values of the identifiable net
assets acquired. Previously, any non-controlling interest was reflected at historical cost.
Common forms of the consideration made in acquisitions include cash and common equity
instruments. Consideration transferred in a business acquisition is measured at the fair
value as at the date of acquisition. For shares issued in a business combination, the Group
has estimated the fair value as of the date of acquisition.
|
F-11
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Business combinations
— continued
|
|
|
|
Where the consideration in an acquisition includes contingent consideration, the payment of
which depends on the achievement of certain specified conditions post-acquisition, from
January 1, 2009 the contingent consideration is recognized and measured at its fair value at
the acquisition date and if recorded as a liability, it is subsequently carried at fair
value with changes in fair value reflected in earnings. For periods prior to January 1, 2009
contingent consideration was not recorded until the contingency was resolved.
|
|
|
|
|
|
Acquired intangible assets, net
|
|
|
|
Acquired intangible assets with finite lives are carried at cost less accumulated
amortization. Amortization of customer base and relationship is computed using the
estimated attrition pattern of the acquired customers or straight-line method based on
specific estimated benefit pattern. Amortization of other finite-lived intangible assets is
computed using the straight-line method. The estimated economic lives of acquired intangible
assets with finite lives are as follows:
|
|
|
|
|
|
|
|
Contract backlog
|
|
0.17-1 year
|
|
|
Customer base and relationship
|
|
3-10 years
|
|
|
Non-compete agreement
|
|
2-5 years
|
|
|
Software technology
|
|
2 years
|
|
|
|
|
Acquired intangible assets with indefinite lives including tradename of $2,393 are carried
at cost without amortization regularly recognized.
|
|
|
|
|
|
Long-term investment
|
|
|
|
Investee companies over which the Group has the ability to exercise significant influence,
but does not have a controlling interest are accounted for using the equity method.
Significant influence is generally considered to exist when the Group has an ownership
interest in the voting stock of the investee between 20% and 50%, and other factors, such as
representation in the investee’s Board of Directors, voting rights and the impact of
commercial arrangements, are considered in determining whether the equity method of
accounting is appropriate.
|
|
|
|
An impairment charge is recorded when the carrying amount of the investment exceeds its fair
value and this condition is determined to be other-than-temporary.
|
F-12
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
|
|
Impairment of long-lived assets
|
|
|
|
The Group reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may no longer be recoverable.
When these events occur, the Group measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the sum of the expected
undiscounted cash flow is less than the carrying amount of the assets, the Group would
recognize an impairment loss based on the excess of the carrying amount over the fair value
of the long-lived assets.
|
|
|
|
|
|
Impairment of goodwill and indefinite-lived intangible assets
|
|
|
|
The Group annually, or more frequently if the Group believes indicators of impairment exist,
reviews the carrying value of intangible assets not subject to amortization, including
goodwill, to determine whether impairment may exist.
|
|
|
|
Specifically, goodwill impairment is determined using a two-step process. The first step
compares the fair value of each reporting unit to its carrying amount, including goodwill.
If the fair value of each reporting unit exceeds its carrying amount, goodwill is not
considered to be impaired and the second step will not be required. If the carrying amount
of a reporting unit exceeds its fair value, the second step compares the implied fair value
of the affected reporting unit’s goodwill to the carrying value of that goodwill. The
implied fair value of goodwill is determined in a manner similar to accounting for a
business combination with the allocation of the assessed fair value determined in the first
step to the assets and liabilities of the reporting unit. The excess of the fair value of
the reporting unit over the amounts assigned to the assets and liabilities is the implied
fair value of goodwill. An impairment loss is recognized for any excess in the carrying
value of goodwill over the implied fair value of goodwill. Estimating fair value is
performed by utilizing various valuation techniques, with the primary technique being a
discounted cash flow.
|
|
|
|
The impairment test for intangible assets not subject to amortization consists of a
comparison of the fair value of the intangible assets with their carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. The estimates of fair value of intangible
assets not subject to amortization are determined using various discounted cash flow
valuation methodologies. Significant assumptions are inherent in this process, including
estimates of discount rates. Discount rate assumptions are based on an assessment of the
risk inherent in the respective intangible assets.
|
|
|
|
The Group determines the entities which have similar economic characteristics as a reporting
unit and performs its annual goodwill and indefinite-lived intangible assets impairment test
on the last day of each fiscal year. The Group did not incur any impairment loss on
goodwill or other intangible assets not subject to amortization for the years ended December
31, 2008, 2009 or 2010.
|
F-13
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
|
|
Revenue recognition
|
|
|
|
|
|
Research and development outsourcing services and IT services
|
|
|
|
The majority of the contracts are for the provision of services performed on a
time-and-material basis. For time-and-material contracts, the Group may render initial
development and maintenance services, typically for a period of less than one year and are
subject to the terms of the master agreement which fixes the billing rates for man-hours
based on level of experience of the engineers regardless of the type of engaged services.
The Group bills customers for related service performance based on pre-agreed charge rates.
Customers may terminate contracts before completion and revenue is considered to be
realizable and earned when all of the following criteria are met: persuasive evidence of a
sales arrangement exists; delivery has occurred or services have been rendered; the price is
fixed or determinable; and collectability is reasonably assured. Thus, the revenues from
this type of contracts are recognized as the billable services are rendered. Software
developed by the Group on behalf of its customers is transferred in its entirety to the
customers. Revenues recognized for time-and-material contracts amounted to $93,525,
$107,866 and $134,019 for the years ended December 31, 2008, 2009 and 2010, respectively.
|
|
|
|
The remaining revenues are earned from fixed-price service contracts. Revenue from
fixed-price contracts require the Group to perform services throughout the contractual
period, which is generally less than one year. Revenues from fixed-price contracts are
generally recognized as per the proportional performance method using an output measure
determined by achievement of milestones which include planning documentation and testing
reports. The Group estimates the man-hours involved in achieving each of these milestones
and when the milestone is achieved the Group recognizes a proportion of the total revenue
under the contract based on the hours incurred in achieving that milestone against its
latest estimate of the total man-hours to be incurred in performing the contract. Revenues
recognized for fixed-price contracts amounted to $12,031 $40,426 and $78,015 for the years
ended December 31, 2008, 2009 and 2010, respectively.
|
|
|
|
Reimbursable out-of-pocket expenses and material costs are recognized as revenues when
billed.
|
|
|
|
The discount terms in the Group’s arrangements with customers generally entitle the customer
to discounts if the customer completes a specified cumulative level of revenue transactions.
The discounts are passed to the customer either as cash payments or as a reduction of
payments due from the customer. The Group has recorded its revenue rebate as reduction in
revenues appropriately at the time of sales.
|
F-14
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Revenue recognition
— continued
|
|
|
|
|
|
Other solutions
|
|
|
|
The Group derives revenues from providing system integration solutions, which normally
include the procurement of hardware on behalf of customers and customized software licenses,
implementation of the software and hardware, and post contract customer supports (“PCS”)
including telephone supports and on-site supports.
|
|
|
|
The Group has established the vender-specific objective evidence (“VSOE”) of fair value of
the PCS based on standalone sales on regular basis and therefore treats the arrangements as
two units of accounting, which are (1) hardware and software implementation and (2) PCS.
Revenues of the hardware and software implementation are primarily recognized using
percentage-of-completion method measured based on the relationship of costs already incurred
to the total estimated costs to be incurred. The Group considers labor costs and other
direct contract costs in calculating the percentage of completion. Revenues of the PCS are
recognized ratably over the PCS period.
|
|
|
|
In addition, the Group, through certain subsidiary, performed a few other projects which
involved IT services, software resale, and maintenance service which is considered PCS.
Since the Group has not established the VSOE of the fair value of any element of these
projects, the contract amounts were recognized as revenues ratably over the period of PCS,
which was the last undelivered element in the arrangements.
|
|
|
|
Revenue recognized in excess of billings is recorded as unbilled receivables and is included
in accounts receivable. Amounts billed but not yet collected are recorded as billed
receivables and are included in accounts receivable. All billed and unbilled amounts are
expected to be collected within one year. Cash received from billings in excess of revenues
recognized is recorded as deferred revenue.
|
|
|
|
|
|
Business tax
|
|
|
|
The Group’s PRC subsidiaries are subject to business tax at rate of 5% of total revenues for
certain types of contracts. Certain services contracts are exempted from business tax in
accordance with the PRC tax laws. Business tax is recorded as a reduction in revenues when
incurred.
|
F-15
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
|
|
Government subsidies
|
|
|
|
The Group receives non-repayable subsidies from PRC local government agencies after meeting
certain conditions, such as locating their office in certain districts or obtaining certain
technological certification. The subsidies are recorded in other operating income on the
consolidated statements of operations in the period in which the right to receive such
subsidies is established.
|
|
|
|
|
|
Operating leases
|
|
|
|
Leases where substantially all the rewards and risks of ownership of assets remain with the
leasing companies are accounted for as operating leases. Payments made under operating
leases are charged to the consolidated statements of operations on a straight-line basis
over the lease periods.
|
|
|
|
|
|
Advertising costs
|
|
|
|
The Group expenses advertising costs as incurred. Total advertising expenses were $8, $62
and $31 for the years ended December 31, 2008, 2009 and 2010, respectively, and have been
included as part of selling, general and administrative expenses.
|
|
|
|
|
|
Income taxes
|
|
|
|
Deferred income taxes are recognized for temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements, net operating
loss carry forwards and credits by applying enacted statutory tax rates applicable to future
years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Current income taxes are provided for in accordance with the laws of
the relevant tax authorities. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on their characteristics.
|
|
|
|
The impact of an uncertain income tax position on the income tax return must be recognized
at the largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be recognized if it
has less than a 50% likelihood of being sustained. The Group classifies interest and
penalties, if any, as a component of its income tax provision.
|
F-16
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
The functional and reporting currency of VanceInfo and VanceInfo BVI are the United States
dollar (“U.S. dollar”). The financial records of the Company’s other subsidiaries and VIE
are maintained in their local currencies, which are the functional currencies of these
entities.
|
|
|
|
Monetary assets and liabilities denominated in currencies other than the functional currency
are translated into the functional currency at the rates of exchange ruling at the balance
sheet date. Transactions in currencies other than the functional currency during the year
are converted into functional currency at the applicable rates of exchange prevailing when
the transactions occurred. Transaction gains and losses are recognized in the statements of
operations.
|
|
|
|
The Group’s entities with functional currency other than U.S. dollar translate their
operating results and financial position into the U.S. dollar, the Company’s reporting
currency. Assets and liabilities are translated using the exchange rates in effect on the
balance sheet date. Equity amounts are translated at historical exchange rates, and
revenues, expenses, gains and losses are translated using the average rate for the year.
Translation adjustments are reported as cumulative translation adjustments and are shown as
a separate component of other comprehensive income.
|
|
|
|
|
|
Comprehensive income
|
|
|
|
Comprehensive income includes net income, unrealized gains on foreign currency forward
exchange contracts for effective portion and foreign currency translation adjustments.
Comprehensive income is reported in the consolidated statements of operations and
comprehensive income.
|
|
|
|
|
|
Concentration of credit risk
|
|
|
|
Financial instruments that potentially expose the Group to concentration of credit risk
consist primarily of cash and cash equivalents and accounts receivable. The Group places
their cash and cash equivalents with authorized financial institutions.
|
|
|
|
Details of customers accounting for 10% or more of total revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
|
11
|
|
|
|
5
|
|
|
|
1
|
|
|
B
|
|
|
18
|
|
|
|
13
|
|
|
|
12
|
|
|
C
|
|
|
10
|
|
|
|
23
|
|
|
|
26
|
|
|
D
|
|
|
9
|
|
|
|
11
|
|
|
|
9
|
|
F-17
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Concentration of credit risk
— continued
|
|
|
|
Details of customers accounting for 10% or more of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
A
|
|
|
3
|
|
|
|
1
|
|
|
B
|
|
|
6
|
|
|
|
5
|
|
|
C
|
|
|
39
|
|
|
|
46
|
|
|
|
|
Share-based payment transactions with employees are measured based on the grant date fair
value of the equity instrument issued and recognized as compensation expense net of a
forfeiture rate over the requisite service period based on a graded vesting attribution
method, with a corresponding impact reflected in additional paid-in capital. The estimate
of forfeitures will be adjusted over the requisite service period to the extent that actual
forfeitures differ, or are expected to differ, from such estimates. Changes in estimated
forfeitures are recognized through a cumulative catch-up adjustment in the period of change.
|
|
|
|
|
|
Net income per share
|
|
|
|
Basic net income per share is computed by dividing net income attributable to ordinary
shareholders of the Company by the weighted average number of ordinary shares outstanding
during the year.
|
|
|
|
The Group had stock options, nonvested shares, and ordinary shares to be issued contingent
upon the satisfaction of certain conditions in connection with business acquisitions, which
could potentially dilute basic earnings per share in the future. To calculate the number of
shares for diluted income per share, the effect of stock options and nonvested shares is
computed using the treasury stock method. Ordinary shares to be issued contingent upon the
attainment of specified earnings levels in future periods by the acquired businesses are
recorded when the contingency is resolved and additional share consideration is issuable.
|
F-18
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
|
|
Recently issued accounting standards
|
|
|
|
In January 2010, the FASB issued authoritative guidance to improve disclosures about fair
value measurements. This guidance amends previous guidance on fair value measurements to
add new requirements for disclosures about transfers into and out of Levels 1 and 2 and
separate disclosures about purchases, sales, issuances, and settlements relating to Level 3
measurement on a gross basis rather than on a net basis as currently required. This
guidance also clarifies existing fair value disclosures about the level of disaggregation
and about inputs and valuation techniques used to measure fair value. This guidance is
effective for annual and interim periods beginning after December 15, 2009, except for the
requirement to provide the Level 3 activities of purchases, sales, issuances, and
settlements on a gross basis, which will be effective for annual and interim periods
beginning after December 15, 2010. Early application is permitted and, in the period of
initial adoption, entities are not required to provide the amended disclosures for any
previous periods presented for comparative purposes. The Group does not expect the adoption
of this pronouncement to have a significant impact on its financial condition or results of
operations.
|
|
|
|
In April 2010, the FASB issued an authoritative pronouncement on milestone method of revenue
recognition. The scope of this pronouncement is limited to arrangements that include
milestones relating to research or development deliverables. The pronouncement specifies
guidance that must be met for a vendor to recognize consideration that is contingent upon
achievement of a substantive milestone in its entirety in the period in which the milestone
is achieved. The guidance applies to milestones in arrangements within the scope of this
consensus regardless of whether the arrangement is determined to have single or multiple
deliverables or units of accounting. The pronouncement will be effective for fiscal years,
and interim periods within those years, beginning on or after June 15, 2010. Early
application is permitted. Companies can apply this guidance prospectively to milestones
achieved after adoption. However, retrospective application to all prior periods is also
permitted. The Group does not expect the adoption of this guidance would have a significant
effect on its consolidated financial position or results of operations.
|
F-19
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
2.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued
|
|
|
|
Recently issued accounting standards
— continued
|
|
|
|
In December 2010, the FASB issued an authoritative pronouncement on when to perform Step 2
of the goodwill impairment test for reporting units with zero or negative carrying amounts.
The amendments in this update modify Step 1 so that for those reporting units, an entity is
required to perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than not that a
goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The qualitative factors are
consistent with existing guidance, which requires that goodwill of a reporting unit be
tested for impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying
amount. For public entities, the guidance is effective for impairment tests performed during
entities’ fiscal years (and interim periods within those years) that begin after December
15, 2010. Early adoption will not be permitted. For nonpublic entities, the guidance is
effective for impairment tests performed during entities’ fiscal years (and interim periods
within those years) that begin after December 15, 2011. Early application for nonpublic
entities is permitted; nonpublic entities that elect early application will use the same
effective date as that for public entities. The Group does not expect the adoption of this
guidance would have a significant effect on its consolidated financial position or results
of operations.
|
|
|
|
In December 2010, the FASB issued an authoritative pronouncement on disclosure of
supplementary pro forma information for business combinations. The objective of this
guidance is to address diversity in practice regarding the interpretation of the pro forma
revenue and earnings disclosure requirements for business combinations. The amendments in
this update specify that if a public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The amendments also expand the supplemental
pro forma disclosures to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The amendments affect any public
entity as defined by Topic 805 that enters into business combinations that are material on
an individual or aggregate basis. The amendments will be effective for business combinations
consummated in periods beginning after December 15, 2010, and should be applied
prospectively as of the date of adoption. Early adoption is permitted. The Group does not
expect the adoption of this guidance would have a significant effect on its consolidated
financial position or results of operations.
|
F-20
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
|
|
The Group’s chief operating decision maker has been identified as the Chief Executive
Officer, who reviews consolidated results when making decisions about allocating resources
and assessing performance of the Group. The Group has only one operating segment.
|
|
|
|
|
|
Geographic information
|
|
|
|
The Group’s major operating entities’ country of domicile is Greater China which refers to
the PRC, including, for purposes of the accompanying financial statements only, Taiwan, Hong
Kong and Macau.
|
|
|
|
The following tables summarize the Group’s long-lived assets and net revenues in different
geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Greater China
|
|
|
47,277
|
|
|
|
73,046
|
|
|
US
|
|
|
2,388
|
|
|
|
2,228
|
|
|
Others
|
|
|
1,324
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,989
|
|
|
|
75,847
|
|
|
|
|
|
|
|
|
|
F-21
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
3.
|
|
SEGMENT INFORMATION — continued
|
|
|
|
Geographic information
— continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
US
|
|
|
56,175
|
|
|
|
56,634
|
|
|
|
70,955
|
|
|
Greater China
|
|
|
22,045
|
|
|
|
59,373
|
|
|
|
95,481
|
|
|
Europe
|
|
|
14,991
|
|
|
|
23,148
|
|
|
|
32,178
|
|
|
Japan
|
|
|
9,157
|
|
|
|
8,466
|
|
|
|
9,889
|
|
|
Others
|
|
|
295
|
|
|
|
445
|
|
|
|
3,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
102,663
|
|
|
|
148,066
|
|
|
|
211,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on the countries in which the customers’ headquarters are located. In
determining the geographic information, customers under common control, such as
subsidiary and its parent entity, are treated as a single customer.
|
|
|
|
The following table summarizes the Group’s net revenues by service lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outsourcing Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research & development services
|
|
|
60,808
|
|
|
|
90,581
|
|
|
|
124,181
|
|
|
Globalization & localization
|
|
|
4,259
|
|
|
|
5,118
|
|
|
|
6,060
|
|
|
IT Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise solutions
|
|
|
13,542
|
|
|
|
14,429
|
|
|
|
19,725
|
|
|
Application development & maintenance
|
|
|
17,061
|
|
|
|
26,373
|
|
|
|
43,825
|
|
|
Quality assurance & testing
|
|
|
6,717
|
|
|
|
7,807
|
|
|
|
13,003
|
|
|
Other Solutions and Services
|
|
|
276
|
|
|
|
3,758
|
|
|
|
4,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
102,663
|
|
|
|
148,066
|
|
|
|
211,550
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS
|
|
|
|
|
|
Acquisition of Solutions’ equity interest
|
|
|
|
On April 1, 2007, the Group entered into an equity transfer agreement to acquire a 75%
equity interest in Solutions, a professional outsourcing service provider, for an initial
equity consideration of 913,393 ordinary shares of VanceInfo at a fair value of $1.71 per
ordinary share on April 1, 2007, the date of the share issuance. The fair value of
VanceInfo ordinary shares was determined by the Company after considering a number of
factors, including the result of an appraisal by a third party appraiser. The transaction
was considered as a business acquisition and accordingly the purchase method of accounting
has been applied. The $394 of contingent consideration, which represents the lesser of the
maximum amount of contingent consideration and the amount of negative goodwill, was
recognized as of the date of acquisition.
|
|
|
|
The transaction was closed on May 29, 2007, which was determined as the date of acquisition.
|
|
|
|
The acquired net assets were recorded at their fair value at the date of acquisition. The
aggregate initial purchase price of $2,014 consisted of the following:
|
|
|
|
|
|
|
|
Fair value of ordinary shares
|
|
|
1,562
|
|
|
Contingent consideration recognized
|
|
|
394
|
|
|
Cost of transaction
|
|
|
58
|
|
|
|
|
|
|
|
Total
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
Cash acquired
|
|
|
1,804
|
|
|
|
|
|
|
Other current assets
|
|
|
1,328
|
|
|
|
|
|
|
Property and equipment
|
|
|
277
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
187
|
|
|
9.6 years
|
|
Non-compete agreement
|
|
|
21
|
|
|
3.8 years
|
|
Deferred income tax liabilities
|
|
|
(51
|
)
|
|
|
|
|
|
Short-term loan
|
|
|
(261
|
)
|
|
|
|
|
|
Other current liabilities
|
|
|
(672
|
)
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of Solutions’ equity interest
— continued
|
|
|
|
Pursuant to the terms of original purchase agreement, an additional cash consideration was
determined, based on the operating results of Solutions in 2007, to be $62, which was paid
in 2008. Since $394, the contingent consideration recognized as of the date of acquisition
was more than $62, the determined additional cash consideration, the excess of $332 was
allocated as a pro rata reduction of the carrying amounts of acquired non-current assets.
|
|
|
|
On July 23, 2008, the Group acquired an additional 10% equity interest in Solutions for a
consideration of $58 in cash and 58,348 ordinary shares of Vanceinfo at a fair value of
$7.06 per ordinary share. On August 13, 2008, the Group acquired the remaining 15% equity
interest in Solutions for a consideration of $869 in cash which was paid in 2008. The
aggregate purchase price of $1,348 consisted of the following:
|
|
|
|
|
|
|
|
Cash consideration
|
|
|
927
|
|
|
Fair value of ordinary shares
|
|
|
412
|
|
|
Cost of transaction
|
|
|
9
|
|
|
|
|
|
|
|
Total
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Contract Backlog
|
|
|
1
|
|
|
0.17 year
|
|
Non-compete agreement
|
|
|
6
|
|
|
2.4 years
|
|
Goodwill
|
|
|
795
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of WIT’s equity interest
|
|
|
|
On October 1, 2008, the Group acquired a 100% equity interest in Wireless Info Tech, Ltd.
(“WIT”), a professional outsourcing service provider, for an initial consideration of $1,080
in cash. Additional cash and share contingent considerations were determined based on
specified earnings objectives predefined for the six-month period ended March 31, 2009 and
twelve-month period ended March 31, 2010, respectively. The transaction was considered an
acquisition of a business and accordingly the purchase method of accounting has been
applied.
|
F-24
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of WIT’s equity interest
— continued
|
|
|
|
The acquired net assets were recorded at their fair value at the date of acquisition. The
aggregate purchase price of $1,147 consisted of the following:
|
|
|
|
|
|
|
|
Cash consideration
|
|
|
1,080
|
|
|
Cost of transaction
|
|
|
67
|
|
|
|
|
|
|
|
Total
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
The purchase price was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired
|
|
|
891
|
|
|
|
|
|
|
Other current assets
|
|
|
858
|
|
|
|
|
|
|
Property and equipment
|
|
|
285
|
|
|
|
|
|
|
Rental deposits
|
|
|
33
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Non-compete agreement
|
|
|
48
|
|
|
5 years
|
|
Goodwill
|
|
|
214
|
|
|
|
|
|
|
Short-term loan
|
|
|
(200
|
)
|
|
|
|
|
|
Current liabilities
|
|
|
(861
|
)
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The additional contingent consideration based on earnings of WIT for the six-month period
ended March 31, 2009 was determined to be $1,506 and recorded as an addition to the goodwill
in 2009, of which $974 was settled in cash and $532 was settled in 95,590 ordinary shares of
the Company at a fair value of $5.56 per share in 2009.
|
|
|
|
The contingent consideration based on earnings of WIT for the twelve-month period ended
March 31, 2010 was determined to be zero as the earnings of WIT did not reach the
performance target predefined in the original purchase agreement.
|
|
|
|
In December 2010, to simplify the corporate structure, the Group deregistered WIT, after
integration of all the operating net assets and business of WIT into another operating
entity of the Group. No significant gain or loss and cash flow were resulted from the
transfer.
|
F-25
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of WIT’s equity interest
— continued
|
|
|
|
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2008 of the Group as if the acquisition had occurred on January 1,
2008. The following pro forma financial information is not necessarily indicative of the
results that would have occurred had the acquisition been completed at the beginning of the
periods indicated, nor is it indicative of future operating results:
|
|
|
|
|
|
|
|
|
|
For the year
|
|
|
|
|
ended December 31,
|
|
|
|
|
2008
|
|
|
|
|
(unaudited)
|
|
|
|
|
Pro forma revenues
|
|
|
106,115
|
|
|
Pro forma net income
|
|
|
16,963
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.45
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.42
|
|
|
|
|
Acquisition of TP’s equity interest
|
|
|
|
On July 2, 2009, the Group acquired 100% equity interests in the operating subsidiaries of
TP Corporation Limited, a provider of customer relationship management solutions and system
integration. The acquisition has strengthened the Group’s position in software services. The
transaction was considered an acquisition of a business. Accordingly, the purchase method
of accounting has been applied. The fair value of additional contingent considerations,
based on specified earnings objectives predefined for the six-month period ended December
31, 2009 and twelve-month period ended December 31, 2010 was determined to be $8,644 at the
date of acquisition. The acquired net assets were recorded at their fair market value at the
date of acquisition. The aggregate purchase price of $8,644 consisted of the following:
|
|
|
|
|
|
|
|
Fair value of contingent consideration:
|
|
|
|
|
|
Cash consideration
|
|
|
4,856
|
|
|
Fair value of equity consideration
|
|
|
3,788
|
|
|
|
|
|
|
|
Total
|
|
|
8,644
|
|
|
|
|
|
|
F-26
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of TP’s equity interest
— continued
|
|
|
|
The purchase price was preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
Cash
|
|
|
1,730
|
|
|
|
|
|
|
Other current assets
|
|
|
2,926
|
|
|
|
|
|
|
Property and equipment
|
|
|
248
|
|
|
|
|
|
|
Rental deposits
|
|
|
82
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
2,163
|
|
|
5 years
|
|
Tradename
|
|
|
1,645
|
|
|
indefinite
|
|
Non-compete agreement
|
|
|
332
|
|
|
5 years
|
|
Contract backlog
|
|
|
743
|
|
|
1.5 years
|
|
Software technology
|
|
|
323
|
|
|
2 years
|
|
Goodwill
|
|
|
6,277
|
|
|
|
|
|
|
Deferred tax assets — non-current
|
|
|
43
|
|
|
|
|
|
|
Current liabilities
|
|
|
(4,607
|
)
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(875
|
)
|
|
|
|
|
|
Short term loan
|
|
|
(2,386
|
)
|
|
|
|
|
|
Total
|
|
|
8,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The first contingent consideration based on the earnings of TP for the six-month period
ended December 31, 2009 was determined to be $1,337 when the contingency was resolved on
December 31, 2009, of which $817 was settled in cash and $520 was settled in 26,442 ordinary
shares of the Company at a fair value of $19.66 per share in 2010.
|
|
|
|
The second contingent consideration based on earnings of TP for the twelve-month period
ended December 31, 2010, was determined to be $3,989 when the contingency was resolved on
December 31, 2010, of which $2,011 will be settled in cash and $1,978 will be settled in
55,944 ordinary shares of the Company at a fair value of $35.36 per share in 2011.
|
|
|
|
The fair value of the third contingent consideration based on the attainment of the earnings
objectives for the 12-month period ending December 31, 2011 was determined to be $3,269 as
of December 31, 2010, of which is up to $2,000 will be settled in cash and $1,269 will be
settled in ordinary shares.
|
|
|
|
The change in fair value of the contingent consideration during the years ended December 31,
2009 and 2010 was a loss of $62 and a gain of $80, respectively, which were recognized in
the consolidated statements of operations.
|
F-27
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of TP’s equity interest
— continued
|
|
|
|
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2008 and 2009 of the Group as if the acquisition had occurred on
January 1, 2008 and 2009. The following pro forma financial information is not necessarily
indicative of the results that would have occurred had the acquisition been completed at the
beginning of the periods indicated, nor is it indicative of future operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years
|
|
|
|
|
ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
Pro forma net revenues
|
|
|
108,995
|
|
|
|
151,068
|
|
|
Pro forma net income
|
|
|
16,019
|
|
|
|
21,869
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.43
|
|
|
|
0.57
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.39
|
|
|
|
0.53
|
|
|
|
|
Acquisition of mobile service business
|
|
|
|
On October 1, 2009, Vanceinfo Beijing entered into a purchase agreement with a mobile
service company to acquire its business of smart phone software testing for a cash
consideration of $1,172. The transaction was considered an acquisition of a business and
accordingly the purchase method of accounting has been applied. The acquired net assets
were recorded at their fair value at the date of acquisition.
|
|
|
|
The purchase price was preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
26
|
|
|
5 years
|
|
Non-compete agreement
|
|
|
22
|
|
|
2 years
|
|
Goodwill
|
|
|
1,306
|
|
|
|
|
|
|
Property and equipment
|
|
|
148
|
|
|
|
|
|
|
Rental prepayment
|
|
|
44
|
|
|
|
|
|
|
Other current liabilities
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unaudited pro forma information of the acquisition as if the acquisition had occurred on
January 1, 2008 and 2009 is not presented because the Group believes it is impracticable to
do so.
|
F-28
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of Link Result’s equity interest
|
|
|
|
On October 1, 2008, the Group completed the purchase of a 33% equity interest in Link Result
Limited (“Link Result”), a China-based company providing IT outsourcing services to
multinational financial institutions, with investment cost of $841, including $330 of cash
consideration paid to selling shareholders, $495 of capital injection to the investee in the
form of an indefinite-lived interest-free loan and $16 of acquisition costs. The Group
accounted for the investment using equity method of accounting because the Group had the
ability to exercise significant influence over the investee.
|
|
|
|
In July 2010, VanceInfo acquired the remaining 67% equity interest in Link Result from other
shareholders with initial consideration of $670 in cash. Contingent consideration
is determined based on a multiple of the earnings of the acquired business. The acquired net
assets were recorded at their fair value at the date of acquisition. The aggregate purchase
price of $5,759 consisted of the following:
|
|
|
|
|
|
|
|
Initial cash payment
|
|
|
670
|
|
|
Fair value of contingent consideration:
|
|
|
|
|
|
Cash consideration
|
|
|
1,555
|
|
|
Fair value of equity consideration
|
|
|
1,834
|
|
|
Fair value of the 33% equity interest:
|
|
|
|
|
|
Carring amount
|
|
|
1,088
|
|
|
Gain on remeasurement of fair value of noncontrolling equity investment
|
|
|
612
|
|
|
|
|
|
|
|
Total
|
|
|
5,759
|
|
|
|
|
|
|
|
|
|
The purchase price was preliminarily allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
824
|
|
|
|
|
|
|
Other current assets
|
|
|
1,997
|
|
|
|
|
|
|
Property and equipment
|
|
|
80
|
|
|
|
|
|
|
Rental deposits
|
|
|
7
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer base and relationship
|
|
|
926
|
|
|
5.5 years
|
|
Non-compete agreement
|
|
|
40
|
|
|
2 years
|
|
Goodwill
|
|
|
2,490
|
|
|
|
|
|
|
Current liabilities
|
|
|
(401
|
)
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
4.
|
|
ACQUISITIONS — continued
|
|
|
|
Acquisition of Link Result’s equity interest
- continued
|
|
|
|
The additional cash consideration, based on the earnings of Link Result for the six-month
period ended December 31, 2010, was determined to be $3,249 when the contingency was
resolved on December 31, 2010, of which $1,633 will be settled in cash and $1,616 will be
settled in ordinary shares of the Company in 2011. The number of ordinary shares to be
issued was determined based on the average closing market price of the Company’s ordinary
shares over the last ten trading days in December 2010 and the first ten trading days in
2011, which was $35.36 per share.
|
|
|
|
The change in fair value of the contingent consideration from the date of acquisition to
December 31, 2010 was a gain of $141 and was recognized in the consolidated statements of
operations.
|
|
|
|
The following unaudited pro forma information summarizes the results of operations for the
years ended December 31, 2009 and 2010 of the Group as if the acquisition had occurred on
January 1, 2009 and 2010. The following pro forma financial information is not necessarily
indicative of the results that would have occurred had the acquisition been completed at the
beginning of the periods indicated, nor is it indicative of future operating results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years
|
|
|
|
|
ended December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net revenues
|
|
|
151,308
|
|
|
|
214,717
|
|
|
Pro forma net income
|
|
|
21,720
|
|
|
|
30,383
|
|
|
Pro forma net income per ordinary share-basic
|
|
|
0.57
|
|
|
|
0.75
|
|
|
Pro forma net income per ordinary share-diluted
|
|
|
0.52
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurements in business acquisitions:
|
|
|
|
The Group measured the fair value of the purchased intangible assets using the “cost”,
“income approach-excess earnings” and “with & without” valuation method. The Group measured
the fair value of the contingent consideration considering, among other factors, forecasted
financial performance of the acquired business, market performance, and the market potential
of the acquired business in China. These purchased intangible assets and contingent
consideration are considered Level 3 assets and liabilities because the Group used
unobservable inputs, reflecting the Group’s assessment of the assumptions market
participants would use in valuing these assets and liabilities.
|
F-30
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
5.
|
|
HELD-TO-MATURITY SECURITIES
|
|
|
|
The Group’s marketable securities include floating rate notes and corporate notes as of
December 31, 2009 and 2010. These securities are classified as held-to-maturity investments
by the Group and carried at costs.
|
|
|
|
The Company held the following held-to-maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
|
December 31
|
|
|
December 31
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Floating rate notes
|
|
|
4,271
|
|
|
|
—
|
|
|
Corporate notes
|
|
|
7,851
|
|
|
|
13,208
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
12,122
|
|
|
|
13,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
Corporate notes
|
|
|
—
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,122
|
|
|
|
14,766
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the maturity dates of the notes ranged from March 1, 2011 to April
11, 2012.
|
|
|
|
The Group’s floating rate notes were purchased from authorized financial institutions.
|
|
|
|
The Group recognized interest income of $193 and $269 for the years ended December 31, 2009
and 2010, respectively. The Group did not hold any held-to-maturity securities in 2008.
|
|
6.
|
|
AVAILABLE-FOR-SALE INVESTMENT
|
|
|
|
In February 2010, the Company extended a loan with principal of $440 to Beijing Viatt
Information Technology Co. Ltd (“Viatt”), a private company providing IT services and
solutions for Chinese domestic financial institutions. The loan carries 8% annual interest
rate with two-year term and is convertible into a 20% equity interest of Viatt. The
investment was accounted for by the Company as available-for-sale investment which measured
at fair value on a recurring basis. The Company recognized $32 interest income in the
consolidated statements of operations. The Company remeasured the fair value of this
available-for-sale investment at the end of December 31, 2010 using a binomial model based
on certain key assumptions such as the probability of conversion to ordinary shares of Viatt
and the fair value of the equity of Viatt, and $494 excess of fair value over the carrying
amount as the unrecognized gains on the available-for-sale investment was recorded in other
comprehensive income for the year ended December 31, 2010.
|
F-31
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
6.
|
|
AVAILABLE-FOR-SALE INVESTMENT-continued
|
|
|
|
In September 2010, the Company extended an additional loan with principal of $221 to Viatt.
The loan carries 12% annual interest rate with two-year term. The Company determined that
the fair value of the investment approximated the outstanding balance of the loan, including
the principal and the interest receivable. The Company recognized an interest income of $9
in the consolidated statements of operations for the year ended December 31, 2010.
|
|
|
|
Accounts receivable consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed accounts receivable
|
|
|
26,077
|
|
|
|
27,052
|
|
|
Unbilled accounts receivable
|
|
|
35,465
|
|
|
|
60,341
|
|
|
Less: allowance for doubtful accounts
|
|
|
(1,018
|
)
|
|
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
|
60,524
|
|
|
|
85,437
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement of allowance for doubtful accounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
|
587
|
|
|
|
1,018
|
|
|
Charge to expenses
|
|
|
445
|
|
|
|
685
|
|
|
Write off
|
|
|
—
|
|
|
|
(335
|
)
|
|
Provision in connection with the losses
caused by an employee (Note 20)
|
|
|
—
|
|
|
|
537
|
|
|
Exchange difference
|
|
|
(14
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
1,018
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
F-32
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
8.
|
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid rentals
|
|
|
1,090
|
|
|
|
1,195
|
|
|
Advances to employees
|
|
|
853
|
|
|
|
790
|
|
|
Performance security deposit
|
|
|
734
|
|
|
|
757
|
|
|
Option exercise receivable
|
|
|
966
|
|
|
|
642
|
|
|
Interests receivable
|
|
|
291
|
|
|
|
347
|
|
|
Advance to suppliers
|
|
|
280
|
|
|
|
136
|
|
|
Prepaid insurance premium
|
|
|
150
|
|
|
|
85
|
|
|
Receivable from American Depositary Shares
(“ADS”) depositary bank
|
|
|
514
|
|
|
|
—
|
|
|
Foreign currency forward exchange contract
|
|
|
161
|
|
|
|
—
|
|
|
Other prepaid expenses
|
|
|
987
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,026
|
|
|
|
4,860
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercise receivable represented the Company’s stock option exercise price receivable
from transfer agent.
|
|
|
|
Performance security deposit represented an IT service contract performance deposit paid at
the request of one of our customers, which is expected to be returned when the related
contract is completed in 2011.
|
|
|
|
Other prepaid expenses primarily consisted of prepaid miscellaneous selling, general and
administrative expenses.
|
F-33
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
9.
|
|
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACT
|
|
|
|
On September 30, 2009, the Group entered into a forward contract to purchase $5,000 for
JPY448.75 million due on October 1, 2010 with nil consideration paid or received. The Group
qualified for foreign currency cash flow hedge accounting with respect to this foreign
currency forward exchange contracts to hedge, for accounting purposes, changes in the cash
flow of forecasted JPY-denominated revenue transactions attributable to fluctuation in
foreign currency exchange rate during the one year term of the forward contract. The
notional amounts of the forward contract designated as cash flow hedge was JPY112.188
million as of December 31, 2009, JPY112.188 million as of March 31, 2010, JPY112.188
million as of June 30, 2010, and JPY112.188 million as of September 30, 2010. The
estimated fair value of the forward contract was $161 as of December 31, 2009. The fair
value of the foreign exchange forward was estimated with the consideration of, among other
factors, discount rate, timing and amount of cash flow and counterparty credit risk and is
reported under Level 2 of the fair value hierarchy.
|
|
|
|
On July 10, 2010, the Group entered into a forward contract to purchase $5,000 for JPY432.50
million due on July 11, 2011 with nil consideration paid or received. The Group qualified
for foreign currency cash flow hedge accounting with respect to this foreign currency
forward exchange contracts, to hedge, for accounting purposes, changes in the cash flow of
forecasted JPY-denominated revenue transactions attributable to fluctuation in foreign
currency exchange rate during the one year term of the forward contract. The notional
amounts of the forward contract designated as cash flow hedge was JPY43.25 million as of
September 30, 2010, JPY129.75 million as of December 31, 2010, JPY129.75 million as of
March 31, 2011, and JPY129.75 million as of June 30, 2010. The estimated fair value of the
forward contract was $332 as of December 31, 2010. The fair value of the foreign exchange
forward was estimated with the consideration of, among other factors, discount rate, timing
and amount of cash flow and counterparty credit risk and is reported under Level 2 of the
fair value hierarchy.
|
|
|
|
During the year 2010, the Group recorded following gains in other comprehensive income
related to the contract:
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Unrealized gains recognized for effective portion
|
|
|
(506
|
)
|
|
Gains transfer to statements of operations
|
|
|
202
|
|
|
|
|
|
|
|
Total
|
|
|
(304
|
)
|
|
|
|
|
|
F-34
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
9.
|
|
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACT — continued
|
|
|
|
During the year 2010, the Group recorded following loss in the exchange difference account
in the consolidated statement of operations related to the contract:
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
Loss transfer from other comprehensive income
|
|
|
(202
|
)
|
|
Loss recognized due to changes in spot-forward difference
|
|
|
(376
|
)
|
|
|
|
|
|
|
Total
|
|
|
(578
|
)
|
|
|
|
|
|
|
|
|
The unrealized loss of $195 for effective portion associated with the forward contract was
recorded in other comprehensive income as of December 31, 2010. The full amount is expected
to be reclassified into earnings within the next 12 months when the underlying forecasted
revenue is recognized. All hedging relationships under cash flow hedges were evaluated to
be highly effective as of December 31, 2010. The Company qualified for cash flow
hedge accounting for a portion of the forward contracts entered into in 2009 with $109
unrealized loss associated with those forward contracts recorded in other comprehensive
income as of December 31, 2009 was settled in 2010 and then recognized a loss of $388 in
exchange difference, net.
|
|
10.
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment
|
|
|
3,820
|
|
|
|
5,230
|
|
|
Motor vehicles
|
|
|
1,187
|
|
|
|
1,403
|
|
|
Computers and software
|
|
|
12,037
|
|
|
|
16,019
|
|
|
Leasehold improvements
|
|
|
7,783
|
|
|
|
11,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,827
|
|
|
|
33,966
|
|
|
Less: Accumulated depreciation and amortization
|
|
|
(9,827
|
)
|
|
|
(13,622
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
15,000
|
|
|
|
20,344
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expenses of property and equipment were recognized for the
years ended December 31, 2008, 2009 and 2010 were $2,896, $4,078 and $6,397, respectively.
|
F-35
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
11.
|
|
ACQUIRED INTANGIBLE ASSETS, NET
|
|
|
|
The costs and accumulated amortization of these acquired intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Tradename
|
|
|
2,376
|
|
|
|
2,393
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
900
|
|
|
|
902
|
|
|
Customer base and relationship
|
|
|
6,708
|
|
|
|
7,821
|
|
|
Non-compete agreement
|
|
|
949
|
|
|
|
1,036
|
|
|
Software Technology
|
|
|
322
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,255
|
|
|
|
12,473
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
|
Contract backlog
|
|
|
(591
|
)
|
|
|
(902
|
)
|
|
Customer base and relationship
|
|
|
(2,405
|
)
|
|
|
(3,806
|
)
|
|
Non-compete agreement
|
|
|
(439
|
)
|
|
|
(688
|
)
|
|
Software technology
|
|
|
(81
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,516
|
)
|
|
|
(5,637
|
)
|
|
|
|
|
|
|
|
|
|
Acquired intangible assets, net
|
|
|
7,739
|
|
|
|
6,836
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group recorded amortization expenses of $823, $1,668 and $2,023 for the years ended
December 31, 2008, 2009 and 2010, respectively. The Group expects to record amortization
expenses of $1,553, $1,181, $878, $625, and $206 for 2011, 2012, 2013, 2014 and 2015,
respectively.
|
F-36
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
|
|
The movement of the goodwill for the years ended December 31, 2009 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1,
|
|
|
15,537
|
|
|
|
24,783
|
|
|
Goodwill recognized in connection with
the following:
|
|
|
|
|
|
|
|
|
|
Additional consideration payment for acquisition
of WIT
|
|
|
1,506
|
|
|
|
—
|
|
|
Acquisition of business from Guangzhou
Kernel Technology Limited.(“Kernel”)
|
|
|
173
|
|
|
|
—
|
|
|
Acquisition of TP
|
|
|
6,277
|
|
|
|
—
|
|
|
Acquisition of business
from a mobile services provider
|
|
|
1,306
|
|
|
|
—
|
|
|
Acquisition of business from Mobi
|
|
|
—
|
|
|
|
205
|
|
|
Acquisition of Link Result(Note 4)
|
|
|
—
|
|
|
|
2,490
|
|
|
Exchange differences
|
|
|
(16
|
)
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
24,783
|
|
|
|
28,072
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company performed its annual goodwill impairment test on the last day of each fiscal
year, and did not incur any impairment loss on goodwill for the years ended December 31,
2008, 2009 or 2010.
|
|
|
|
On October 1, 2008, the Company completed the purchase of 33% equity interest in Link
Result, a China-based company providing IT outsourcing services to multinational financial
institutions, with an investment cost of $841, including $330 of cash consideration paid to
selling shareholders, $495 of capital injection to the investee in the form of an
indefinite-lived interest-free loan and $16 of acquisition costs. The Company accounted for
the investment using equity method of accounting because the Company has the ability to
exercise significant influence over the investee. On July 2, 2010, the Company acquired the
remaining equity interest of Link Result as set out in Note 4.
|
|
|
|
In September 2010, VanceInfo BVI, through one of its subsidiaries, made a strategic
investment in Salsatec Corporation Pty. Ltd. (“Salsatec”), an Australia-based IT services
and solution provider for Australian telecom and technology companies. Under the terms of
the agreement, the Company made a payment of $200 in cash for an initial equity interest of
20% of Salsatec in convertible redeemable preferred stock, with an exclusive option right to
acquire the remaining 80% of the equity within the next 12 months. As the Group has significant influence over
Salsatec, the investment has been recorded using the equity method of accounting.
|
F-37
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
13.
|
|
LONG-TERM INVESTMENT — continued
|
|
|
|
Equity method investment — continued
|
|
|
|
The investment earnings generated from two equity method investments for the years ended
December 31, 2008, 2009 and 2010 was $20, $69 and $151, respectively.
|
|
14.
|
|
PREPAID LAND USE RIGHTS
|
|
|
|
The Company commenced the process to obtain land use rights for two pieces of land in
Beijing in 2009, on which the Company plans to construct its new corporate headquarters and
research and development center. In November 2009, the Company entered into an agreement
with Zhongguancun Software Park Development Co., Ltd. (“ZSPD”), pursuant to which ZSPD
agreed to develop the land in preparation for construction by the Company. Based on the
agreement with ZSPD, the Company will be eligible to enter into a land transfer agreement
with relevant PRC government authorities in order to obtain land use rights with respect to
such land. As of December 31, 2010, the Company had paid approximately $18,009 pursuant to
the agreement with ZSPD and recorded as a prepaid land use rights on its consolidated
balance sheets as of December 31, 2010. The Company has not obtained the access to
the land use rights; therefore, the land use
rights have not been amortized in 2010. The Company expects to report land use rights at
cost less accumulated amortization and to amortize the cost of the land use rights on a
straight-line basis over the term of the land use rights to be authorized, which is expected
to be 50 years.
|
|
|
|
Short-term bank loan, amounting to $3,020 as of December 31, 2010, was borrowed from a PRC
bank with the guarantee provided by China National Investment & Guaranty Co., Ltd. and the
pledge deposit of a term $679 which was recorded as restricted cash in the consolidated
balance sheet. The loan had an annual interest rate of 5.31% and will be due in June or July
2011.
|
F-38
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
16.
|
|
ACCRUED EXPENSES AND OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll and employee welfare
|
|
|
4,019
|
|
|
|
6,069
|
|
|
Accrued bonus
|
|
|
6,198
|
|
|
|
8,693
|
|
|
Accrued subcontract costs and reimbursable
operating costs
|
|
|
4,445
|
|
|
|
8,203
|
|
|
Payable for business acquisition-current
|
|
|
1,686
|
|
|
|
3,919
|
|
|
Business tax payable
|
|
|
1,789
|
|
|
|
2,782
|
|
|
Other taxes payable
|
|
|
1,192
|
|
|
|
1,252
|
|
|
Professional fee
|
|
|
1,525
|
|
|
|
1,184
|
|
|
Advance from customer
|
|
|
584
|
|
|
|
1,173
|
|
|
Payable for purchase of property and equipment
|
|
|
1,518
|
|
|
|
925
|
|
|
Foreign currency forward exchange contract
|
|
|
—
|
|
|
|
332
|
|
|
Payable for share offering costs
|
|
|
264
|
|
|
|
127
|
|
|
Other accrued liabilities
|
|
|
980
|
|
|
|
1,718
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,200
|
|
|
|
36,377
|
|
|
|
|
|
|
|
|
|
|
|
|
VanceInfo and VanceInfo BVI are tax exempted companies incorporated in the Cayman Islands
and the British Virgin Islands, respectively.
|
|
|
|
In 2008, the income tax provision of the Group was made for the operations of the
subsidiaries located in the PRC, VanceInfo Japan, VanceInfo US and WIT. In 2009, the income tax provision of the Group was made for the operations of the
subsidiaries located in the PRC, VanceInfo Japan, VanceInfo US, WIT, TP HK, TP Taiwan and TP Teleservices.
In 2010, the income tax provision of the Group was made for the operations of the subsidiaries located in the
PRC, Vanceinfo Japan, TP HK, TP Taiwan, TP Teleservices and AIT.
|
|
|
|
Pursuant to the relevant tax rules and regulations applicable to VanceInfo Japan, VanceInfo
Japan was required to provide income tax of $26, $1 and $5 for the years of 2008, 2009 and
2010, respectively,
|
|
|
|
VanceInfo US and WIT were subject to a progressive federal income tax rate from 15% to 35%
depending on the income level and a state income tax rate at 8.84% for the years of 2008,
2009 and 2010.
|
|
|
|
TP HK, TP Taiwan and TP Teleservices were subject to profit tax rate of 16.5% for the year
of 2009 and 2010.
|
F-39
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
17.
|
|
INCOME TAXES — continued
|
|
|
|
On March 16, 2007, the National People’s Congress of China enacted a new EIT law, which has
taken into effect from January 1, 2008. Under the new EIT law, foreign invested
enterprises, or FIEs, such as VanceInfo Beijing, and Chinese domestic companies are subject
to EIT at a uniform rate of 25%. In addition, certain enterprises may still benefit from a
preferential tax rate of 15% under the new EIT law if they qualify as “high and new
technology enterprises strongly supported by the State”. According to the new EIT law and
relevant implementation rules, the “high and new technology enterprises strongly supported
by the State” shall refer to an enterprise that owns the core proprietary intellectual
property rights and fulfills all of the conditions stipulated therein.
|
|
|
|
VanceInfo Beijing obtained the certificate on high and new technology enterprises in 2008
and is entitled to the preferential tax rate of 7.5% from 2008 to 2010. Shanghai VanceInfo
was qualified as a “high and new technology enterprise” in December 2008, which entitled it
to a 15% preferential income tax rate in 2008, and was further recognized as a “key software
enterprise under the State plan” in December 2009, which entitled it to a 10% preferential
income tax rate in 2009. Shanghai Vanceinfo obtained the certificate of high and new
technology enterprise and was subject to 15% in 2010. TP Shanghai obtained the certificate
of high and new technology enterprise and was subject to 15% in 2009 and 2010. Nanjing
VanceInfo obtained the certificate of new setup software enterprise in 2009 and was entitled
to an exemption of EIT from 2009 to 2010 and 50% reduction for the subsequent three years at
the preferential tax rate of 12.5% from 2011 to 2013. AIT was acquired in 2010 which was
incorporated in 2002. AIT was recognized as a qualified “Software enterprises” in 2007, and
was entitled to enjoy tax exemption in 2007 and 2008, and 50% tax reduction from 2009 to
2011 at the effective rate of 10%, 11%, 12%, respectively.
|
|
|
|
The applicable EIT rate for other PRC subsidiaries was 25% in 2008, 2009 and 2010.
|
|
|
|
Due to the changes in the new EIT law in March 2007, the Group’s deferred tax balances were
calculated based on the newly enacted tax rate to be effective January 1, 2008.
|
F-40
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
17.
|
|
INCOME TAXES — continued
|
|
|
|
The high and new technology enterprise status is valid for three years and the qualified
enterprises can then apply to renew for an additional three years provided the company’s
business operations continue to qualify for high and new technology enterprise status. The
Group believes it is highly likely that its qualifying entities will continue to obtain the
renewal in the future. Accordingly, in calculating deferred tax assets and liabilities, the
Group has assumed its qualifying entities will continue to renew the high and new technology
enterprise status at the conclusion of the initial three year period. If the Group’s
qualifying entities failed to obtain such renewals, then the net deferred tax assets balance
would increase by $892 and the net deferred liability balance would increase by $216, as of
December 31, 2010, which would result in the decrease of the income tax expenses.
|
|
|
|
Uncertainties exist with respect to how the current income tax law in the PRC applies to the
Group’s overall operations, and more specifically, with regard to tax residency status. New
EIT law includes a provision specifying that legal entities organized outside of the PRC
will be considered residents for Chinese income tax purposes if the place of effective
management or control is within the PRC. The implementation rules to the new EIT law
provide that non-resident legal entities will be considered China tax residents if
substantial and overall management and control over the manufacturing and business
operations, personnel, accounting, properties, etc, occurs within the PRC. Despite the
present uncertainties resulting from the limited PRC tax guidance on the issue, the Group
does not believe that the legal entities organized outside of the PRC within the Group
should be treated as Chinese tax residents for the new EIT law purposes. If the PRC tax
authorities subsequently determine that the Company and its subsidiaries registered outside
the PRC should be deemed as tax resident enterprises, the Company and its subsidiaries
registered outside the PRC will be subject to the PRC income tax at a rate of 25%.
|
|
|
|
If the Company and its subsidiaries registered outside the PRC were to be non-resident for
PRC tax purpose, dividends paid to them out of profits earned by the Company’s subsidiaries
located in the PRC, which are tax resident in the PRC, after January 1, 2008 would be
subject to a withholding tax of 10%.
|
|
|
|
Aggregate undistributed earnings of the Company’s subsidiaries located in the PRC available
for distribution to the Company are $77,775 as of December 31, 2010. The Group does not
have any present plan to pay any cash dividends on its ordinary shares in the foreseeable
future. It intends to retain most of its available funds and any future earnings for use in
the operation and expansion of its business. As such, the undistributed earnings of the
Company’s PRC subsidiaries are considered to be indefinitely reinvested and accordingly, no
provision has been made for the Chinese dividend withholding taxes as of December 31, 2010.
|
F-41
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
17.
|
|
INCOME TAXES — continued
|
|
|
|
Income tax expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,078
|
|
|
|
3,533
|
|
|
|
3,772
|
|
|
Deferred
|
|
|
(780
|
)
|
|
|
(1,444
|
)
|
|
|
(1,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,298
|
|
|
|
2,089
|
|
|
|
2,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal components of deferred income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
96
|
|
|
|
227
|
|
|
Accrued compensation related
|
|
|
1,301
|
|
|
|
2,214
|
|
|
Net operating loss carry forwards
|
|
|
76
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,473
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
172
|
|
|
|
100
|
|
|
Property and equipment
|
|
|
130
|
|
|
|
140
|
|
|
Valuation allowance
|
|
|
(172
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,603
|
|
|
|
2,581
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(1,322
|
)
|
|
|
(1,217
|
)
|
|
Property and equipment
|
|
|
(136
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,458
|
)
|
|
|
(1,318
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(1,458
|
)
|
|
|
(1,318
|
)
|
|
|
|
|
|
|
|
|
F-42
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
17.
|
|
INCOME TAXES — continued
|
|
|
|
For the purpose of balance sheet presentation, certain deferred tax assets and liabilities
attributable to the same tax-paying components of the Group and within the same tax
jurisdictions have been offset. The following is the analysis of the deferred tax balances
for financial reporting purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
96
|
|
|
|
227
|
|
|
Accrued compensation related
|
|
|
1,301
|
|
|
|
2,214
|
|
|
Net operating loss carry forwards
|
|
|
76
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
1,473
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
172
|
|
|
|
100
|
|
|
Property and equipment
|
|
|
—
|
|
|
|
42
|
|
|
Valuation allowance
|
|
|
(172
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets
|
|
|
—
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets acquired in business acquisitions
|
|
|
(1,322
|
)
|
|
|
(1,217
|
)
|
|
Property and equipment
|
|
|
(6
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities, net
|
|
|
(1,328
|
)
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance has been recognized for net operating losses carry forward of certain
subsidiaries of the Group, because the Group does not believe these entities can generate
future taxable income to recognize the income tax benefit. Net operating losses totaled
$1,265 and $399 as of December 31, 2009 and 2010, respectively, which included $1,265 as of
December 31, 2009 expiring on various dates throughout 2014, $399 as of December 31, 2010
expiring on various dates throughout 2015.
|
F-43
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
17.
|
|
INCOME TAXES — continued
|
|
|
|
A reconciliation between the statutory PRC enterprise income tax rate and the effective tax
rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
%
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate in PRC
|
|
|
25.00
|
|
|
|
25.00
|
|
|
|
25.00
|
|
|
Changes in valuation allowances
|
|
|
(0.45
|
)
|
|
|
(0.20
|
)
|
|
|
(0.22
|
)
|
|
Effect of income tax rate differences of subsidiaries
operating with different tax jurisdictions
|
|
|
(10.30
|
)
|
|
|
(8.57
|
)
|
|
|
(8.34
|
)
|
|
Effect of tax holidays enjoyed by PRC subsidiaries
|
|
|
(6.79
|
)
|
|
|
(7.38
|
)
|
|
|
(8.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
7.46
|
|
|
|
8.85
|
|
|
|
7.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2008, 2009 and 2010, if the Company’s subsidiaries in
the PRC were neither in the tax holiday period nor had they been specifically allowed
special tax concessions, income tax expense and net income per share amounts would be as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in income tax expense
|
|
|
1,180
|
|
|
|
1,735
|
|
|
|
2,780
|
|
|
Decrease in net income per ordinary share-basic
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.07
|
)
|
|
Decrease in net income per ordinary share-diluted
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.07
|
)
|
|
|
|
The Group did not identify any significant unrecognized tax benefits or incur any interest
or penalties related to potential underpaid income tax expenses for each of the three years
ended December 31, 2008, 2009 and 2010. The Group does not expect to have a significant
increase or decrease on unrecognized tax benefits within 12 months from December 31, 2010.
|
|
|
|
The Group has various tax years from 2004 to 2010 which remain open in various tax
jurisdictions.
|
F-44
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
|
|
The calculation of the net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Net income
attributable to holders of ordinary share
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used
in computing net income per ordinary share-basic
|
|
|
37,276,306
|
(i)
|
|
|
38,389,495
|
(i)
|
|
|
40,298,060
|
(i)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used
in computing net income per ordinary share-diluted
|
|
|
40,695,982
|
(ii)
|
|
|
41,576,217
|
(ii)
|
|
|
43,406,080
|
(ii)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per ordinary share-basic
|
|
|
0.43
|
|
|
|
0.56
|
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per ordinary share-diluted
|
|
|
0.40
|
|
|
|
0.52
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
In 2008 and 2010, the Company issued 2,000,000, 2,140,148 ordinary shares for
future delivery to employees and non-employees upon exercise of vested stock options or
grant of nonvested shares. 219,196, 1,211,897 and 1,824,660 shares were transferred to
the relevant employees in 2008, 2009 and 2010, respectively. Accordingly, the
remaining shares outstanding during the years were excluded in computation of basic net
income per share in 2008, 2009 and 2010.
|
|
|
|
|
|
The ordinary shares issuable in connection with business acquisitions were also
include in computation of basic net income per share.
|
|
|
|
(ii)
|
|
The Group had securities outstanding which could potentially dilute basic net
income per share in the future, but which were excluded from the computation of diluted
net income per share in the years ended December 31, 2008, 2009 and 2010 as their
effects would have been anti-dilutive. For the years of 2008, 2009 and 2010, such
outstanding securities consisted of stock options of a weighted average number of
562,717, 661,234 and 91,684, respectively.
|
|
|
|
|
|
A weighted average number of 319,584, 36,493 and 146,344 contingently issuable
ordinary shares and nonvested shares in connection with business acquisitions were
included in the computation of diluted net income per share in the years of 2008,
2009 and 2010, respectively.
|
|
|
|
|
|
The calculation of the weighted average number of ordinary shares in 2008, 2009 and
2010 for the purpose of diluted net income per share has included the effect of stock
options and nonvested shares of a weighted average number of 4,909,091, 4,406,820 and
3,677,197 which gives rise to an incremental weighted average number of 3,100,092,
3,150,229 and 2,961,677 ordinary shares from the assumed conversion of these stock
options and nonvested shares using the treasury stock method, respectively.
|
F-45
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
19.
|
|
SHARES-BASED COMPENSATION
|
|
|
|
On November 3, 2005, the Group adopted the 2005 Stock Option Plan, which allows the Group to
grant options to its employees and directors to purchase 1,867,500 ordinary shares subject
to vesting requirement. In April and May 2006, additional options to purchase 2,400,000
ordinary shares were authorized with the approval from shareholders. No options shall be
exercisable after ten years from the date of grant. The options will vest first 1/4 on a
date specified in the option award agreement, which is usually a date approximately 9 months
or one year from the date of grant, and thereafter, 1/48 on each of the monthly
anniversaries or 1/16 on each of the quarterly anniversaries from the first vesting date.
|
|
|
|
On July 30, 2007, the Board of Directors and shareholders adopted the 2007 Share Incentive
Plan as amended on August 1, 2007, which authorizes to grant to employees and non-employees
options to purchase ordinary shares or nonvested shares up to a total of 1,100,000 ordinary
shares of the Company with an annual increase up to 3% of the number of ordinary shares
outstanding as of the first day of each year beginning 2008. The plan will expire on the
tenth anniversary of the effective date of the plan. The term of any option granted under
the 2007 Share Incentive Plan shall not exceed ten years. The options and nonvested shares
will vest first 1/4 on the first anniversary of the date of grant and thereafter, 1/16 on
each of the quarterly anniversaries from of the first vesting date.
|
|
|
|
|
|
I. Stock Options
|
|
|
|
|
|
Termination of option
|
|
|
|
If the grantee ceases to be employed by or ceases to provide services to the Group, (a) the
grantee will have until the date that is 30 days after his or her severance date to exercise
the options (or portion thereof) to the extent that they were vested on the severance date;
(b) the options to the extent not vested on the severance date, shall terminate on the
severance date; (c) the options, to the extent exercisable for the 30-day period following
the severance date and not exercised during such period, shall terminate at the close of the
business on the last day of the 30-day period.
|
|
|
|
|
|
Option exercise
|
|
|
|
The option shall be exercisable by the delivery of a written notice to the Company, in the
form approved by the Company, stating the number of ordinary shares to be purchased pursuant
to the option and payment in full for the exercise price of the shares to be purchased in
cash, by check or by electronic funds transfer to the Company.
|
F-46
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
19.
|
|
SHARES-BASED COMPENSATION — continued
|
|
|
|
I. Stock Options
— continued
|
|
|
|
|
|
Options to employees and non-employee directors
|
|
|
|
During the years ended December 31, 2008, 2009 and 2010, the Company granted a total of
1,336,200, 146,000 and 776,340 share options to employees and non-employee directors at an
exercise price ranging from $4.70 to $8.92 per share, $4.58 to $14.69 and $16.90 to $35.50
per share, respectively.
|
|
|
|
The following table summarizes information regarding the stock options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
fair value
|
|
|
intrinsic
|
|
|
|
|
|
|
|
|
average
|
|
|
per ordinary
|
|
|
value per
|
|
|
|
|
Options
|
|
|
exercise price
|
|
|
share at the
|
|
|
option at the
|
|
|
Quarter ended
|
|
granted
|
|
|
per option
|
|
|
grant dates
|
|
|
grant dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
540,000
|
|
|
|
5.44
|
|
|
|
5.44
|
|
|
|
—
|
|
|
June 30, 2008
|
|
|
60,200
|
|
|
|
6.68
|
|
|
|
6.68
|
|
|
|
—
|
|
|
September 30, 2008
|
|
|
162,000
|
|
|
|
8.58
|
|
|
|
8.58
|
|
|
|
—
|
|
|
December 31, 2008
|
|
|
574,000
|
|
|
|
4.94
|
|
|
|
4.94
|
|
|
|
—
|
|
|
March 31, 2009
|
|
|
48,000
|
|
|
|
4.58
|
|
|
|
4.58
|
|
|
|
—
|
|
|
June 30, 2009
|
|
|
15,000
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
—
|
|
|
September 30, 2009
|
|
|
39,500
|
|
|
|
11.00
|
|
|
|
11.00
|
|
|
|
—
|
|
|
December 31, 2009
|
|
|
43,500
|
|
|
|
14.69
|
|
|
|
14.69
|
|
|
|
—
|
|
|
March 31, 2010
|
|
|
123,000
|
|
|
|
16.90
|
|
|
|
16.90
|
|
|
|
—
|
|
|
June 30, 2010
|
|
|
97,500
|
|
|
|
21.70
|
|
|
|
21.70
|
|
|
|
—
|
|
|
December 31, 2010
|
|
|
555,840
|
|
|
|
34.50
|
|
|
|
34.50
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,258,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
average fair value
|
|
|
|
|
|
|
|
|
average
|
|
|
per ordinary
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
share at the
|
|
|
|
|
options
|
|
|
per option
|
|
|
grant dates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of January 1, 2010
|
|
|
4,397,895
|
|
|
|
3.49
|
|
|
|
2.84
|
|
|
Granted
|
|
|
776,340
|
|
|
|
30.11
|
|
|
|
30.11
|
|
|
Forfeited
|
|
|
(65,199
|
)
|
|
|
8.06
|
|
|
|
6.53
|
|
|
Exercised
|
|
|
(1,786,408
|
)
|
|
|
2.53
|
|
|
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
3,322,628
|
|
|
|
10.13
|
|
|
|
9.54
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
19.
|
|
SHARES-BASED COMPENSATION — continued
|
|
|
|
I. Stock Options
— continued
|
|
|
|
Options to employees and non-employee directors
— continued
|
|
|
|
The following table summarizes information with respect to stock options outstanding as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding
|
|
|
Options exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
intrinsic
|
|
|
|
|
|
|
average
|
|
|
intrinsic
|
|
|
|
|
|
|
|
|
remaining
|
|
|
exercise
|
|
|
value as of
|
|
|
|
|
|
|
exercise
|
|
|
value as of
|
|
|
|
|
Number
|
|
|
contractual
|
|
|
price per
|
|
|
December 31,
|
|
|
Number
|
|
|
price per
|
|
|
December 31,
|
|
|
|
|
outstanding
|
|
|
life
|
|
|
option
|
|
|
2010
|
|
|
exercisable
|
|
|
option
|
|
|
2010
|
|
|
|
|
Ordinary shares
|
|
|
3,322,628
|
|
|
|
4.38
|
|
|
|
10.13
|
|
|
|
81,244
|
|
|
|
1,765
|
|
|
|
3.08
|
|
|
|
55,527
|
|
|
|
|
The total intrinsic value of options exercised during the years ended December 31, 2008,
2009 and 2010 was $1,617, $12,760 and $47,703, respectively.
|
|
|
|
The range of fair value of the options as of their respective grant dates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Options
|
|
|
1.43-2.55
|
|
|
|
1.60-5.30
|
|
|
|
6.09-12.13
|
|
|
|
|
The fair value of each option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for grants during the
applicable periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Volatility
|
|
|
36.0%-40.8
|
%
|
|
|
40.8%-44.7
|
%
|
|
|
41.5%-44.7
|
%
|
|
Risk-free interest rate of return
|
|
|
3.18%-4.15
|
%
|
|
|
2.62%-3.62
|
%
|
|
|
1.89%-2.62
|
%
|
|
Expected term
|
|
2.72-3.61 years
|
|
|
3.61 years
|
|
|
3.61-4.11 years
|
|
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
The volatility of the underlying ordinary shares during the life of the options was
estimated based on the historical stock price volatility of listed comparable
companies over a period comparable to the expected term of the options.
|
|
|
(2)
|
|
Risk-free interest rate of return
|
|
|
|
|
Risk-free interest rate was estimated based on the yield to maturity of China
international government bonds with a maturity period close to the expected term of
the options.
|
F-48
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
19.
|
|
SHARES-BASED COMPENSATION — continued
|
|
|
I.
Stock Options
— continued
|
|
|
|
Options to employees and non-employee directors
— continued
|
|
|
(3)
|
|
Expected term
|
|
|
|
|
|
|
As the Company did not have sufficient historical share option exercise experience,
it estimated the expected term as the average between the vesting term of the options
and the original contractual term.
|
|
|
|
|
(4)
|
|
Dividend yield
|
|
|
|
|
|
|
The dividend yield was estimated by the Company based on its expected dividend policy
over the expected term of the options.
|
|
|
|
|
(5)
|
|
Exercise price
|
|
|
|
|
|
|
The exercise price of the options was determined by the Company’s board of directors.
|
|
|
|
|
(6)
|
|
Fair value of underlying ordinary shares
|
|
|
|
|
|
|
When estimating the fair value of the ordinary shares on the grant dates before the
Initial Public Offering (the “IPO”) of the Company, management considered a number of
factors, including the result of equity transactions of the Company, while taking
into account standard valuation methods and the achievement of certain events. After
the IPO, the closing market price of the ordinary shares of the Company as of the
grant date was used as the fair value of the ordinary shares on that date.
|
|
|
|
The Group recorded share-based compensation of $1,308, $1,311 and $1,482 for options granted
to employees and non-employee directors for the years ended December 31, 2008, 2009 and
2010, respectively, using the graded vesting attribution method.
|
|
|
|
There was total unrecognized compensation expense of $5,487 related to unvested share
options granted as of December 31, 2010. The expense is expected to be recognized over a
weighted-average period of 1.40 years according to the graded vesting schedule.
|
F-49
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
19.
|
|
SHARES-BASED COMPENSATION — continued
|
II. Nonvested Shares
|
|
|
In December 2008, 2009 and 2010, the Company granted 17,480, 89,874 and 298,874 nonvested
ordinary shares, respectively, to employees under 2007 Share Incentive Plan. The nonvested
shares will vest first 1/4 on the first anniversary of the vesting commencement date and
thereafter the remaining 3/4 will vest on a pro-rata basis after the expiration of each of
the 12 quarters after the first vesting date.
|
|
|
|
A summary of the nonvested shares activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
average fair value
|
|
|
|
|
number of
|
|
|
per ordinary
|
|
|
|
|
nonvested
|
|
|
share at the
|
|
|
|
|
shares
|
|
|
grant dates
|
|
|
|
|
Outstanding as of January 1, 2010
|
|
|
108,070
|
|
|
|
7.64
|
|
|
Granted
|
|
|
298,874
|
|
|
|
23.66
|
|
|
Vested
|
|
|
(38,252
|
)
|
|
|
7.36
|
|
|
Forfeited
|
|
|
(10,785
|
)
|
|
|
7.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
357,907
|
|
|
|
21.06
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2010, the Company granted 85,000 nonvested shares to certain executives at a
discount purchase price of $22.00 per share, which is lower than the market closing price of
$34.13 on December 15, 2010, the day before the grant date, by $12.13. 25% of the 850,000
nonvested shares will vest on the first anniversary of the grant date and 6.25% will vest
each of the following 12 quarter. The total purchase price of $1,870,000 will be recorded as
a liability when the amount is paid by the relevant executives. This liability will be
eliminated with a corresponding increase in equity upon the vesting of nonvested shares over
the vesting period.
|
|
|
|
The total fair value of nonvested shares vested during the years ended December 31, 2008,
2009 and 2010 was $18, $128 and $959, respectively.
|
|
|
|
The Company recorded compensation expenses based on the fair value of nonvested shares on
the grant dates over the requisite service period of award using the graded vesting
attribution method. The fair value of the nonvested shares on the grant date was the
closing market price of the ordinary shares as of the date. For nonvested share granted in
2008, 2009 and 2010, the fair value at the date of grant ranged from $4.75 to $35.50. The
related compensation expense of $83, $254 and $1,765 is recorded in 2008, 2009 and 2010,
respectively.
|
|
|
|
There was total unrecognized compensation expense of $2,656 related to nonvested shares
granted as of December 31, 2010. The expense is expected to be recognized over a
weighted-average period of 3.23 years according to the graded vesting schedule.
|
F-50
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
20.
|
|
ORDINARY SHARES ISSUANCE AND REPURCHASE
|
|
|
|
In June 2008, the Company issued 2,000,000 ordinary shares for future delivery to the
employees and non-employees upon exercise of vested stock options or
grant of nonvested shares as set out in Note 18.
|
|
|
|
In June 2008, the Company issued 58,348 ordinary shares to NEC System Technology Limited as
part of the consideration for the acquisition of the additional equity interest of
Solutions.
|
|
|
|
In September 2008, the Company repurchased and cancelled 172,919 and 53,703 ordinary shares
from Airland and Bizexpress, respectively, at a total consideration of $2,020. The excess,
amounting to $1,633, of repurchase price over the initial issuance price was recorded as a
reduction in retained earnings of the Group. These ordinary shares were cancelled upon
repurchase.
|
|
|
|
In September 2008, the Company issued 87,045 ordinary shares to One Silver Development
Limited as a part of the additional consideration for the acquisition of Shanghai Megainfo
Tech Co., Ltd.
|
|
|
|
In September 2008, the Company issued 3,201 ordinary shares to Global Mission Limited as a
part of the additional consideration for the acquisition of VanceInfo Japan.
|
|
|
|
On February 21, 2009, the Company’s Board of Directors approved a share repurchase program
authorizing the Company to acquire up to $10,000 worth of the Company’s outstanding ADSs
within the next 12 months.
|
|
|
|
In March 2009, 2,800 shares were repurchased for a total consideration of $13 from the open
market under this program. The repurchased shares, represented in the form of ADSs, and
were to be used for future delivery to the employees and non-employees upon exercise of
vested stock options or grant of nonvested shares.
|
|
|
|
In July 2009, the Company completed a public offering of 345,000 ordinary shares for total
proceeds of $3,624, net of offering costs of $976.
|
|
|
|
In October 2009, the Company issued 106,820, 106,820, 106,820 ordinary shares to Cypress
Hill Holdings Limited, Fortune Sea International Limited and Million International Limited
respectively, as a part of the additional consideration for the acquisition of Chosen.
|
|
|
|
In October 2009, the Company issued 95,590 ordinary shares to Wireless Info Tech Limited as
a part of the additional consideration for the acquisition of WIT.
|
F-51
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
20.
|
|
ORDINARY SHARES ISSUANCE AND REPURCHASE — continued
|
|
|
|
In October 2009, the Company issued 6,163 ordinary shares to Xiang Liu as a part of the
consideration for the acquisition of Kernel.
|
|
|
|
In January 2010, one of our employees was suspected to be in violation of the non-compete
agreement (signed with the Company in connection with an acquisition in 2007) and his
employment with the Company was terminated. This caused certain potential losses
to the Group relating to certain accounts receivable balance. As a result,
the employee entered into a settlement agreement with the Company in March 2010 and agreed
to return his ordinary shares of 27,772 to the Group as compensation. The fair value of the
ordinary shares was $537 as of the settlement date, and was recorded in the
consolidated statements of operations to net off a related $537 provision for doubtful
accounts. The shares were canceled immediately after they were returned to the Company.
|
|
|
|
In June 2010, the Company issued 51,084 ordinary shares for future delivery to the employees
and non-employees upon exercise of vested stock options or grant of nonvested shares as set
out in Note 18.
|
|
|
|
In July 2010, the Company issued 1,089,064 ordinary shares for future delivery to the
employees and non-employees upon exercise of vested stock options or grant of nonvested
shares as set out in Note 18.
|
|
|
|
In November 2010, the Company issued 1,000,000 ordinary shares for future delivery to the
employees and non-employees upon exercise of vested stock options or grant of nonvested
shares as set out in Note 18.
|
|
|
|
In November 2010, the Company issued 26,442 ordinary shares to Hui Wing Han Christina Wendy
& Wong Kit Cheung Paul as a part of the consideration for the acquisition of TP as set out
in Note 4.
|
|
|
|
In November 2010, the Company completed a public offering of 2,530,000 ordinary shares for
total proceeds of $89,223, net of offering costs of $590.
|
F-52
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
21.
|
|
FAIR VALUE MEASUREMENTS
|
|
|
|
Measured on recurring basis
|
|
|
|
The Group’s financial assets/(liabilities) measured at fair value on a recurring basis as of
December 31, 2009 and 2010 include a foreign currency exchange forward contract (Note 8)
based on Level 2 inputs, the contingent consideration payable in connection with business
acquisitions consummated in 2009 and 2010 and an available-for-sale investment in
convertible loan based on Level 3 inputs.
|
|
|
|
The following table summarizes the Group’s financial assets/(liabilities) measured at fair
value on recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Active Market for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
December 31,
|
|
|
Identical Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Description
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
(7,370
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(7,370
|
)
|
|
Forward contract
|
|
|
161
|
|
|
|
—
|
|
|
|
161
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,209
|
)
|
|
$
|
—
|
|
|
$
|
161
|
|
|
$
|
(7,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting Date Using
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
Active Market for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
December,
|
|
|
Identical Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Description
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
Available-for-sale investment
|
|
$
|
1,302
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,302
|
|
|
Contingent consideration
|
|
|
(3,269
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,269
|
)
|
|
Forward contract
|
|
|
(332
|
)
|
|
|
—
|
|
|
|
(332
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,299
|
)
|
|
$
|
—
|
|
|
$
|
(332
|
)
|
|
$
|
(1,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
21.
|
|
FAIR VALUE MEASUREMENTS — continued
|
|
|
|
Measured on recurring basis
— continued
|
|
|
|
The following table summarizes the movement of the balances of the Group’s financial
assets/(liabilities) measured at fair value on a recurring basis based on level 3 inputs:
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
Balance as of January 1, 2010
|
|
|
(7,370
|
)
|
|
Initial recognition of contingent consideration in connection with
acquisition of Link Result
|
|
|
(3,389
|
)
|
|
Change in fair value of contingent considerations
|
|
|
221
|
|
|
Settlement of contingent considerations for business acquisitions
|
|
|
7,238
|
|
|
Available-for-sale investment
|
|
|
661
|
|
|
Accrued interest on the available-for-sale investment
|
|
|
41
|
|
|
Unrecognized gain on available-for-sale investment
|
|
|
581
|
|
|
Exchange difference
|
|
|
50
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
(1,967
|
)
|
|
|
|
|
|
|
|
|
The Group’s financial assets and liabilities measured at fair value on a non-recurring basis
include acquired assets and liabilities based on Level 3 inputs in connection with business
acquisitions.
|
|
22.
|
|
EMPLOYEE BENEFIT PLAN
|
|
|
|
Full time employees of the Group in the PRC participate in a government-mandated defined
contribution plan pursuant to which certain pension benefits, medical care, unemployment
insurance, employee housing fund and other welfare benefits are provided to employees. The
Group accrues for these benefits based on certain percentages of the employees’ salaries.
The total provisions for such employee benefits were $4,780, $7,219 and $11,258 for the
years ended December 31, 2008, 2009 and 2010, respectively.
|
|
|
|
PRC legal restrictions permit payments of dividends by the Group’s PRC entities only out of
their retained earnings, if any, determined in accordance with PRC regulations. Prior to
payment of dividends, pursuant to the laws applicable to the PRC Foreign Investment
Enterprises, the Group’s PRC subsidiaries must make appropriations from after-tax profit to
non-distributable reserve funds as determined by the board of directors of the Company’s PRC
subsidiaries. These reserve funds include one or more of the following (i) a general
reserve (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject
to certain cumulative limits, the general reserve fund requires annual appropriations of 10%
of after-tax profit (as determined under accounting principles generally accepted in the PRC
at each year-end), and the other fund appropriations are at the management’s discretion.
These statutory reserve funds can only be used for purposes of general enterprise expansion
and staff bonus and welfare and are not distributable as cash dividends. Appropriations to
these reserves by the Company’s PRC subsidiaries were $392, $991 and $1,171 for the years
ended December 31, 2008, 2009 and 2010, respectively.
|
F-54
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
24.
|
|
LITIGATION THREAT AGAINST THE COMPANY
|
|
|
|
In August 2004, through VanceInfo Beijing, a wholly owned subsidiary of the Company, the
Company acquired the IT services business and related assets of Wensi Chuangyi and its
subsidiaries, the predecessor of the Company. On December 3, 2007, Chris Chen, chairman and
chief executive officer of the Company, and David Chen, chief operating officer of the
Company received a letter from a law firm in California purporting to set forth a notice of
claim on behalf of Mr. Jonathan Jianguo Jiang against Chris Chen, David Chen, the Company,
and two subsidiaries of the Company and VanceInfo Creative Software Technology Ltd., or
VanceInfo California, a dissolved California corporation controlled by Wensi Chuangyi. The
letter alleges the following:
|
|
|
•
|
|
Mr. Jiang is a shareholder of Octiga, Inc., or Octiga, a dissolved California
corporation; Octiga owns more than a 40% interest in the joint venture, Beijing Heteng
Software Technology Co., Ltd. (“Heteng”); and Heteng owns 100% of Wensi Chuangyi, the
predecessor of the Company.
|
|
|
•
|
|
Valuable (but unspecified) proprietary information owned by Wensi Chuangyi and/or
its subsidiaries as well as all its employees were transferred to VanceInfo Beijing not
in good faith and without adequate consideration to Heteng and its joint venture
partners. This unspecified proprietary information allegedly has been utilized by
VanceInfo California and continues to be used by a Delaware subsidiary of the Company.
|
|
|
•
|
|
In connection with these transactions, Chris Chen was an officer, director,
beneficial owner or in control of the relevant entities that caused the transfer to be
executed not in good faith and without adequate consideration or the receiving entity
that obtained the valuable proprietary information not in good faith and without
adequate consideration, all in breach of his fiduciary responsibilities to Octiga,
Heteng and their shareholders and/or joint venture partners.
|
|
|
•
|
|
The letter also alleges that Mr. Jiang will be able to demonstrate the role and
responsibility of various other parties in these alleged improper transactions,
including Wensi Chuangyi and/or its subsidiaries, VanceInfo Beijing, VanceInfo
California and other subsidiaries of the Company.
|
F-55
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
24.
|
|
LITIGATION THREAT AGAINST THE COMPANY — continued
|
|
|
|
The letter states that Mr. Jiang is considering commencing litigation on all legal theories
available to him as well as for the benefit of other investors in Heteng, including Long
March Launch Vehicle Technology Co., Ltd., or Long March, to recover the value of the assets
that were allegedly improperly transferred by Wensi Chuangyi and its subsidiaries to
VanceInfo Beijing as well as other damages and costs. The Company believes that Long March
owned a 70% equity interest in Heteng in August 2004.
|
|
|
|
In November 2010, Jiang filed an action naming the Company, its subsidiary VanceInfo
Technologies Inc., a Delaware corporation, or VanceInfo US, and its executives Chris Shuning
Chen and David Lifeng Chen as defendants in the Superior Court of California, County of San
Mateo captioned Jonathan Jiang v. VanceInfo Technologies, et al., CIV 500979. An amended
complaint filed January 21, 2011 alleges:
|
|
|
•
|
|
Jiang was a minority shareholder of Octiga, Inc., a dissolved California
Corporation. Octiga, Inc. allegedly owned “more than 30% interest in a joint venture”
in Beijing Heteng Software Technology Company, Ltd., or Heteng, a company incorporated
in China.
|
|
|
•
|
|
Heteng owned 95% of Wensi Chuangyi.
|
|
|
•
|
|
Jiang owned 220,000 ordinary shares of Octiga, Inc. for which compensation was not
appropriately provided.
|
|
|
•
|
|
The transfer of assets of Wensi Chuangyi from Heteng to us occurred without proper
compensation to Octiga, Inc.
|
|
|
|
These matters are scheduled to be heard in the next few months. Jiang has submitted theories
for claims of damages in an unknown range of values. Jiang’s claims are brought on his own
behalf, and Jiang also seeks to assert the claims derivatively on behalf of Octiga, Inc.
The Company believes that Jiang’s factual allegations are flawed and his legal theories
unsound, and there are meritorious defenses to the claims. On March 10, 2011, the Company
filed a motion to quash service on it and a demurrer to the amended complaint on behalf of
VanceInfo US.
|
|
|
(i)
|
|
Operating lease commitments
|
|
|
|
|
|
|
The Group has entered into operating lease agreements principally for its office
spaces. These leases expire through 2016 and are renewable upon negotiation. Rental
expense under operating leases was $4,865, $6,573 and $8,889 for the years ended
December 31, 2008, 2009 and 2010, respectively.
|
F-56
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
25. COMMITMENTS — continued
Future minimum lease payments under such non-cancelable leases as of December 31,
2010 are as follows:
|
|
|
|
|
|
|
2011
|
|
|
8,476
|
|
|
2012
|
|
|
5,543
|
|
|
2013
|
|
|
4,222
|
|
|
2014
|
|
|
2,881
|
|
|
2015 and after
|
|
|
3,349
|
|
|
|
|
|
|
|
|
|
|
24,471
|
|
|
|
|
|
|
|
|
(ii)
|
|
Purchase commitments
|
|
|
|
|
|
|
As of December 31, 2010, $278 was contractually committed by the Group for purchases
of equipment and leasehold improvements, $278 will be paid in 2011.
|
|
26.
|
|
RELATED PARTY TRANSACTIONS
|
|
|
|
The Group had the following significant transactions with related parties in addition to the
disclosures in Notes 19 and 20:
|
|
|
|
The Group provided various IT services to Lenovo (Beijing) Co., Ltd., Lenovo (Shanghai) Co.,
Ltd., Lenovo (Shanghai) Electronic Technology Co., Ltd., Lenovo Mobile Communications Co.,
Ltd., Beijing Lenovo Software Co., Ltd., Shanghai Lenovo Electronic Co., Ltd., Sunny
Information Technology Service, Inc., and Lenovo (Dalian) Technologies Service Co., Ltd.
(collectively “Lenovo”), affiliates of LC Fund II, a principal shareholder of the Company.
The Group recognized $1,750, $2,357 and $3,977 revenue for these transactions for the years
ended December 31, 2008, 2009 and 2010, respectively. The accounts receivable balances from
Lenovo were $1,043 and $1,533 as of December 31, 2009 and 2010, respectively. The advance
from customer balances from Lenovo was $7 and $48 as of December 31, 2009 and 2010,
respectively.
|
|
|
|
In January 2011, the Group acquired 100% equity interest in Viatt. Under the terms of the
acquisition agreement, the Group paid an initial consideration of approximately $1.5 million
in cash. Contingent consideration will be determined up to $4.9 million based on Viatt’s
financial performance in 2011 and 2012. The acquisition is expected to strengthen the
Group’s position in China’s domestic financial services sector. Over 80 professionals from
Viatt joined the Company in connection with the acquisition transaction.
|
F-57
VANCEINFO TECHNOLOGIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — continued
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands, except share and share related data)
|
27.
|
|
SUBSEQUENT EVENTS — continued
|
|
|
|
In March 2011, the Group entered an acquisition agreement with Think Consulting Limited to
acquire certain businesses of its wholly owned subsidiary, Bright Consulting (Beijing)
Limited (“Bright”), a China-based IT services company providing Oracle consulting and
implementation services to Chinese domestic clients. This acquisition was completed in April
2011. The initial consideration was $0.7 million, of which $0.5 million was settled in cash
and $0.2 million was settled in ordinary shares. The additional contingent considerations
will be determined based on specified earnings objectives in the acquisition agreement for
the first three years after the acquisition.
|
|
|
|
In April 2011, the Group acquired 100% equity interest in the main operating subsidiaries of
LW International Holdings Limited (“Lifewood”), a China-based company providing business
process outsourcing services. Under the terms of the acquisition agreement, the Group will
pay an initial consideration of approximately $5.6 million in cash and stock, with
contingent consideration to be paid based on Lifewood’s financial performance over the next
three years.
|
|
|
|
In March 2011, the Group announced that its Board of Directors has approved a share
repurchase program, effective March 2011. Under the program, VanceInfo has been authorized,
but is not obligated, to repurchase up to $40 million worth of outstanding ADSs representing
the ordinary shares of VanceInfo from time to time over the next 12 months, depending on
market conditions, share price and other factors, as well as subject to the relevant rules
under US securities regulations. In April 2011, 68,277 ordinary shares were repurchased for
a total consideration of $1,999 from open market under this program.
|
F-58
VANCEINFO TECHNOLOGIES INC.
Additional Information — Financial Statement Schedule I
Financial Information of Parent Company
Balance Sheets
(in U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
42,277
|
|
|
|
102,832
|
|
|
Term deposit
|
|
|
10,000
|
|
|
|
5,000
|
|
|
Held-to-maturity securities — current
|
|
|
12,122
|
|
|
|
13,208
|
|
|
Prepaid expenses and other current assets
|
|
|
1,972
|
|
|
|
602
|
|
|
Amount due from related parties
|
|
|
45,254
|
|
|
|
35,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
111,625
|
|
|
|
157,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity securities — non-current
|
|
|
—
|
|
|
|
1,558
|
|
|
Investment in subsidiaries
|
|
|
64,070
|
|
|
|
143,426
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
175,695
|
|
|
|
302,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Amount due to related parties
|
|
|
10,364
|
|
|
|
3,775
|
|
|
Accrued expenses and other payables
|
|
|
731
|
|
|
|
719
|
|
|
Deferred income-current
|
|
|
260
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,355
|
|
|
|
4,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income-non-current
|
|
|
1,778
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,133
|
|
|
|
6,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
Ordinary shares ($0.001 par value, 70,000,000 shares authorized; 39,888,092
and 44,556,910 shares issued and outstanding in 2009 and 2010, respectively)
|
|
|
40
|
|
|
|
45
|
|
|
Additional paid-in capital
|
|
|
111,680
|
|
|
|
208,431
|
|
|
Shares issuable in connection with business acquisitions
|
|
|
520
|
|
|
|
3,594
|
|
|
Accumulated other comprehensive income
|
|
|
4,924
|
|
|
|
8,836
|
|
|
Retained earnings
|
|
|
45,398
|
|
|
|
75,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
162,562
|
|
|
|
296,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
175,695
|
|
|
|
302,428
|
|
|
|
|
|
|
|
|
|
F-59
VANCEINFO TECHNOLOGIES INC.
Financial Information of Parent Company
Statements of Operations
(In U.S. dollars in thousands, except share and share related data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
Cost of revenues (including share-based compensation of $265,
$313 and $492 in 2008, 2009 and 2010, respectively)
|
|
|
(265
|
)
|
|
|
(313
|
)
|
|
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
(including share-based compensation of $1,126, $1,252
and $2,755 in 2008, 2009 and 2010, respectively)
|
|
|
(2,154
|
)
|
|
|
(1,853
|
)
|
|
|
(3,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
132
|
|
|
|
196
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(2,287
|
)
|
|
|
(1,970
|
)
|
|
|
(3,234
|
)
|
|
Equity in earnings of subsidiaries
|
|
|
16,800
|
|
|
|
22,755
|
|
|
|
33,139
|
|
|
Interest income
|
|
|
1,528
|
|
|
|
672
|
|
|
|
432
|
|
|
Exchange differences
|
|
|
132
|
|
|
|
51
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VanceInfo Technologies Inc. shareholders
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to VanceInfo Technologies Inc. shareholders
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
2,578
|
|
|
|
(48
|
)
|
|
|
3,722
|
|
|
Unrealized gains (loss) on foreign currency exchange forward contract
|
|
|
—
|
|
|
|
145
|
|
|
|
(506
|
)
|
|
(Gains) loss on foreign currency exchange forward contract transfer to
statements of operations
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
202
|
|
|
Net unrealized gain on available-for-sale investment, net tax effect of $87
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income, net of tax
|
|
|
2,578
|
|
|
|
61
|
|
|
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Vanceinfo Technologies Inc
|
|
|
18,751
|
|
|
|
21,569
|
|
|
|
33,775
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
VANCEINFO TECHNOLOGIES INC.
Financial Information of Parent Company
Parent Company Statements of Change in Equity and Comprehensive Income
(In U.S. dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issuable
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in connection
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
Additional
|
|
|
with business
|
|
|
comprehensive
|
|
|
Retained
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
paid-in capital
|
|
|
acquisitions
|
|
|
income
|
|
|
earnings
|
|
|
shareholders’ equity
|
|
|
|
|
Balance as of January 1, 2008
|
|
|
37,198,907
|
|
|
|
37
|
|
|
|
98,706
|
|
|
|
—
|
|
|
|
2,285
|
|
|
|
9,350
|
|
|
|
110,378
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
148,594
|
|
|
|
—
|
|
|
|
1,174
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,174
|
|
|
Shares issuable in connection with Chosen acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,527
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302
|
|
|
Repurchase of ordinary shares
|
|
|
(226,622
|
)
|
|
|
—
|
|
|
|
(387
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,633
|
)
|
|
|
(2,020
|
)
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,391
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,391
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,578
|
|
|
|
—
|
|
|
|
2,578
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,173
|
|
|
|
16,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
39,120,879
|
|
|
|
39
|
|
|
|
101,184
|
|
|
|
1,527
|
|
|
|
4,863
|
|
|
|
23,890
|
|
|
|
131,503
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
422,213
|
|
|
|
1
|
|
|
|
2,088
|
|
|
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
|
562
|
|
|
Shares issuable in connection with TP acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
520
|
|
|
|
—
|
|
|
|
—
|
|
|
|
520
|
|
|
Repurchase of ordinary shares
|
|
|
(2,800
|
)
|
|
|
—
|
|
|
|
(13
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13
|
)
|
|
Issuance of ordinary shares upon share offering
|
|
|
345,000
|
|
|
|
—
|
|
|
|
2,648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,648
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,800
|
|
|
|
—
|
|
|
|
4,208
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,208
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
1,565
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,565
|
|
|
Unrealized gain on foreign currency exchange forward contract recognized
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
|
|
—
|
|
|
|
145
|
|
|
Gain on foreign currency exchange forward contract transfer to statements of operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(36
|
)
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
(48
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,508
|
|
|
|
21,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
39,888,092
|
|
|
|
40
|
|
|
|
111,680
|
|
|
|
520
|
|
|
|
4,924
|
|
|
|
45,398
|
|
|
|
162,562
|
|
|
Issuance of ordinary shares in connection with business acquisitions
|
|
|
26,442
|
|
|
|
—
|
|
|
|
520
|
|
|
|
(520
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Shares issuable in connection with TP acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,978
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,978
|
|
|
Shares issuable in connection with AIT acquisition (Note 4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,616
|
|
|
Ordinary shares returned from an employee (Note 20)
|
|
|
(27,772
|
)
|
|
|
—
|
|
|
|
(537
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(537
|
)
|
|
Issuance of ordinary shares upon share offering
|
|
|
2,530,000
|
|
|
|
3
|
|
|
|
89,223
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89,226
|
|
|
Ordinary shares issued for share-based compensation
|
|
|
2,140,148
|
|
|
|
2
|
|
|
|
4,514
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,516
|
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
3,031
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,031
|
|
|
Unrealized loss on foreign currency exchange forward contract
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(507
|
)
|
|
|
—
|
|
|
|
(507
|
)
|
|
Loss on foreign currency exchange forward contract transfer to
statements of operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
202
|
|
|
|
—
|
|
|
|
202
|
|
|
Net unrealized gain on available-for-sale investment, net tax effect of $87
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
494
|
|
|
|
—
|
|
|
|
494
|
|
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,723
|
|
|
|
—
|
|
|
|
3,723
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29,863
|
|
|
|
29,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
44,556,910
|
|
|
|
45
|
|
|
|
208,431
|
|
|
|
3,594
|
|
|
|
8,836
|
|
|
|
75,261
|
|
|
|
296,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
VANCEINFO TECHNOLOGIES INC.
Financial Information of Parent Company
Statements of Cash Flows
(In U.S. dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,173
|
|
|
|
21,508
|
|
|
|
29,863
|
|
|
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,391
|
|
|
|
1,565
|
|
|
|
3,247
|
|
|
Equity in earnings of subsidiaries
|
|
|
(16,800
|
)
|
|
|
(22,755
|
)
|
|
|
(33,139
|
)
|
|
(Gain) loss on foreign currency exchange
forward contracts recognized in statements of operations
|
|
|
—
|
|
|
|
(52
|
)
|
|
|
578
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(526
|
)
|
|
|
(552
|
)
|
|
|
1,188
|
|
|
Amounts due from related parties
|
|
|
(14,444
|
)
|
|
|
(5,222
|
)
|
|
|
12,666
|
|
|
Amounts due to related parties
|
|
|
3,779
|
|
|
|
5,865
|
|
|
|
(6,789
|
)
|
|
Accrued expenses and other payables
|
|
|
(299
|
)
|
|
|
151
|
|
|
|
(375
|
)
|
|
Deferred income
|
|
|
1,281
|
|
|
|
757
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(9,445
|
)
|
|
|
1,265
|
|
|
|
6,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of non-current investment-held-to-maturity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,560
|
)
|
|
Purchase of current investment-held-to-maturity securities
|
|
|
—
|
|
|
|
(12,104
|
)
|
|
|
(15,213
|
)
|
|
Proceeds from maturity of held-to-maturity securities
|
|
|
—
|
|
|
|
—
|
|
|
|
13,648
|
|
|
Purchase of businesses and increased investment in subsidiaries
|
|
|
(138
|
)
|
|
|
—
|
|
|
|
(42,001
|
)
|
|
Payment for settlement of foreign currency forward exchange contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
(388
|
)
|
|
Purchase of term deposit
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
Cash received upon maturity of term deposit
|
|
|
—
|
|
|
|
—
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(138
|
)
|
|
|
(22,104
|
)
|
|
|
(40,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of options
|
|
|
302
|
|
|
|
3,625
|
|
|
|
5,011
|
|
|
Payment for issuance costs in connection with initial public offering
|
|
|
(847
|
)
|
|
|
—
|
|
|
|
|
|
|
Repurchase of ordinary shares
|
|
|
(2,020
|
)
|
|
|
(13
|
)
|
|
|
—
|
|
|
Proceeds from issuance of ordinary shares upon share offering in 2009
|
|
|
—
|
|
|
|
3,624
|
|
|
|
—
|
|
|
Payment for issuance costs in connection with share offering in 2009
|
|
|
—
|
|
|
|
(712
|
)
|
|
|
(220
|
)
|
|
Proceeds from issuance of ordinary shares upon share offering in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
89,816
|
|
|
Payment for issuance costs in connection with share offering in 2010
|
|
|
—
|
|
|
|
—
|
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,565
|
)
|
|
|
6,524
|
|
|
|
94,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(12,148
|
)
|
|
|
(14,315
|
)
|
|
|
60,555
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
68,740
|
|
|
|
56,592
|
|
|
|
42,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
56,592
|
|
|
|
42,277
|
|
|
|
102,832
|
|
|
|
|
|
|
|
|
|
|
|
|
F-62
VANCEINFO TECHNOLOGIES INC.
NOTES TO ADDITIONAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2008, 2009 AND 2010
(In U.S. dollars in thousands)
|
|
|
The condensed financial information of the Company has been prepared using the same
accounting policies as set out in the Group’s consolidated financial statements except that
the Company used the equity method to account for investments in its subsidiaries.
|
|
2.
|
|
INVESTMENTS IN SUBSIDIARIES
|
|
|
|
The Company and its subsidiaries were included in the consolidated financial statements
where inter-company balances and transactions were eliminated upon consolidation. For
purpose of the Company’s stand- alone financial statements, its investments in subsidiaries
were reported using the equity method of accounting. The Company’s share of income and
losses from its subsidiaries were reported as equity in earnings of subsidiaries in the
accompanying parent company financial statements.
|
F-63
Vanceinfo Technologies American Depositary Shares (NYSE:VIT)
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Vanceinfo Technologies American Depositary Shares (NYSE:VIT)
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